Leasing

SUMMARY: The Office of the Comptroller of the Currency (OCC) is

proposing to revise its regulation governing the personal property

lease financing transactions of national banks. This proposal is

another component of the OCC's Regulation Review Program to update and

streamline OCC regulations and to reduce unnecessary regulatory costs

and other burdens. The proposal revises the regulation to improve its

clarity. In addition, the OCC has identified several areas where

substantive changes may be appropriate based upon comments received in

this rulemaking.

DATES: Comments must be received by November 6, 1995.

ADDRESSES: Comments should be directed to: Communications Division, 250

E Street, SW., Washington, DC 20219, Attention: Docket No. 95-21.

Comments will be available for public inspection and photocopying at

the same location.

FOR FURTHER INFORMATION CONTACT: Morris Morgan, Credit and Management

Policy, Chief National Bank Examiner's Office 202/874-5170; Jacqueline

Lussier, Senior Attorney, Legislative and Regulatory Activities 202/

874-5090, Aline J. Henderson, Senior Attorney, Bank Activities and

Structure, Chief Counsel's Office 202/874-5300.

SUPPLEMENTARY INFORMATION:

Introduction

The OCC is proposing to revise 12 CFR part 23, which governs

personal property lease financing transactions by national banks. This

proposal is another component of the OCC's Regulation Review Program.

The principal goal of the Program is to review all of the OCC's rules

with a view toward eliminating provisions that do not contribute

significantly to maintaining the safety and soundness of national banks

or to accomplishing the OCC's other statutory responsibilities. Another

important goal is to clarify regulations so that they more effectively

convey the standards the OCC seeks to apply.

The OCC first adopted part 23 in mid-1991.1 The OCC's

experience to date suggests that a complete, substantive rewrite of the

regulation is not warranted at this time, but that revisions to improve

its clarity would be useful. Accordingly, the proposal revises the

regulation by shortening and streamlining its text; reorganizing many

of its provisions and adding paragraph headings; and conforming its

style to that of the OCC's other rules. In addition, the OCC has

identified several areas, described in the Discussion section below,

where substantive changes may be appropriate based upon the comments

received in response to this proposal.

\1\ 56 FR 28314 (June 20, 1991). The final regulation replaced

the OCC's interpretive ruling on lease financing transactions, which

had been codified at 12 CFR 7.3400. Much of the substance of this

interpretive ruling was retained, however, in the portions of part

23 that apply to Section 24(Seventh) Leases.

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Background

National banks may engage in leasing activities pursuant to two

independent sources of authority. First, under 12 U.S.C. 24(Seventh),

national banks may engage in personal property lease financing

transactions (Section 24(Seventh) Leases) when the lease is the

functional equivalent of a loan.2 The OCC has interpreted the

functional equivalency standard to mean that Section 24(Seventh) Leases

must be ``net, full-payout leases.'' Under the current regulation, the

net lease requirement means that the lessor national bank may not

provide certain enumerated services such as repairs, maintenance, or

insurance in connection with the leased property. The full-payout

requirement means that the bank must expect to recover the full

acquisition and financing costs of the leasing transaction from sources

that include the estimated, unguaranteed residual value of the leased

property, but that the bank may rely on estimated residual value only

to a limited extent. There is no aggregate limit on a national bank's

investment in Section 24(Seventh) Leases.

\2\ See M & M Leasing Corp. v. Seattle First National Bank, 563

F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978)

(upholding national banks' authority under 12 U.S.C. 24(Seventh) to

engage in personal property lease financing transactions if the

lease is the functional equivalent of a loan).

In 1987, Congress gave national banks a second, explicit source of

authority to engage in the personal property lease financing. The

Competitive Equality Banking Act (CEBA) 3 amended 12 U.S.C. 24 by

adding a new paragraph Tenth, which allows national banks to invest in

tangible personal property, including vehicles, manufactured homes,

machinery, equipment, and furniture, for lease financing transactions

on a net lease basis. Investment in personal property to be leased

under the authority of 12 U.S.C. 24(Tenth) (CEBA Leases) may not exceed

10 percent of a national bank's assets. Although a national bank must

expect to recover its full acquisition and financing costs in a CEBA

leasing transaction from the same sources as the regulation specifies

for a Section 24(Seventh) leasing transaction, CEBA Leases are not

subject to a maximum estimated residual value limit.

