[Federal Register Volume 72, Number 109 (Thursday, June 7, 2007)]
[Rules and Regulations]
[Pages 31441-31444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11014]



[[Page 31441]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 32

[Docket ID: OCC-2007-0011]
RIN 1557-AD03


Special Lending Limits for Residential Real Estate Loans, Small 
Business Loans, and Small Farm Loans

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

ACTION: Interim rule, request for comment.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending Part 32 to permanently incorporate special lending limits for 
1-4 family residential real estate loans, small business loans, and 
small farm loans or extensions of credit. These special lending limits 
have, since 2001, been available to certain eligible national banks 
through a lending limits pilot program (pilot program). Under the pilot 
program, an eligible national bank with a main office located in a 
state that has a lending limit for residential real estate, small 
business, or small farm loans that is higher than the current Federal 
limit may apply to take part in the pilot program and make use of the 
higher limit. The OCC has found that banks in the pilot program, and 
loans made under the program, have operated in a safe and sound manner 
since 2001. Accordingly, this interim rule amends Part 32 to make 
permanent the special limits set forth in the pilot program. This 
interim rule removes the expiration date for the pilot program and 
makes one change to the special lending limits available under the 
pilot program. The OCC also seeks comment on any other changes that 
should be considered for the final rule. As in the past, only eligible 
banks can use the special limits. Those banks already approved to 
participate in the pilot program may continue to use the special 
lending limits and need not submit a new application to do so.

DATES: Effective Date: June 7, 2007. Comments must be received by July 
9, 2007.

ADDRESSES: You may submit comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
http://www.regulations.gov, select ``Comptroller of the Currency'' from 
the agency drop-down menu, then click ``Submit.'' In the ``Docket ID'' 
column, select ``OCC-2007-0011'' to submit or view public comments and 
to view supporting and related materials for this interim rule. The 
``User Tips'' link at the top of the Regulations.gov home page provides 
information on using Regulations.gov, including instructions for 
submitting or viewing public comments, viewing other supporting and 
related materials, and viewing the docket after the close of the 
comment period.
     E-mail: [email protected].
     Fax: (202) 874-4448.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 1-5, Washington, DC 20219.
     Hand Delivery/Courier: 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 1-5, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket Number OCC-2007-0011'' in your comment. In general, OCC will 
enter all comments received into the docket and publish them on 
Regulations.gov without change, including any business or personal 
information that you provide such as name and address information, e-
mail addresses, or phone numbers. Comments, including attachments and 
other supporting materials, received are part of the public record and 
subject to public disclosure. Do not enclose any information in your 
comment or supporting materials that you consider confidential or 
inappropriate for public disclosure.
    You may review comments and other related materials by any of the 
following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov, select ``Comptroller of the Currency'' from the 
agency drop-down menu, then click ``Submit.'' In the ``Docket ID'' 
column, select ``OCC-2007-0011'' to view public comments for this 
interim rule.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC's Public Information Room, 250 E 
Street, SW., Washington, DC. You can make an appointment to inspect 
comments by calling (202) 874-5043.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: Mitchell Plave, Counsel, Legislative 
and Regulatory Activities Division, (202) 874-5090, Stuart Feldstein, 
Assistant Director, Legislative and Regulatory Activities Division, 
(202) 874-5090, or Terry Howard, National Bank Examiner, Commercial 
Credit Risk, (303) 293-1866.

SUPPLEMENTARY INFORMATION:

Background

    The percentage of capital and surplus that a bank may loan to any 
one borrower is limited by 12 U.S.C. 84. Section 84 and the OCC's 
implementing regulations, 12 CFR part 32, permit a national bank to 
make loans in an amount up to 15 percent of its unimpaired capital and 
surplus to a single borrower. A national bank 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.'' \1\ Part 32 refers to 
these lending limits as the ``combined general limit.'' The statute and 
regulation also provide exceptions to, and exemptions from, the 
combined general limit for various types of loans and extensions of 
credit.
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    \1\ See 12 CFR 32.2(n) (defining ``readily marketable 
collateral'').
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    Section 84 authorizes the OCC to establish lending limits ``for 
particular classes or categories of loans or extensions of credit'' 
that are different from those expressly provided by the statute's 
terms.\2\ Effective September 10, 2001, the OCC added to Part 32 a new 
Sec.  32.7, which established a three-year pilot program with special 
lending limits for certain residential real estate loans and small 
business loans or extensions of credit.\3\ The OCC extended the pilot 
program in 2004 for an additional three years and, at the same time, 
expanded the scope of the program to include certain small farm 
loans.\4\ The aim of the program is to enable community national banks 
to utilize a higher lending limit for certain residential real estate, 
small business loans, and small farm loans, where the bank is located 
in a state that allows state-chartered banks to apply a higher lending 
limit, subject to the national bank's compliance with certain 
conditions designed to ensure that lending under the higher limits is 
consistent with safety and soundness.
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    \2\ 12 U.S.C. 84(d).
    \3\ 66 FR 31114 (June 11, 2001); 12 CFR 32.7.
    \4\ 69 FR 51355 (August 19, 2004).
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    For purposes of the special limits, a residential real estate loan 
is a loan secured by a perfected first-lien security interest in 1-4 
family real estate in an amount that does not exceed 80 percent of the 
appraised value of the collateral at the time the loan is made. A small 
business loan is a loan ``secured by nonfarm, nonresidential 
properties'' or a ``commercial and industrial loan'' as those terms are 
described in the current

