Lending Limits

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

proposing revisions to its lending limits regulation in order to

provide additional flexibility for a national bank to preserve personal

property securing a loan, consistent with safe and sound banking

practices. The proposal also makes several technical changes designed

to clarify certain provisions in the current rule.

DATES: Comments must be received by September 16, 1996.

ADDRESSES: Comments should be directed to Office of the Comptroller of

the Currency, Communications Division, 250 E Street, SW., Washington,

DC 20219, Attention: Docket No. 96-14. Comments will be available for

public inspection and photocopying at the same location. In addition,

comments may be sent by facsimile transmission to FAX number (202) 874-

5274 or by internet mail to [email protected].

FOR FURTHER INFORMATION CONTACT: William C. Kerr, National Bank

Examiner, or Frank R. Carbone, National Bank Examiner, Credit and

Management Policy, (202) 874-5170; Laura Goldman, Attorney, or Aline J.

Henderson, Senior Attorney, Bank Activities and Structure Division,

(202) 874-5300; or Mark J. Tenhundfeld, Senior Attorney, Legislative

and Regulatory Activities Division, (202) 874-5090.

SUPPLEMENTARY INFORMATION:

Background

In 1995, as part of its Regulation Review Program (Program), the

OCC comprehensively revised its lending limits regulation. See 60 FR

8537 (February 15, 1995). These amendments to part 32 changed, among

other things, the definition of ``loans and extensions of credit'' to

exempt under certain circumstances additional funds advanced for the

payment of maintenance and operating expenses necessary to preserve the

value of real property securing a loan. See 12 CFR 32.2(j)(2)(i). Also,

the amendments changed the definition of ``capital and surplus'' to

allow a national bank, in most instances, to calculate its lending

limit based on information contained in the bank's most recent

quarterly Consolidated Report of Condition and Income (Call Report).

See id. Sec. 32.4.

As is explained in greater detail in the discussion that follows,

these changes prompted requests for the OCC: (a) to extend the

exemption for funds advanced to preserve and maintain collateral to

loans secured by personal property as well as to loans secured by real

property; and (b) to clarify the date on which a national bank must

recalculate its capital and surplus. This proposal addresses both

issues, and makes several technical changes designed to improve part 32

without changing its substance. Moreover, the proposal reflects the

OCC's continuing commitment to assess the effectiveness of the rules it

has revised under the Program and to make further changes where

necessary to improve a regulation.

The OCC invites comments of a general nature on all aspects of the

proposal in addition to comments on specific issues identified in the

text that follows.

The Proposal

Definition of ``Loans and Extensions of Credit'' (Sec. 32.2(j))

Current Sec. 32.2(j)(2)(i) states that additional funds advanced

for the benefit of a borrower by a bank for payment of maintenance and

operating expenses necessary to preserve the value of real property

securing a loan are not ``loans or extensions of credit'' for purposes

of 12 U.S.C. 84 and part 32 under certain circumstances. This exemption

for funds advanced to protect collateral does not address advances for

the purpose of protecting personal property collateral.

The proposal amends the current exemption by treating an advance to

protect personal property collateral the same as an advance to protect

real property collateral. The reasoning underlying both types of

advances is identical, namely, to protect the position of the lending

bank by preserving collateral prior to foreclosure in order to avoid

greater expenses later. For example, advancing funds for the purpose of

preserving the condition of equipment or getting perishable crops to

market may protect the bank's condition more effectively than waiting

until after foreclosure to take the steps necessary to protect the

bank's interest.

Under the proposal, an advance to protect personal property

collateral is subject to the same safeguards that currently apply to an

advance to protect real property. Thus, the advance must be for

maintenance and operating expenses only to the extent necessary to

preserve the collateral, and must be consistent with safe and sound

banking practices. These advances are permitted only for the purpose of

protecting a bank's interest in the collateral. Moreover, a bank must

treat any amount so advanced as an extension of credit if the bank

makes a new loan to the borrower.

In proposing this expansion of the exemption, the OCC expects that

a bank will reasonably anticipate a borrower's need to fund various

expenses in determining the appropriate size of the loan that the bank

will make. Moreover, the OCC intends for the exemption not to create

incentives for borrowers to divert or reclassify spending in order to

qualify larger portions of their credit needs for the exemption. A bank

that wishes to advance funds pursuant to the proposed exemption should

be able to document what collateral is being protected, how the

additional advance will preserve the collateral, why the amount of the

advance is the necessary amount, the basis for the bank's belief that

the additional advance is likely to be repaid, and how the bank's

position would be protected by preserving the collateral as compared to

attempting a sale of the property.

