Risk-Based Capital RequirementsSmall Business Loan Obligations

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 95-22]

RIN 1557-AB14

Risk-Based Capital Requirements--Small Business Loan Obligations

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

ACTION: Interim rule with request for comments.

-----------------------------------------------------------------------

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

amending its risk-based capital standards as required by section 208 of

the Riegle Community Development and Regulatory Improvement Act of

1994. The changes will modify the risk-based capital treatment of

transfers of small business loans or leases of personal property with

recourse, and are intended to facilitate such transfers.

[[Page 47456]]

DATES: The interim rule is effective September 13, 1995. Comments must

be received on or before November 13, 1995.

ADDRESSES: Written comments should be submitted to Docket No. 95-22.

Communications Division, Third Floor, Office of the Comptroller of the

Currency, 250 E Street, SW., Washington, DC 20219, Fax (202) 874-5274.

Comments will be available for inspection and photocopying at that

address.

FOR FURTHER INFORMATION CONTACT: David Thede, Senior Attorney,

Securities and Corporate Practices Division (202/874-5210); Stephen

Jackson, National Bank Examiner, (202) 874-5070, Office of the

Comptroller of the Currency.

SUPPLEMENTARY INFORMATION: The OCC is amending its risk-based capital

standards for transfers of small business obligations with recourse as

required by section 208 of the Riegle Community Development and

Regulatory Improvement Act of 1994 (the Riegle Act), 12 U.S.C. 1835.

Banks typically transfer assets with recourse as part of securitization

transactions. Sections 201-210 of the Riegle Act were intended to

increase small business access to capital by removing impediments in

existing law to the securitization of small business loans and leases.

Under the OCC's current risk-based capital standards, assets

transferred with recourse are reported on the balance sheet in

regulatory reports. These amounts are thus included in the calculation

of banks' risk-based capital and leverage capital ratios.

Section 208 requires the OCC, the Office of Thrift Supervision, the

Federal Deposit Insurance Corporation, and the Federal Reserve Board

(the Federal banking agencies) to change this capital treatment for

transfers of small business loans and leases with recourse. Under

section 208, a bank may hold capital only against the face amount of a

recourse obligation (rather than the amount of the asset transferred

with recourse) if the bank establishes a reserve equal to the bank's

reasonable estimated liability under the recourse obligation.1

Section 208 limits the availability of this treatment as follows:

\1\ For purposes of determining a bank's capital ratio, the

reserve would not be subtracted from the amount of the recourse

obligation.

---------------------------------------------------------------------------

(1) To apply section 208 to a transaction, a bank must be a

``qualified insured depository institution'' at the time of the sale

with recourse. A qualified insured depository institution must be

either well capitalized or, with the approval of the OCC, adequately

capitalized (in either case, without regard to section 208). If an

institution loses its ``qualified'' status, transactions completed

while the institution was qualified will continue to receive the

favorable capital treatment.

(2) The total outstanding amount of recourse retained by a bank

with respect to transfers of small business loans and leases of

personal property and included in the risk-weighted assets of the bank

as described in section 208 may not exceed 15 percent of the risk-based

capital of the bank, unless the OCC, by regulation or order, specifies

a greater amount.

Prompt Corrective Action

Section 208(f) states that the capital of an insured depository

institution shall be computed without regard to section 208 in

determining whether the institution is adequately capitalized,

undercapitalized, significantly undercapitalized, or critically

undercapitalized under section 38 of the Federal Deposit Insurance Act

(12 U.S.C. 1831o). Section 1831o addresses prompt corrective action.

The caption to section 208(f), ``Prompt Corrective Action Not

Affected,'' and the legislative history indicate that section 208 was

not intended to affect the operation of the prompt corrective action

system. See S. Rep. No. 103-169, 103d Cong., 1st Sess. 38, 69 (1993).

However, the statute does not include ``well capitalized'' in the list

of capital categories not affected. The prompt corrective action system

deals primarily with imposing corrective sanctions on banks that are

less than adequately capitalized. Therefore, allowing a bank that is

adequately capitalized without the section 208 treatment 2 to use

section 208 for purposes of determining whether the bank is well

capitalized generally would not affect the application of the prompt

corrective action sanctions to the bank. Other statutes and regulations

treat a bank more favorably if it is well capitalized as defined under

the prompt corrective action statute, but these provisions are not part

of the prompt corrective action system of sanctions. Permitting a bank

to be treated as well capitalized for purposes of these other

provisions also will not affect the imposition of prompt corrective

action sanctions.

\2\ It is very unlikely but theoretically possible that a bank

that is undercapitalized without section 208 would become well

capitalized if it applied the treatment in section 208. Because

section 208 was not intended to affect prompt corrective action, and

because allowing an undercapitalized bank to become well capitalized

would affect prompt corrective action, the OCC interprets section

208 not to allow an undercapitalized bank to use the capital

treatment it describes to become well capitalized for purposes of

prompt corrective action.