[[Page 31442]]

version of the instructions for preparation of the Consolidated Report 
of Condition and Income (Call Report), Schedule RC-C, part I, item nos. 
1.e and 4 (FFIEC 031 and 041) (Loans and Lease Financing Receivables). 
A ``small farm loan or extension of credit'' is a loan described in the 
current version of the instructions for preparation of the Call Report, 
Schedule RC-C, part I, item nos. 1.b and 3, as ``loans secured by 
farmland'' and ``loans to finance agricultural production and other 
loans to farmers.'' \5\
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    \5\ For reporting purposes, the current version of the 
instructions for Schedule RC-C part II of the Call Report, provides 
that ``loans to small farms'' should be included on that schedule 
only if the loans are for original amounts of $500,000 or less. This 
$500,000 limit is not part of the regulation's definition of ``loans 
to small farms.'' Therefore, it does not apply to or condition the 
lending authority granted under the pilot program. Similarly, the 
current version of the instructions for Schedule RC-C, part II of 
the Call Report, provides that loans ``secured by nonfarm 
residential property'' and ``commercial and industrial'' loans 
should be included on that schedule only if they are loans for 
original amounts of $1,000,000 or less. This $1,000,000 limit is not 
part of the regulation's definition of loans ``secured by nonfarm 
residential property'' and ``commercial and industrial'' loans. 
Therefore, the $1,000,000 limit does not apply to or condition the 
lending authority granted under the pilot program.
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    The pilot program authorizes an eligible national bank to apply for 
approval to make residential real estate, small business, and small 
farm loans to a single borrower in addition to amounts that they may 
already lend to that borrower under the existing combined general limit 
in 12 CFR 32.3(a) and the limits for the particular categories of loans 
enumerated in 12 CFR 32.3(b). A bank is eligible for the pilot program 
only if it is well capitalized, as defined in 12 CFR 6.4(b)(1),\6\ and 
has a composite 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 the 
program is available only to banks in good financial condition with a 
demonstrated record of making sound loans.
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    \6\ A ``well capitalized'' bank under 12 CFR 6.4(b)(1) is one 
that: (i) Has a total risk-based capital ratio of 10.0 percent or 
greater; (ii) has a Tier 1 risk-based capital ratio of 6.0 percent 
or greater; (iii) has a leverage ratio of 5.0 percent or greater; 
and (iv) is not subject to any written agreement, order or capital 
directive, or prompt corrective action directive issued by the OCC 
pursuant to section 8 of the Federal Deposit Insurance Act (FDI 
Act), the International Lending Supervision Act of 1983 (12 U.S.C. 
3907), or section 38 of the FDI Act, or any regulation thereunder, 
to meet and maintain a specific capital level for any capital 
measure.
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    Under the pilot program, an eligible national bank may make 
residential loans, small business loans, and small farm 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 (in the state where the main office of the bank 
is located) for residential loans, small business loans, and small farm 
loans, or for unsecured loans.
    The pilot program contains a number of safeguards that apply to a 
bank using its special lending limits. 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 expressed as 
percentages of the bank's capital and surplus. Under the individual 
borrower cap, the total outstanding amount of a bank's loans to one 
borrower under Sec. Sec.  32.3(a) and (b), together with loans made to 
that borrower under the special limits authorized by Sec.  32.7, may 
not exceed 25 percent of the bank's capital and surplus. The aggregate 
cap provides that the total outstanding amount of loans made by a bank 
to all of its borrowers under the special limits authorized by Sec.  
32.7 may not exceed 100 percent of the bank's capital and surplus. 
Finally, for each loan category covered by Sec.  32.7, a bank may not 
lend more than $10 million to a single borrower under the special 
limit.
    A bank 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; 
citations to relevant state laws or regulations 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.
    The OCC stated in the preamble to its 2001 and 2004 final rules 
that, prior to the conclusion of the pilot program, the OCC would 
evaluate the performance of the program and determine whether, and 
under what circumstances, to extend the program or adopt it 
permanently.