\3\ Pub. L. 100-86, Sec. 108, 101 Stat. 552, 579 (August 10,

1987). See also S. Rep. No. 100-19, 100th Cong., 1st Sess. 43 (1987)

(CEBA expanded national banks' leasing authority in order to enable

them to respond to customer demand for a broader range of lease

financing transactions and to compete with thrift and other nonbank

lessors).

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Both Section 24(Seventh) Leases and CEBA Leases are governed by

standards set forth in part 23. The current version of part 23 contains

three subparts: subpart A applies to all lease financing transactions;

subpart B contains additional requirements applicable only to CEBA

Leases; and subpart C contains additional requirements applicable only

to Section 24(Seventh) Leases. The proposal retains the three-subpart

structure, but revises and reorganizes the rule's provisions to enhance

clarity. A derivation table showing these changes appears at the

conclusion of this preamble.

The Discussion portion of the preamble contains a section-by-

section description of the proposed revisions.

[[Page 46247]]

Discussion

Subpart A--General Provisions

Authority, Purpose, and Scope (Proposed Sec. 23.1)

Current Section 23.1(a) sets out the authority of national banks to

engage in personal property lease financing transactions. The proposal

does not change the authority provision, but it adds subsections

describing the purpose of part 23 and the scope of its respective

subparts. Current 23.1(b), which authorizes a national bank to recover

its acquisition and financing costs from rentals, tax benefits, and the

residual value of the leased property, is relocated to proposed

Sec. 23.3.

Definitions (Proposed Sec. 23.2)

The current regulation does not contain a definitions section.

Proposed Sec. 23.2 defines several terms, including ``CEBA Lease,''

``conforming lease,'' ``off-lease property,'' and ``Section 24(Seventh)

Lease'' for the purpose of making the operative provisions of the

regulation shorter and easier to read.

Current Sec. 23.2 contains both a definition of the term ``net

lease'' and operative provisions, including the so-called ``distress

clauses,'' which allow a national bank to take reasonable action to

protect its interest in leased property, and a provision that allows a

national bank to arrange for a third party to provide operational

services that the bank is precluded from providing under a net lease.

The definition of ``net lease'' is retained in proposed Sec. 23.2(d)

without substantive change; the operative provisions are moved to

proposed Sec. 23.4.

Proposed Sec. 23.2(c) contains a definition of the term ``full-

payout lease.'' The term is defined as a lease financing transaction in

which the unguaranteed portion of the estimated residual value of the

leased property \4\ on which a bank relies for recovery of its

acquisition and financing costs is no greater than 25 percent of the

cost of the leased property to the lessor. This estimated residual

value limit is the same as the limit that currently appears at

Sec. 23.11(a) of the current regulation. Other, operative provisions of

the current regulation that pertain to residual value are retained in

subpart C of part 23, as described below.

\4\ The ``estimated residual value'' is the estimated market

value of leased property at the end of the lease term; the

``unguaranteed portion'' of the estimated residual value is the

estimated residual value at the end of the lease term less any

portion of the estimated residual value guaranteed by the lessee,

the manufacturer, or a third party. See 12 CFR 23.1(b), 23.11.

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The purpose of a residual value limit is to ensure that a lessor

bank relies primarily on the creditworthiness of the lessee to recover

its entire investment in the leased property. When the OCC adopted the

current residual value limit in 1979, it selected 25 percent as the

level that best protected national banks from the increased risk that

results from excessive reliance on residual value. That amount was

based in part on the OCC's experience at that time in examining and

supervising banks engaged in Section 24(Seventh) lease financing

activities. See 44 FR 22388, 22390 (April 13, 1979) (adoption of

interpretive rule establishing estimated residual value limit of 25

percent).\5\

\5\ In 1979, the regulations promulgated by the Board of

Governors of the Federal Reserve System (FRB) that authorized a bank

holding company or its subsidiary to engage in lease financing

activities limited the reliance placed on residual value to a

maximum of 20 percent of the cost of the property. In 1992, the FRB

decided to conform its residual value provisions to the OCC's limit

for Section 24(Seventh) Leases. The FRB based its decision, in part,

on the fact that the OCC had not identified any significant

increased risk from permitting reliance on the slightly higher level

of 25 percent. See 57 FR 20958, 20959-60 (May 18, 1992) (final

regulation; discussion of bases for FRB action). The FRB's

regulation appears at 12 CFR 225.25(b)(8).