---------------------------------------------------------------------------

There is one provision of the prompt corrective action system that

could be affected by treating a bank as well capitalized rather than

adequately capitalized. If the OCC determines that a bank is in an

unsafe or unsound condition or is engaging in an unsafe or unsound

practice, 12 U.S.C. 1831o(g) authorizes the OCC to require an

adequately capitalized bank (but not a well capitalized bank) to comply

with certain prompt corrective action provisions as if the bank were

undercapitalized. Because the text and legislative history of section

208 indicate that it was not intended to affect prompt corrective

action, the OCC believes that section 208 does not affect the capital

calculation for purposes of 12 U.S.C. 1831o(g), regardless of the

bank's capital level. (The OCC requests comment on this conclusion and

also asks that commenters discuss the legal justification for any

alternative interpretation that they suggest.)

Thus, a bank may use the capital treatment described in section 208

when determining whether it is well capitalized for purposes of prompt

corrective action as well as for other regulations that reference the

well capitalized capital category.3 A bank may not use the capital

treatment described in section 208 when determining whether it is

adequately capitalized, undercapitalized, significantly

undercapitalized, or critically undercapitalized for purposes of prompt

corrective action or other regulations that directly or indirectly

reference the prompt corrective action capital categories.4 The

banking agencies will disregard the capital treatment described in

section 208 for purposes of 12 U.S.C. 1831o(g).

\3\ An institution that is subject to a written agreement or

capital directive as discussed in the OCC's prompt corrective action

regulation would not be considered well capitalized.

\4\ Under section 208, the capital calculation used to determine

whether an institution is well capitalized differs from the

calculation used to determine whether an institution is adequately

capitalized. As a result, it is possible that an institution could

be well capitalized using one calculation and adequately capitalized

using the other. In this situation, the institution would be

considered well capitalized.

---------------------------------------------------------------------------

The OCC requests comments on all aspects of this interim rule.

Summary Outline

(1) Which small business obligations can an institution apply

section 208 to? The answer depends on the capital level of the bank

without considering section 208.

[[Page 47457]]

(a) Bank is well capitalized without using section 208: bank is

``qualifying'' and can apply section 208 to any transfer of small

business obligations with recourse, up to the 15% of capital limit.

(b) Bank is adequately capitalized without using section 208 and

has permission from its regulator: bank is ``qualifying'' and can apply

section 208 to any transfer of small business obligations with

recourse, up to the 15% of capital limit.

(c) Other banks: bank is not ``qualifying'' and so cannot apply

section 208 to new obligations. However, if the bank was qualifying in

the past, it can continue to apply section 208 to obligations arising

out of transfers that occurred during the time that the bank was

qualified.

(2) If a bank has assets that it can apply section 208 to, for what

purposes can the bank use the section 208 treatment? Again, the answer

depends on the capital level of the bank without considering section

208.

----------------------------------------------------------------------------------------------------------------

Other laws and Other laws and

Capital level PCA, except 1831o(g) 1831o(g) regulations that regulations that do

reference PCA not reference PCA

----------------------------------------------------------------------------------------------------------------

Well capitalized without Yes................. N/A 2............... Yes................. Yes.

using 208 1.

Well capitalized using Yes................. No.................. Yes................. Yes.

208 and adequately

capitalized without

using 208.

Other banks............. No.................. No.................. No.................. Yes.

----------------------------------------------------------------------------------------------------------------

1 Most banks currently fall into this category and so would be able to use section 208 for all capital

calculations.

2 If a bank is well-capitalized without using section 208, application of section 208 will not affect the status

of the bank under 12 U.S.C. 1831o(g).

Regulatory Flexibility Act

It is hereby certified that this interim rule will not have a

significant economic impact on a substantial number of small entities.

This rulemaking is required by statute and will not affect a bank's

risk-based capital for Prompt Corrective Action purposes, regardless of

bank size.

Administrative Procedure Act

Section 208(g) requires that the Federal banking agencies

promulgate rules implementing section 208 no later than March 22, 1995.

The OCC has determined that the notice and public participation that

are ordinarily required by the Administrative Procedure Act (5 U.S.C.

553) before a regulation may take effect would, in this case, be

impracticable due to the time constraints imposed by section 208(g). In

addition, in the OCC's view, advanced public notice and comment is

unnecessary as the interim rule merely restates the statute. Further,

the interim rule would permit qualifying institutions to reduce their

capital levels, thereby providing these institutions with greater

lending flexibility. Consequently, the added delay that would result

from providing advance notice and public participation could adversely

affect credit availability.

The interim rule is immediately effective upon publication in the

Federal Register. This action is being taken pursuant to 5 U.S.C.

553(d) of the Administrative Procedure Act which permits the waiver of

the 30-day delayed effective date requirement for good cause or where a

rule relieves a restriction. The OCC views the limitations of time and

the potential loss of benefit to affected parties during the pendency

of this rulemaking as good cause to waive the 30-day delayed effective

date. In addition, as the interim rule relieves a restriction, the 30-

day delayed effective date may be waived. Nevertheless, the OCC desires

to have the benefit of public comment before adoption of a final rule.

Accordingly, the OCC invites interested persons to submit comments

during a 60-day comment period. In adopting a final rule, the OCC will

revise the interim rule as may be appropriate based on the comments

received.

