Loans to one Borrower

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 95-55]

RIN 1550-AA78

Loans to one Borrower

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Office of Thrift Supervision (OTS) is amending its lending

limits regulation, also known as the loans to one borrower (LTOB) rule,

to reflect recent changes to the Office of the Comptroller of the

Currency's (OCC's) lending limits regulation. Section 5(u) of the Home

Owners' Loan Act requires that savings association lending limits

parallel those applicable to national banks. This interim final rule

amends OTS's LTOB regulation so that thrifts, like national banks, will

use regulatory capital as the starting point for determining

``unimpaired capital and unimpaired surplus'' for LTOB purposes,

removing the need for a separate calculation. It also removes other

outdated or redundant provisions.

DATES: The interim final rule is effective March 28, 1995. Written

comments on this interim final rule must be received on or before April

27, 1995.

ADDRESSES: Send comments to Director, Information Services Division,

Office of Thrift Supervision, 1700 G Street, NW., Washington, D.C.

20552, Attention Docket No. 95-55. These submissions may be hand-

delivered to 1700 G Street, NW., from 9 a.m. to 5 p.m. on business

days; they may be sent by facsimile transmission to FAX Number (202)

906-7755. Comments will be available for inspection at 1700 G Street,

NW., from 1 p.m. until 4 p.m. on business days. Visitors will be

escorted to and from the Public Reading Room at established intervals.

FOR FURTHER INFORMATION CONTACT: William J. Magrini, Project Manager,

Policy, (202) 906-5744; Valerie J. Lithotomos, Counsel (Banking and

Finance), (202) 906-6439; Deborah Dakin, Assistant Chief Counsel, (202)

906-6445, Regulations and Legislation Division, Chief Counsel's Office,

Office of Thrift Supervision, 1700 G Street, NW., Washington DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory and Regulatory Ties Between OCC and OTS Lending Limits

Both savings associations and national banks have statutory limits

placed on the amount an institution can lend to one borrower. Since

1989, Section 5(u) of the Home Owners' Loan Act (HOLA) has provided

that ``Section 5200 of the Revised Statutes applies to savings

associations in the same manner and to the same extent as it applies to

[[Page 15862]] national banks.''1 Section 5200 establishes lending

limits, measured as a percentage of an institution's capital and

surplus, for national banks.2 The OCC's implementing regulations

appear at 12 CFR part 32. The OTS's LTOB rule references the lending

limits set forth in the OCC rule and most lending limit

definitions.3 Therefore, as OCC amends those limits and

definitions in Part 32, the new limits and definitions apply directly

to savings associations, without further OTS action. However, section

563.93(b)(11) of the OTS LTOB rule currently defines the term

``unimpaired capital and unimpaired surplus'' by reference to another

OCC regulation, 12 CFR 3.100. Any OCC changes to the use of that

definition for lending limit purposes would require separate OTS

regulatory action to clarify what definition thrifts should use in

calculating lending limits.

\1\ 12 U.S.C. 1464(u)(1).

\2\ 12 U.S.C. 84.

\3\ 12 CFR 563.93(b), (c)(1994).

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B. Recent OCC Revisions to Lending Limits

As part of the OCC's Regulation Review Program, the OCC has

recently published final revisions to the national bank lending limits

regulation.4 OCC's primary purpose in revising this regulation was

to eliminate inefficient and unduly costly regulatory requirements for

national banks and thereby better focus the lending limits rule on

areas of significant safety and soundness concern.5 The regulation

also incorporates interpretations OCC has developed over the years.

These changes will apply to savings associations upon the OCC's rule

becoming effective.

\4\See 60 FR 8526 (February 15, 1995).

\5\Id. at 8527.

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One of the most important changes OCC's final rule makes is

redefining ``capital and surplus.'' Before amendment, OCC's lending

limit rule used a definition of ``capital and surplus'' at 12 CFR 3.100

that is calculated separately from the definitions of Tier 1 and Tier 2

capital used for determining capital adequacy. In its recent

rulemaking, the OCC redefined ``capital and surplus'' as Tier 1 and

Tier 2 capital included in calculating a bank's risk-based capital,

plus the balance of its allowances for loan and lease losses (ALLL) not

included in its Tier 2 capital. Thus, national banks no longer need to

perform totally different calculations for calculating lending limits

and capital adequacy, but can use the same Report of Bank Condition

(Call Report) line items to calculate both.

The OCC's new definition included the balance of ALLL not already

included in Tier 2 capital because the full amount of ALLL had long

been included under section 3100. The preamble to the proposal that

formed the basis for the recent final rule stated that ``The OCC

believes it is inadvisable to constrict the lending limit base at a

time when concerns about credit availability are widespread, and

believes this proposed change will not impact credit

availability.''6

\6\ 59 FR 6593, 6595 (February 11, 1994).