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Since then, national banks have been given authority to enter into

CEBA Leases, which are not subject to a maximum residual value limit

(but are restricted in aggregate amount to 10 percent of a national

bank's total consolidated assets). National banks do not appear to be

engaged in CEBA leasing to the full extent of their statutory

authority, and liberalization of the residual value limit for Section

24(Seventh) Leases may therefore be unnecessary.

The OCC is interested in commenters' views on this question, and

specifically invites comment on whether the residual value limit for

Section 24(Seventh) Leases should be modified. In addressing this

question, commenters may wish to discuss the effect of Financial

Accounting Standards Board Statement of Financial Accounting Standard

13, ``Accounting for Leases,'' which, as a practical matter, may affect

the extent to which a national bank relies on residual value.

Commenters who support a more flexible limit on residual value for

Section 24(Seventh) Leases are asked to identify any increased risk

that may accompany a new limit and to discuss how the OCC should

address that risk.

Recovery of Investment (Proposed Sec. 23.3)

Proposed Sec. 23.3 is the same as current Sec. 23.1(b), which

requires that a national bank entering into a lease financing

transaction must reasonably expect to recover its full investment in

the leased property as well as its estimated financing costs over the

life of the lease from three sources: rentals, estimated tax benefits,

and the estimated residual value of the leased property.

As its placement in subpart A of part 23 indicates, the recovery of

investment provision applies both to CEBA Leases and to Section

24(Seventh) Leases. The maximum estimated residual value requirement

that appears in the definition of the term ``full-payout lease,''

however, applies only to Section 24(Seventh) Leases. Neither the

current regulation nor the proposal limits the extent to which a

national bank may rely on residual value to recover its acquisition and

financing costs in a CEBA Lease transaction.

Net Lease Requirement (Proposed Sec. 23.4)

A new paragraph (a) is added to proposed Sec. 23.4. This paragraph

contains an explicit statement of the requirement that national banks

may engage in a lease financing transaction, and in activities

incidental to the transaction, only if the lease is a net lease. The

current rule does not contain a plain statement of this basic

requirement. The statement is added for purposes of clarity and

completeness; it is not intended to change the requirement.

The incidental activities clause in proposed Sec. 23.4(a) reflects

the OCC's long-standing interpretations authorizing national banks to

engage in activities incidental to leasing. As the placement of the

incidental activities reference within subpart A of part 23 indicates,

the OCC takes the position that a national bank may engage in

incidental activities with respect both to Section 24(Seventh) Leases

and CEBA Leases.

The activities incidental to leasing that the OCC has authorized to

date for national banks acting as lessors include: \6\ providing

management,

[[Page 46248]]

marketing, and administrative services through an operating subsidiary;

offering credit life insurance to lessees; and acquiring rights under

maintenance contracts associated with purchased leases.\7\ The OCC does

not propose to include a list of permissible activities incidental to

leasing in part 23. Commenters are, however, invited to address the

desirability of retaining this case-by-case approach and to discuss

incidental activities that may be appropriate for OCC consideration. In

particular, the OCC is seeking comment on whether it should, on a case-

by-case basis, permit national banks to lease real estate when the real

estate lease is incidental to a personal property lease financing

transaction. This issue may arise, for example, when a bank wishes to

lease personalty, such as machinery, that is affixed to the land on

which it sits.

\6\ The OCC has also authorized national banks to engage in

incidental activities with respect to lease financing transactions

to which the bank is not a party. These activities include acting as

finder or performing similar functions as agent or broker. See 12

CFR 7.7200. They also include providing lease consulting services

such as financial advice; providing management, brokerage, and

finder services; and performing lease servicing for third parties.

See, e.g., OCC Interpretive Letter No. 567 (Oct. 29, 1991) reprinted

in [1991-92 Transfer Binder] Fed. Banking L. Rep. (CCH) para.

83,337; Letter from Wallace S. Nathan (Oct. 28, 1985) (unpublished);

Letter from Peter Liebesman (June 15, 1981) (unpublished).