A. Supervisory Experience, 2001-2004

    As of the end of February 2004, 169 national banks headquartered in 
23 states had received approval to participate in the program. At that 
time, the OCC compared the performance of 129 banks that participated 
in the program to that of comparable state-chartered banks and national 
banks that did not participate in the program focusing on: (1) Loan 
portfolio composition; (2) asset quality; (3) liquidity and capital; 
and (4) differences in interest expense, non-interest expense and 
profitability indicators between participating banks and their peers. 
The OCC could not attribute any statistical differences in this 
comparison group directly to participation in the pilot program and 
concluded that the program had operated in a safe and sound manner 
since its inception in 2001.\7\ On this basis, the OCC extended the 
pilot program for three years, from 2004 until 2007, to collect 
additional data and assess whether to integrate the special lending 
limits provided by the program into Part 32 on a long-term or permanent 
basis.
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    \7\ 69 FR 21978, 21980 (April 23, 2004).
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B. Supervisory Experience, 2004 to 2007

    As of February, 2007, the OCC had approved more than 288 national 
banks to participate in the pilot program, representing nearly 15% of 
national community banks. Banks that participate in the pilot program 
are headquartered in twenty-four states in the U.S. The OCC gathered 
supervisory data during the second phase of the pilot program to assess 
the performance of participating banks. The data focused on: (1) 
Adherence to the capital and surplus limits; (2) adherence to the $10 
million cap on loans to one borrower; (3) whether loans made under the 
pilot program were subject to supervisory criticism and, if so, the 
amount of such loans and the category of supervisory criticism; (4) 
whether loans made under the pilot program were past due and, if so, 
the amount of such loans; (5) whether banks had adequate internal 
controls and monitoring systems to provide oversight of loans made 
under the pilot program; and (6) whether loans made under the pilot 
program were in compliance with the resolutions issued by the bank's 
board governing the program.
    The OCC's supervisory experience between 2004 and 2007 shows that 
the expanded lending limits capacity has had a neutral impact on the 
asset quality and overall safety and soundness of participating 
institutions. This experience confirms our earlier observation that 
authorization to use higher lending limits has been consistent with the 
safety and soundness of participating institutions. National banks that 
have made use of the program have indicated to the OCC that the special 
lending limits allowed those banks to better serve their customers and 
communities.

[[Page 31443]]

Description of the Interim Rule

    The interim rule incorporates the special lending limits currently 
authorized by the pilot program into Part 32 with one change, makes 
technical changes to remove references to the ``pilot program,'' and 
eliminates the provision in Part 32 that limits the duration, to 
September 10, 2007, of approvals given by the OCC to banks to lend 
under the program's special limits. The interim rule removes the $10 
million cap on loans to one borrower for loans in each loan category 
covered by the interim rule. In view of the other limits and safeguards 
in the interim rule, and the OCC's experience with the pilot program, 
the OCC does not believe this restriction is necessary.
    Under the interim rule, an eligible national bank will continue to 
be required to apply to, and receive approval by, the OCC before using 
the special lending limits. A newly chartered national bank may apply 
to use the special limits once it meets the criteria for an eligible 
bank. The authority given by the OCC to national banks under the 
special limits will not expire, but will continue to be subject to 
discretionary termination by the OCC based on supervisory concerns 
about credit quality, undue concentrations in the bank's portfolio of 
residential real estate, small business, or small farm loans, or 
concerns about the bank's overall credit risk management systems and 
controls. The effect of this interim rule is to make the pilot program 
permanent with the change noted above.
    The OCC also requests comment on the interim rule and on ways in 
which the special lending limits could be expanded or enhanced, 
consistent with safety and soundness.