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C. Comparable OTS Revisions to Its Lending Limits Regulation

The OTS, in making conforming changes to its LTOB regulation,

enables savings associations to realize a similar reduction in

regulatory burden. Extensive revision is not necessary because nearly

all of the OCC changes will become effective for savings associations

by virtue of OTS's referencing of most of the OCC lending limits

regulation. However, a few small changes are required.

First, section 563.93(c) is being amended today to remove an

obsolete cross-reference to former section 32.7, which OCC removed.

Second, the OCC has changed its lending limits rule to allow

national banks to calculate their lending limits quarterly, rather than

every time a new loan is made. The OTS LTOB rule already incorporates

periodic calculations at section 563.93(f)(1). That section is being

modified only to remove an obsolete parenthetical reference to

``monthly or quarterly'' calculations.

Third, as discussed above, section 563.93(b)'s definition of

``unimpaired capital and unimpaired surplus'' currently incorporates 12

CFR 3.100. The OCC's lending limits regulation no longer refers to that

definition but substitutes a definition based on the components

national banks already use in calculating capital for capital adequacy

purposes. This has created confusion about how this change applies to

savings association calculation of ``unimpaired capital and unimpaired

surplus.'' OTS also wants savings associations to have their regulatory

calculation burden reduced as much as possible. Because of the

structure of the OTS capital regulation, however, an extra step is

required to reach the same result as the OCC revision.

For savings associations, the components calculated on their Thrift

Financial Report for capital adequacy purposes are core and

supplementary capital. These are substantially similar to Tier 1 and

Tier 2 capital for banks. However, in calculating core capital for

capital adequacy purposes, thrifts may not include investments in

certain subsidiaries, commonly known as ``nonincludable subsidiaries.''

This requirement, imposed pursuant to section 5(t) of the HOLA, is

designed to ensure that a thrift with investments in such subsidiaries

holds enough capital to fully protect it against any risks such

investments might pose. An ``includable subsidiary'' is one engaged

solely in activities permissible for a national bank, with a few

exceptions not relevant here.7 A national bank may have

subsidiaries, such as service corporations, that engage in activities

not authorized for the bank itself.8 Thus, a national bank may

have a subsidiary, which, if held by a savings association, would be

considered a ``nonincludable subsidiary'' and deducted in calculating

core capital pursuant to section 5(t).

\7\ 12 CFR 567.1(l) (1994).

\8\ 12 U.S.C. 1864(f) (bank service corporation may engage in

any activity other than deposit taking permitted for a bank holding

company, notwithstanding section 1864(d), which otherwise limits the

activities of a bank service corporation in which a national bank is

a shareholder to services authorized for a national bank).

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The section 5(t) deduction from capital has never affected savings

associations' lending limit calculations under section 5(u). Section

5(u) does not require such a deduction in calculating capital and

surplus for lending limits nor has the OCC required such a deduction.

Under both 12 CFR 3.100 and new section 32.2(b), investments in

subsidiaries are not deducted in calculating capital. Using the OTS

section 5(t) capital definitions could thus cause a savings association

with non-includable subsidiaries to have a lower lending limit than it

currently has or would have if it were a national bank with the

identical subsidiaries. Such a credit-limiting result would not be

driven by safety or soundness concerns on the part of either the OTS or

the OCC, but merely by a difference in capital components not relevant

for lending limit purposes.

If section 3.100 still applied, or if OTS were to reference section

32.2(b), a savings association would not be required to deduct any of

its investments in any of its subsidiaries in calculating capital and

surplus. However, this approach would not allow savings associations to

realize the benefit of being able to use the same basic components used

for capital adequacy purposes in calculating lending limits. Unlike

national banks, they would continue to have to [[Page 15863]] complete

a complex worksheet in order to determine their lending limit base of

capital and surplus.

II. Description of Interim Final Rule

The OTS has therefore determined that unimpaired capital and

unimpaired surplus is best defined as the sum of a savings

association's core and supplementary capital included in total capital

under 12 CFR part 567, plus the balance of its general valuation

allowances for loan and lease losses or ALLL not included in its

supplementary capital under part 567, plus its investments in

subsidiaries that are not included in calculating core capital under

part 567. Because the net worth certificates currently specifically

included in section 563.93(b)(11) are included in supplementary

capital, the new regulation removes this reference.

This definition neither raises nor lowers savings associations'

lending limits. It will make it substantially easier for all savings

associations to calculate their loan-to-one-borrower limitations

because all of the components are already reported on the Thrift

Financial Report. This definition eliminates the requirement that a

savings association prepare a separate and complex worksheet to

calculate its LTOB limit without itself raising or lowering savings

associations' lending limits. Just as OCC found it appropriate to

continue to include the full balance of the ALLL in its new definition

of capital and surplus in order to avoid a credit-limiting result, so

the OTS believes it is appropriate to continue to include both the full

balance of loss allowances and savings association investments in

subsidiaries in calculating unimpaired capital and unimpaired surplus

to avoid a credit-limiting result.

The OTS is also removing an obsolete definition of ``qualifying

association'' and an outdated provision in the Appendix to section

563.93 and correcting cross-references.