Copies of unpublished letters are available in the OCC's public

comment file for this rulemaking.

\7\ See Letter from H. Joe Selby, Nov. 24, 1976 (unpublished)

(management, marketing, and administrative services through an

operating subsidiary); Letter from Peter Liebesman, Jan. 14, 1985

(unpublished) (credit life insurance); Letter from J.T. Watson, May

14, 1975 (unpublished) (rights under maintenance contracts

associated with purchased leases).

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The substance of proposed Sec. 23.4(b) is the same as that of

current Sec. 23.2(b), (c), and (d), but the text has been revised so

that it is shorter and simpler. For example, the provisions specifying

the conditions under which a national bank may take appropriate action

to protect its interests have been amended so that they no longer

require that a change in condition be ``unexpected'' or that a bank's

increased exposure to risk be ``significant.'' As is the case in

current Sec. 23.2, proposed Sec. 23.4(b) provides that the actions a

national bank may take to salvage or protect its investment under the

distress clauses include the actions described in the definition of net

lease at Sec. 23.2(d).

Investment in Personal Property (Proposed Sec. 23.5)

Current Sec. 23.3, which governs the acquisition of property to be

leased, the disposition of the property at the conclusion of the lease

term or upon the lessee's default, and the use of short-term leases,

has been moved to proposed Sec. 23.5 with certain clarifying changes.

For example, the text of the provision covering bridge or interim

leases has been rewritten to state more clearly the current rule that a

bank's use of a bridge or interim lease pending the long-term

disposition of off-lease property does not extend the off-lease holding

period. Property is ``off-lease'' at the expiration of the lease term

or upon the lessee's default on the lease agreement prior to

expiration.

Current Sec. 23.3(b) requires that a national bank dispose of or

re-lease off-lease property as soon as practicable, but not later than

two years from the date the lease expires. Proposed Sec. 23.5(b) is

substantively the same but contains new language to clarify that the

two-year holding period runs either from the date the lease expires or

from the date of the lessee's default, depending on the reason that the

national bank takes possession or control of the leased property.

Both Section 24(Seventh) Leases and CEBA Leases are subject to this

holding period limitation for off-lease assets. Property that the bank

retains in anticipation of re-leasing must be revalued when it comes

off-lease at the lower of current fair market value or book value. Upon

the expiration of the two-year period, national banks are required to

write-off any remaining book value for off-lease assets.

The OCC has considered whether it should extend the holding period

for off-lease property. For example, a longer holding period may be

appropriate where markets for particular types of property become

depressed, and the two-year period might be insufficient to allow

national banks to proceed with the orderly liquidation or re-lease of

the property. The OCC, however, lacks empirical data on the experiences

national banks have had in attempting to liquidate or re-lease specific

kinds of off-lease property within the current holding period and,

accordingly, is not now proposing any change.

The OCC would consider modifying the holding period in the final

revisions of part 23 if commenters present persuasive reasons,

supported by empirical evidence, for doing so. Accordingly, the OCC

requests comment on the following issues: (1) Should the holding period

for off-lease assets be extended and, if so, should it be extended for

all categories of assets or only for particular categories? (2) If the

holding period were extended, what is a reasonable additional time

period, in general or for particular categories of assets? (3) What

evidence supports extension of the holding period? (4) If the holding

period were extended, how should the OCC ensure that banks do not use

the longer period to retain property for essentially speculative

purposes? The OCC invites specific comment on the experiences of

national banks in attempting to liquidate or re-lease specific kinds of

off-lease personal property that are relevant to the issue of extending

the holding period requirement.

Requirement for Separate Records (Proposed Sec. 23.6)

Proposed Sec. 23.6 retains the requirement in current Sec. 23.4

that national banks maintain separate records for CEBA Leases and

Section 24(Seventh) Leases. Minor revisions have been made to shorten

and clarify the text.

Applicability of Consumer Laws (Current Sec. 23.6; Removed in Proposal)

Current Sec. 23.6 states that nothing in part 23 shall be construed

to be in conflict with the duties, liabilities and standards imposed by

the Consumer Leasing Act of 1976, 12 U.S.C. 1667 et seq. (CLA). The OCC

is proposing to remove this section because other consumer protection

laws and regulations may also apply to personal property lease

financing, making the cross-reference potentially misleading. Of

course, this change does not affect the applicability of the CLA or any

other consumer credit laws to national banks' lease financing

activities, and national banks must know and comply with the full range

of requirements that govern these activities.