Administrative Procedure Act/Effective Date

    The OCC finds that there is good cause to dispense with prior 
notice and public comment on this interim rule and with the 30-day 
delay of effective date generally prescribed by the Administrative 
Procedure Act (APA). 5 U.S.C. 553. Under section 553(b) of the APA, the 
OCC is not required to provide notice and an opportunity for public 
comment on a rule if we find, for good cause, that notice and comment 
are ``impracticable, unnecessary or contrary to the public interest.'' 
The OCC finds that notice and public comment before the interim rule 
takes effect are unnecessary. The OCC has previously provided the 
opportunity for comment on all aspects of the pilot program, in 2001 
and 2004. The one change made to the program by the interim rule 
relieves the restriction imposed by a cap that the OCC has concluded is 
unnecessary based on its experience supervising institutions that have 
participated in the program thus far. In addition, by issuing the rule 
on an interim final basis, the OCC will avoid any unnecessary 
disruption in the operation of the program and its special limits 
during the pendancy of the comment period.
    Under section 553(d) of the APA, 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.'' The OCC finds that there is good 
cause to dispense with the effective date requirement because the 
interim rule recognizes an exemption and will prevent unnecessary 
disruption in the operation of the lending limits program in its 
current form. In addition, the purpose of the delayed effective date 
provision is to afford affected persons a reasonable time to comply 
with rule changes. The interim rule imposes no further restrictions on 
the substance of the existing lending limits pilot program. As such, 
there is no need for banks to make adjustments to their current lending 
under the program.

Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 
section 722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires an agency 
to use plain language in all proposed and final rules published. The 
OCC believes that the interim rule is presented in a clear and 
straightforward manner. We invite your comments on how to make this 
interim rule easier to understand. For example:
     Have we organized the material to suit your needs? If not, 
how could this material be better organized?
     Are the requirements in the regulation clearly stated? If 
not, how could the regulation be more clearly stated?
     Does the regulation contain language or jargon that is not 
clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
     What else could we do to make the regulation easier to 
understand?

Solicitation of Comments on Impact on Community Banks

    The OCC adopted the pilot program following a review of our 
regulations that focused on ways to change the regulations to respond 
to community bank needs. 66 FR 31114, 31115 (June 11, 2001). The 
purpose of the review was to explore ways in which our regulations 
could be modified, consistent with safety and soundness, to reflect the 
fact that community banks operate with more limited resources, and 
often different risk profiles, than larger institutions. Our goal was 
to identify alternative regulatory approaches to minimize the burden on 
community banks and promote their competitiveness.
    The special lending limits in the interim rule are substantively 
identical to those authorized by the pilot program. The OCC seeks 
comments on how community banks assess the interim rule and on the 
impact of the proposal on community banks' current resources and 
available personnel with requisite expertise. The OCC also seeks 
comments on whether the goals of the interim rule could be achieved, 
for community banks, through an alternative approach.

Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) does not apply to a rulemaking 
where a general notice of proposed rulemaking is not required. 5 U.S.C. 
603 and 604. As noted previously, the OCC has determined that it is 
unnecessary to publish a notice of proposed rulemaking for this interim 
final rule. Accordingly, the RFA's requirements relating to an initial 
and final regulatory flexibility analysis do not apply.

Executive Order 12866

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

Unfunded Mandates Reform Act of 1995

    The Unfunded Mandates Reform Act of 1995 (UMA), Public Law 104-4, 
109 Stat. 48, applies only when an agency is required to issue a 
general notice of proposed rulemaking or a final rule for which the 
agency published a general notice of proposed rulemaking, 2 U.S.C. 
1532. As noted previously, the OCC has determined, for good cause, that 
notice and comment is unnecessary for this interim rule. Accordingly, 
the UMA does not require a budgetary impact analysis.

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

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the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). The 
interim rule does not change the information collection previously 
approved under control number 1557-0221 nor does it establish any new 
information collections.

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 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., 84, and 93a.


0
2. In Sec.  32.7:
0
a. Remove the last sentence in paragraphs (a)(1), (a)(2), and (a)(3);
0
b. Revise the section heading;
0
c. Revise paragraph (c); and
0
d. Remove paragraph (e) and redesignate existing paragraph (f) as 
paragraph (e).
    The revisions read as follows:


Sec.  32.7  Residential real estate loans, small business loans, and 
small farm loans.

* * * * *
    (c) Duration of approval. Except as provided in Sec.  32.7(d), a 
bank that has received OCC approval may continue to make loans and 
extensions of credit under the special lending limits in paragraphs 
(a)(1), (2), and (3) of this section, provided the bank remains an 
``eligible bank.''
* * * * *

    Dated: May 24, 2007.
John C. Dugan,
Comptroller of the Currency.
 [FR Doc. E7-11014 Filed 6-6-07; 8:45 am]
BILLING CODE 4810-33-P