III. Need for an Interim Final Rule

The OTS believes that an immediately effective interim final rule

is appropriate and necessary because of how closely the OTS lending

limits regulation is tied to the OCC lending limits regulation. The

OCC's final rule is effective March 17, 1995, 30 days after its

publication in the Federal Register.9

\9\ 60 FR 8526 (February 15, 1995).

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The OTS's interim final rule will eliminate any potential confusion

for savings associations that may result from the OCC's new lending

limit requirements; it will also eliminate any possible lending limit

disparities savings associations may have as compared to national

banks. Additionally, immediate application of the OTS interim final

rule will relieve unnecessary regulatory burdens and provide savings

associations with the increased flexibility that national banks have

been accorded by the OCC's final rule.

Section 553 of the Administrative Procedure Act10 requires

separate findings for good cause, first, that notice and comment are

impracticable, unnecessary, or contrary to the public interest when an

agency determines to issue a rule without prior notice and comment and

second, when it determines to make a rule effective without a 30-day

delay. Section 302 of the Riegle Community Development and Regulatory

Improvement Act of 199411 requires that a regulation that imposes

new requirements take effect on the first day of the quarter following

publication of the final rule. That section provides, however, that an

agency may determine that the rule should take effect earlier upon a

finding of good cause.

\10\ 5 U.S.C. 553.

\11\ 12 U.S.C. 4802.

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Under existing section 563.93, savings associations are already

bound by the lending limits of the new OCC rule. Allowing 12 CFR

563.93(b)'s outdated cross-reference to 12 CFR 3.100 to remain in place

during notice and comment rulemaking and a delayed effective date could

lead to considerable confusion and result in savings associations

performing unnecessary calculations. Additionally, the OTS believes (as

does the OCC with respect to its rule) that this rule relieves burden

by eliminating inefficient and unduly costly regulatory requirements

and better focusing the lending limit rules on areas of significant

safety and soundness concern.12 For these reasons, the OTS

believes there is good cause to make this rule effective immediately

upon publication.

\12\See 60 FR at 8531.

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IV. Comment Solicitation

Because OTS application of the OCC's new limits is statutorily

mandated, this interim final rulemaking does not seek comments on the

substance of the OCC's revisions that are referenced in the OTS LTOB

rule. However, interested parties are invited to submit written

comments on the interim final rule as to the amendments adopted here. A

30-day comment period is provided.

V. Regulatory Flexibility Act

This regulation simplifies lending limit calculations for all

savings associations. Other alternatives might result in some smaller

savings associations having lower lending limits.

VI. Executive Order 12866

It has been determined that this document is not a significant

regulatory action. It will benefit savings associations by simplifying

their lending limit calculations. It is not expected to raise or lower

savings association lending limits themselves.

List of Subjects in 12 CFR Part 563

Accounting, Advertising, Crime, Currency, Flood insurance,

Investments, Reporting and recordkeeping requirements, Savings

associations, Securities, Surety bonds.

Accordingly, the Office of Thrift Supervision hereby amends part

563, chapter V, title 12 of the Code of Federal Regulations as set

forth below.

SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS

PART 563--OPERATIONS

1. The authority citation for part 563 continues to read as

follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1828, 3806; 42 U.S.C. 4106.

2. Section 563.93 is amended by:

a. Removing the phrase ``See 2 CFR part 32.'' from the introductory

text of paragraph (b) and by adding in lieu thereof the phrase ``See 12

CFR Part 32.'';

b. revising paragraphs (b)(6) and (b)(11);

c. removing the phrase ``12 CFR 541.20'' from paragraph (b)(9) and

by adding in lieu thereof the phrase ``12 CFR 541.25'';

d. removing the phrase ``, but not including 12 CFR 32.7'' from the

introductory text of paragraph (c);

e. removing the phrase ``paragraph (b)(11)'' from paragraph

(d)(3)(ii) and by adding in lieu thereof the phrase ``paragraph

(b)(6)'';

f. removing the phrase ``(monthly or quarterly)'' from paragraph

(f)(1); and

g. in the appendix to Sec. 563.93, by removing section 563.93-102.

Sec. 563.93 Lending limitations.

* * * * *

(b) * * *

(6) The term fully phased-in capital standards means the capital

standards that will be in effect at the expiration of

[[Page 15864]] all statutory and regulatory phase-in requirements set

forth in 12 U.S.C. 1464(t) and 12 CFR 567.2, 567.5, and 567.9.

* * * * *

(11) Unimpaired capital and unimpaired surplus means--(i) A savings

association's core capital and supplementary capital included in its

total capital under part 567 of this chapter; plus

(ii) The balance of a savings association's general valuation

allowances for loan and lease losses not included in supplementary

capital under part 567 of this chapter; plus

(iii) The amount of a savings association's loans to, investments

in, and advances to subsidiaries not included in calculating core

capital under part 567 of this chapter.

* * * * *

Dated: March 14, 1995.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 95-7589 Filed 3-27-95; 8:45 am]

BILLING CODE 6720-01-P