Application of Lending Limits; Restrictions on Transactions With

Affiliates (Proposed Sec. 23.7)

The proposal continues to subject lease financing transactions to

lending limits and transactions with affiliates restrictions, but

clarifies that the transactions with affiliates restrictions apply only

if the lessee is an affiliate of the lessor bank. The proposal also

retains the reservation of the OCC's authority to impose other limits

or restrictions. These provisions currently appear at Sec. 23.5; they

are relocated in the proposal to Sec. 23.7.

Subpart B--CEBA Leases

Provisions Applicable to CEBA Leases (Proposed Secs. 23.8, 23.9, and

23.10)

Proposed Secs. 23.8, 23.9, and 23.10 contain the requirements

applicable to CEBA Leases, including a statement of the general rule

authorizing investment in CEBA Leases, the limits placed on banks'

exercise of their CEBA leasing authority, and a transition rule for

CEBA Leases entered into after CEBA's enactment but before the

effective date of the OCC's final implementing rule. The substance of

these provisions is the same as that of current Secs. 23.7. 23.8, and

23.9. Minor changes have been made to shorten and clarify the text.

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Subpart C--Section 24(Seventh) Leases

General Rule (Proposed Sec. 23.11)

Current Sec. 23.10 states the general rule authorizing national

banks to engage in lease financing pursuant to 12 U.S.C 24(Seventh).

The substance of proposed Sec. 23.11 is the same as this current rule.

The reference to incidental activities in the current rule has been

deleted as redundant, however, given the treatment of incidental

activities in proposed Sec. 23.4. Other, minor revisions have been made

to shorten and clarify the text.

Estimated Residual Value (Proposed Sec. 23.12)

Current Sec. 23.11 prescribes not only the residual value limit

that applies to Section 24(Seventh) Leases but also certain other

provisions that apply to a bank's reliance on or estimate of residual

value. First, the amount of any estimated residual value guaranteed by

a manufacturer, the lessee, or a third party that is not an affiliate

of the bank may exceed 25 percent of the original cost of the property

if the bank has determined that the guarantor has the resources to meet

the guarantee and the bank can document its determination. Second, the

estimated residual value amounts must be reasonable given the type of

property leased and the relevant circumstances, so that realization of

the lessor bank's full investment and the cost of financing the

property primarily depends on the creditworthiness of the lessee and

any guarantor of the residual value, and not on the residual market

value of the leased item. Finally, when a bank leases personal property

to a government entity, its estimates of residual value may be based on

future transactions that it reasonably anticipates will occur.

The estimated residual value limit has been incorporated into a

definition of the term ``full-payout lease'' that appears in proposed

Sec. 23.2. The other provisions remain substantively unchanged but have

been moved to proposed Sec. 23.12 with minor revisions to shorten and

clarify the text.

Transition Rule (Proposed Sec. 23.13)

Current Sec. 23.12 provides that leases executed before June 12,

1979,\8\ are not subject to part 23 and prescribes rules for renewing

those leases. Proposed Sec. 23.13 retains these provisions with minor

revisions to shorten and clarify the text.

\8\ June 12, 1979, was the effective date of the OCC's final

rule amending 12 CFR 7.3400 to reflect the Ninth Circuit's decision

in the M&M Leasing case.

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The OCC welcomes comments on any aspect of the proposed regulation,

particularly on those issues specifically noted in this preamble.

Derivation Table

[This table directs readers to the provision(s) of the current

regulation, if any, upon which the proposed revision is based.]

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Original

Revised provision provision Comments

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Sec. 23.1................................ Sec. 23.1(a) Modified.

Sec. 23.2(a), (b), (c)................... ............. Added.

Sec. 23.2(d)............................. Sec. 23.2(a) Modified.

Sec. 23.3................................ Sec. 23.1(b) Modified.

Sec. 23.4(a)............................. ............. Added.

Sec. 23.4(b)............................. Sec. 23.2 Modified.

(b), (c),

(d).