Executive Order 12866

The OCC has determined that this interim rule is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates

Act) requires that an agency prepare a budgetary impact statement

before promulgating a rule that includes 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 an agency to identify and

consider a reasonable number of regulatory alternatives before

promulgating a rule. As discussed in the preamble, the interim rule

authorizes an alternative method of calculating capital that permits

banks to elect to hold less capital for certain recourse obligations.

Because the OCC has determined that the interim rule 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, the OCC has not

prepared a budgetary impact statement or specifically addressed the

regulatory alternatives considered.

Paperwork Reduction Act (44 U.S.C. 3501 et seq.) and Regulatory Burden

The OCC has determined that this interim rule will not increase the

regulatory paperwork burden of national banks.

Section 302 of the Riegle Act requires that new regulations and

amendments to regulations that impose additional reporting, disclosure,

or other new requirements take effect on the first day of the calendar

quarter following publication of the rule unless, among other things,

the agency determines, for good cause, that the regulation should

become effective on a day other than the first day of the next quarter.

The OCC believes that an immediate effective date is appropriate since

the interim rule relieves a regulatory burden on qualifying banks that

transfer small business obligations with recourse by significantly

reducing the capital requirements on such obligations. This immediate

effective date will permit qualifying institutions to reduce the amount

of capital they must maintain to support the risk retained in these

sales. Moreover, the OCC does not anticipate that immediate application

of the rule will present a hardship to qualifying institutions in terms

of compliance. Also, there is a statutory requirement for the banking

agencies to promulgate final regulations implementing the provisions of

section 208 by March 22, 1995. For these reasons, the OCC has

determined that there is sufficient good cause to provide for an

immediate effective date.

[[Page 47458]]

List of Subjects in 12 CFR Part 3

Administrative practice and procedure, Capital risk, National

banks, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the preamble, appendix A to part 3 of

chapter I of title 12 of the Code of Federal Regulations is amended as

follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

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

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n

note, 1835, 3907, and 3909.

2. In appendix A to part 3, section 3 is amended by adding a new

paragraph (c) to read as follows:

Appendix A To Part 3--Risk-Based Capital Guidelines

* * * * *

Section 3. Risk Categories/Weights for On-Balance Assets and Off-

Balance Sheet Items.

* * * * *

(c) Alternative Capital Calculation for Small Business

Obligations. (1) Definitions. For purposes of this section 3(c):

(i) Qualified bank means a bank that:

(A) Is well capitalized as defined in 12 CFR 6.4 without

applying the capital treatment described in this section 3(c), or

(B) Is adequately capitalized as defined in 12 CFR 6.4 without

applying the capital treatment described in this section 3(c) and

has received written permission from the appropriate district office

of the OCC to apply the capital treatment described in this section

3(c).

(ii) Recourse has the meaning given to such term under generally

accepted accounting principles.

(iii) Small business means a business that meets the criteria

for a small business concern established by the Small Business

Administration in 13 CFR part 121 pursuant to 15 U.S.C. 632.

(2) Capital and reserve requirements. With respect to a transfer

of a small business loan or a lease of personal property with

recourse that is a sale under generally accepted accounting

principles, a qualified bank may elect to apply the following

treatment:

(i) The bank establishes and maintains a non-capital reserve

under generally accepted accounting principles sufficient to meet

the reasonable estimated liability of the bank under the recourse

arrangement;

(ii) For purposes of calculating the bank's risk-based capital

ratio, the bank includes only the amount of its retained recourse in

its risk-weighted assets; and

(iii) For purposes of calculating the bank's tier 1 leverage

ratio, the bank excludes from its average total consolidated assets

the outstanding principal amount of the small business loans and

leases transferred with recourse.

(3) Limit on aggregate amount of recourse. The total outstanding

amount of recourse retained by a qualified bank with respect to

transfers of small business loans and leases of personal property

and included in the risk-weighted assets of the bank as described in

section 3(c)(2) of this appendix A may not exceed 15 percent of the

bank's total capital after adjustments and deductions, unless the

OCC specifies a greater amount by order.

(4) Bank that ceases to be qualified or that exceeds aggregate

limit. If a bank ceases to be a qualified bank or exceeds the

aggregate limit in section 3(c)(3) of this appendix A, the bank may

continue to apply the capital treatment described in section 3(c)(2)

of this appendix A to transfers of small business loans and leases

of personal property that occurred when the bank was qualified and

did not exceed the limit.

(5) Prompt Corrective Action not affected. (i) A bank shall

compute its capital without regard to this section 3(c) for purposes

of prompt corrective action (12 U.S.C. 1831o and 12 CFR part 6)

unless the bank is an adequately or well capitalized bank (without

applying the capital treatment described in this section 3(c)) and,

after applying the capital treatment described in this section 3(c),

the bank would be well capitalized.

(ii) A bank shall compute its capital without regard to this

section 3(c) for purposes of 12 U.S.C. 1831o(g) regardless of the

bank's capital level.

* * * * *

Dated: August 28, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95-22666 Filed 9-12-95; 8:45 am]

BILLING CODE 4810-33-P