Sec. 23.5................................ Sec. 23.3... Modified.

Sec. 23.6................................ Sec. 23.4... Modified.

Sec. 23.7................................ Sec. 23.5... Modified.

Sec. 23.6... Removed.

Sec. 23.8................................ Sec. 23.7... Modified.

Sec. 23.9................................ Sec. 23.8... Modified.

Sec. 23.10............................... Sec. 23.9... Modified.

Sec. 23.11............................... Sec. 23.10.. Modified.

Sec. 23.12............................... Sec. 23.11.. Modified.

Sec. 23.13............................... Sec. 23.12.. Modified.

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Regulatory Flexibility Act

It is hereby certified that this proposal, if adopted as a final

rule, will not have a significant economic impact on a substantial

number of small entities. Accordingly, a regulatory flexibility

analysis is not required. This proposal, if adopted as a final rule,

will reduce the regulatory burden on national banks, regardless of

size, by simplifying and clarifying existing regulatory requirements.

Executive Order 12866

The OCC has determined that this proposal is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

The OCC has determined that the requirements of this proposal will

not result in expenditures by State, local, and tribal governments, or

by the private sector, of more than $100 million in any one year.

Accordingly, a budgetary impact statement is not required under section

202 of the Unfunded Mandates Reform Act of 1995.

List of Subjects in 12 CFR Part 23

National banks, Banking, Leasing, Lease financing transactions.

Authority and Issuance

For the reasons set out in the preamble, part 23 of title 12,

chapter I, of the Code of Federal Regulations is proposed to be amended

as set forth below:

1. Part 23 is revised to read as follows:

PART 23--LEASING

Subpart A--General Provisions

Sec.

23.1 Authority, purpose, and scope.

23.2 Definitions.

23.3 Recovery of investment.

23.4 Net lease requirement.

23.5 Investment in personal property.

23.6 Requirement for separate records.

23.7 Application of lending limits; restrictions on transactions

with affiliates.

Subpart B--CEBA Leases

23.8 General rule.

23.9 Lease term.

23.10 Transition rule.

Subpart C--Section 24(Seventh) Leases

23.11 General rule.

23.12 Estimated residual value.

23.13 Transition rule.

Authority: 12 U.S.C. 1; 12 U.S.C. 24(Seventh) and 24(Tenth); 12

U.S.C. 93a.

Subpart A--General Provisions

Sec. 23.1 Authority, purpose, and scope.

(a) Authority. A national bank may engage in personal property

lease financing transactions pursuant to 12 U.S.C. 24(Seventh) and 12

U.S.C. 24(Tenth).

(b) Purpose. The purpose of this part is to set forth standards for

personal property lease financing transactions authorized for national

banks.

(c) Scope. A national bank that enters into a lease under the

authority of 12 U.S.C. 24(Seventh) must comply with subparts A and C of

this part. A national bank that enters into a lease under the authority

of 12 U.S.C. 24(Tenth) must comply with subparts A and B of this part.

Sec. 23.2 Definitions.

(a) CEBA Lease means a personal property lease entered into under

the authority of 12 U.S.C. 24(Tenth).

(b) Conforming lease means:

(1) A CEBA Lease that conforms with the requirements of subparts A

and B of this part; or

(2) A Section 24(Seventh) Lease that conforms with the requirements

of subparts A and C of this part.

(c) Full-payout lease means a lease financing transaction in which

any unguaranteed portion of the estimated residual value relied upon by

the bank to yield the return of its full investment in the leased

property, plus the estimated cost of financing the property over the

term of the lease, does not exceed 25 percent of the original cost of

the property to the lessor.

[[Page 46250]]

(d) Net lease means a lease under which the bank will not, directly

or indirectly, provide or be obligated to provide for:

(1) Servicing, repair, or maintenance of the leased property during

the lease term;

(2) Purchasing parts and accessories for the leased property;

however, improvements and additions to the leased property may be

leased to the lessee upon the lessee's request in accordance with any

applicable requirements for maximum estimated residual value;

(3) Loan of replacement or substitute property while the leased

property is being serviced;

(4) Purchasing insurance for the lessee, except where the lessee

has failed in its contractual obligation to purchase or maintain the

required insurance; or

(5) Renewal of any license or registration for the property unless

renewal by the bank is necessary to protect its interest as owner or

financier of the property.

(e) Off-lease property means personal property that reverts to a

national bank's possession or control upon the expiration of a lease or

upon the default of the lessee.

(f) Section 24(Seventh) Lease means a personal property lease

entered into under the authority of 12 U.S.C. 24(Seventh).

Sec. 23.3 Recovery of investment.

A national bank that enters into a lease financing transaction must

reasonably expect to realize the return of its full investment in the

leased property, plus the estimated cost of financing the property over

the term of the lease, from:

(1) Rentals;

(2) Estimated tax benefits; and

(3) The estimated residual value of the property at the expiration

of the term of the lease.

Sec. 23.4 Net lease requirement.

(a) General rule. A national bank may engage in a lease financing

transaction and activities incidental to the transaction only if the

lease qualifies as a net lease.

(b) Exceptions--(1) Change in conditions. If, in good faith, a

national bank believes that there has been a change in conditions that

threatens its financial position by increasing its exposure to loss,

then the bank may:

(i) As the owner and lessor under a net lease, take reasonable and

appropriate action (including the actions specified in Sec. 23.2(d)) to

salvage or protect the value of the property or its interests arising

under the lease;

(ii) As the assignee of a lessor's interest in a lease, become the

owner and lessor of the leased property pursuant to its contractual

rights, or take any reasonable and appropriate action (including the

actions specified in Sec. 23.2(d)) to salvage or protect the value of

the property or its interests arising under the lease.

(2) Provisions to protect the bank's interests. A national bank may

include any provisions in a lease, or make any additional agreements,

to protect its financial position or investment in the event of a

change in conditions that would increase its exposure to loss.

(3) Arranging for services by a third party. A national bank may

arrange for any of the services enumerated in Sec. 23.2(d) to be

provided to a lessee by a third party at the expense of the lessee.

Sec. 23.5 Investment in personal property.

(a) Requirement for written agreement. A national bank may acquire

specific personal property to be leased only after the bank has entered

into either:

(1) A legally binding written agreement that indemnifies the bank

against loss in connection with its acquisition of the property; or

(2) A legally binding written commitment to enter into a conforming

lease.

(b) Two-year holding period. At the expiration of the lease

(including any renewals or extensions with the same lessee), or in the

event of a default on a lease agreement prior to the expiration of the

lease term, a national bank shall either liquidate the property or re-

lease it under a conforming lease as soon as practicable. In any event,

liquidation or re-lease shall occur not later than two years from the

date of the expiration of the lease or the date of the lessee's

default. Property that the bank retains in anticipation of re-leasing

must be revalued at the lower of current fair market value or book

value before the bank enters into any subsequent lease.

(c) Bridge or interim leases. During the two-year holding period

allowed by paragraph (b) of this section, a bank may enter into a

short-term bridge or interim lease pending the sale of off-lease

property or the re-lease of the property under a long-term conforming

lease. A short-term bridge or interim lease must be a net lease, but it

need not comply with any other requirement of subpart B or C of this

part.

Sec. 23.6 Requirement for separate records.

If a national bank enters into both CEBA Leases and Section

24(Seventh) Leases, the bank's records must distinguish the CEBA Leases

from the Section 24(Seventh) Leases.

Sec. 23.7 Application of lending limits; restrictions on transactions

with affiliates.

A national bank's lease financing transactions are subject to the

lending limits prescribed by 12 U.S.C. 84 or, if the lessee is an

affiliate of the bank (as defined by 12 U.S.C. 371c), to the

restrictions on transactions with affiliates prescribed by 12 U.S.C.

371c and 371c-1. The OCC may also determine that other limits or

restrictions apply.

Subpart B--CEBA Leases

Sec. 23.8 General rule.

Pursuant to 12 U.S.C. 24(Tenth), a national bank may invest in

tangible personal property, including, without limitation, vehicles,

manufactured homes, machinery, equipment, or furniture for lease

financing transactions, or may become the owner and lessor of tangible

personal property by purchasing the property from another lessor in

connection with the bank's purchase of the related lease, provided

that: the lease is a conforming lease; and the aggregate book value of

all tangible personal property held for lease under the authority of 12

U.S.C. 24(Tenth) does not exceed 10 percent of the bank's consolidated

assets.

Sec. 23.9 Lease term.

(a) Initial term. A CEBA Lease must have an initial term of not

less than 90 days.

(b) Exception. The 90-day term requirement prescribed by paragraph

(a) of this section does not apply to the acquisition of property

subject to an existing lease with a remaining maturity of less than 90

days, provided that, at its inception the lease was a conforming lease.

Sec. 23.10 Transition rule.

(a) General rule. CEBA Leases entered into prior to July 22, 1991,

may continue to be administered in accordance with the lease financing

terms agreed to by the bank/lessor and the lessee. For purposes of

applying the lending limits and the restrictions on transactions with

affiliates described in Sec. 23.7, however, a bank that enters into a

new extension of credit to a customer, including a lease, shall include

all outstanding leases regardless of the date on which they were made.

(b) Renewal of non-conforming leases. A national bank may renew a

CEBA Lease that was entered into prior to July 22, 1991, and that is

not a conforming lease only if the following conditions are satisfied:

[[Page 46251]]

(1) The bank entered into the CEBA Lease in good faith;

(2) The expiring lease contains a binding agreement requiring that

the bank renew the lease at the lessee's option, and the bank cannot

reasonably avoid its commitment to do so; and

(3) The bank determines in good faith and demonstrates by

appropriate documentation that renewal of the lease is necessary to

avoid financial loss and to recover its investment in and its cost of

financing the property.

Subpart C--Section 24(Seventh) Leases

Sec. 23.11 General rule.

Pursuant to 12 U.S.C. 24(Seventh), a national bank may become the

legal or beneficial owner and lessor of, or otherwise acquire, personal

property; or may become the owner and lessor of personal property by

purchasing the property from another lessor in connection with the

bank's purchase of the related lease, provided that: the lease is a

net, full-payout lease representing a noncancelable obligation of the

lessee (notwithstanding the possible early termination of that lease);

and the lease is a conforming lease.

Sec. 23.12 Estimated residual value.

(a) Recovery of investment and costs. A national bank's estimates

of the residual value of the property and the portion of the estimated

residual value that the bank relies upon to satisfy the requirements of

a full-payout lease, as defined in Sec. 23.2(c), must be reasonable in

light of the nature of the leased property and all circumstances

relevant to the transaction. The bank's realization of its full

investment in the leased property, plus the estimated cost of financing

the property over the term of the lease, must depend primarily on the

creditworthiness of the lessee and any guarantor of the residual value,

and not on the residual value of the leased item.

(b) Estimated residual value subject to guarantee. The amount of

any estimated residual value guaranteed by the manufacturer, the

lessee, or a third party may exceed 25 percent of the original cost of

the property if the bank determines and demonstrates by appropriate

documentation that the guarantor has the resources to meet the

guarantee and the guarantor is not an affiliate of the bank, as defined

by 12 U.S.C. 371c.

(c) Leases to government entities. Calculations of estimated

residual value on leases of personal property to Federal, State, or

local government entities may be based on future transactions or

renewals that the bank reasonably anticipates will occur.

Sec. 23.13 Transition rule.

(a) Exclusion. Subpart A and this subpart shall not apply to any

Sec. 24(Seventh) Leases executed prior to June 12, 1979. For purposes

of applying the lending limits and the restrictions on transactions

with affiliates described in Sec. 23.7, however, a bank that enters

into a new extension of credit to a customer, including a lease shall

include all outstanding leases regardless of the date on which they

were made.

(b) Renewal of non-conforming leases. A national bank may renew a

Section 24(Seventh) Lease that was entered into prior to June 12, 1979,

and that is not a conforming lease only if the following conditions are

satisfied:

(1) The bank entered into the Section 24(Seventh) Lease in good

faith;

(2) The expiring lease contains a binding agreement requiring that

the bank renew the lease at the lessee's option, and the bank cannot

reasonably avoid its commitment to do so; and

(3) The bank determines in good faith and demonstrates by

appropriate documentation that renewal of the lease is necessary to

avoid financial loss and to recover its investment in and its cost of

financing the property.

Dated: August 14, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95-21983 Filed 9-5-95; 8:45 am]

BILLING CODE 4810-33-P