The proposal also clarifies that the exemption, whether it applies

to

[[Page 37228]]

advances to protect real or personal property, is to protect and

maintain identified collateral for a particular loan. The exemption is

not intended to allow a bank to speculate on the value of collateral by

advancing additional funds in the hope that increasing collateral

values will enable the borrower to repay all funds advanced. Nor is the

exemption intended to permit a bank to continue funding the operations

of a borrower until the borrower's business fortunes improve. To

further clarify the scope of the exemption with respect to advances to

protect either real or personal property collateral, and to emphasize

that the exception is not available for speculative purposes, the

proposal deletes the words ``value of'' used in conjunction with the

reference to the relevant real or personal property.

The OCC requests comment on whether the restrictions it proposes to

place on the advance of funds pursuant to the expanded exemption are

workable and adequate to insure safety and soundness. Commenters are

invited to suggest additional or alternative conditions.

Calculation of Lending Limits (Sec. 32.4)

Current Sec. 32.4(a) requires a bank to calculate its lending limit

as of the later of the date when the bank's Call Report ``is required

to be filed'' or when the bank's capital category changes for purposes

of the prompt corrective action provisions of 12 U.S.C. 1831o and 12

CFR part 6. Pursuant to current Sec. 32.4(b), the OCC may require a

national bank to calculate its lending limit more frequently if the OCC

determines that the bank should do so for safety and soundness reasons.

Because the General Instructions to the Call Report refer to two

separate ``filing'' dates, questions have arisen under the current rule

concerning the date on which a recalculated lending limit is to become

effective. The first potential filing date identified in the General

Instructions, termed the ``report date,'' is defined as the last

calendar day of each calendar quarter. The second potential filing

date, termed the ``submission date,'' is the date by which the

appropriate Federal banking agency must receive the Call Report. For

most banks, the submission date is 30 days after the report date. Thus,

the reference in the current rule to the date when the Call Report ``is

required to be filed'' could produce some confusion as to when a

recalculated limit becomes effective, depending on which ``filing''

date is used.

The proposal resolves this ambiguity by distinguishing the

``calculation date'' of a lending limit from its ``effective date.''

Assuming that a national bank's capital category has not changed, the

bank is to calculate its lending limit using numbers reported in the

bank's most recent Call Report, and, therefore, base its lending limit

on the bank's capital and surplus as of the end of the most recent

calendar quarter (the calculation date). However, this new limit will

not be effective until the earlier of the date on which the bank

submits its Call Report or is required to submit the Call Report (the

effective date). The proposal amends Sec. 32.4(a)(1), redesignates

current Sec. 32.4(b) as Sec. 32.4(c), and adds a new Sec. 32.4(b) that

sets forth the effective date for using the updated numbers to

accomplish this result.

If a bank's capital category for prompt corrective action purposes

changes, then the bank must determine its lending limit as of the date

on which the capital category changes. The new limit in this instance

will be effective on the date that the limit is to be recalculated. The

OCC also will continue its practice of permitting a recalculation of

lending limits at a point during a quarter when there is a material

change in a bank's capital arising from corporate activities such as a

merger or stock issuance.

Technical Amendments (Secs. 32.2(b) and 32.3(c))

The proposal makes several clarifying technical amendments to part

32. None of these amendments affects the substance of the current rule.

The technical amendments are summarized below.

Current Sec. 32.2(b) states that capital and surplus includes,

among other things, a bank's Tier 1 and Tier 2 capital ``included in

the bank's risk-based capital under'' the OCC's minimum capital ratios

as set forth in Appendix A to 12 CFR Part 3. The proposal clarifies

this definition by changing that language to refer to a bank's Tier 1

and Tier 2 capital ``calculated under the OCC's risk-based capital

standards set out in Appendix A to part 3 of this chapter as reported

in the bank's Consolidated Report of Condition and Income as filed

under 12 U.S.C. 161.''

Current Sec. 32.3(c)(4)(ii) exempts a loan from the lending limits

to the extent that the loan is secured by an unconditional takeout

commitment or guarantee of a Federal agency. In explaining when a

commitment or guarantee is unconditional, Sec. 32.3(c)(4)(ii)(B) notes

that protection against loss is not materially diminished or impaired

by a procedural requirement, such as ``an agreement to take over only

in the event of default * * *.'' The proposal clarifies that the phrase

``an agreement to take over'' means an agreement to pay on an

obligation.

Finally, current Sec. 32.3(c)(6)(ii)(B) states that a bank must

establish procedures to revalue foreign currency deposits to ensure

that the loan or extension of credit remains fully secured at all

times. The proposal clarifies that the revaluation must be periodic.

The OCC invites comments on these proposed technical amendments and

suggestions for other technical changes that would clarify or improve

the rule.

Regulatory Flexibility Act

It is hereby certified that this proposal will not have a

significant economic impact on a substantial number of small entities.

As is explained in greater detail in the preamble to this proposal, the

only substantive change that is proposed would enhance a national

bank's ability to protect its interest in real property that serves as

collateral for a loan already made by the bank. By relaxing a

restriction that currently impedes this ability, the proposal will

reduce the regulatory burden on national banks, regardless of size.

Accordingly, a regulatory flexibility analysis is not required.

Executive Order 12866

The OCC has determined that this proposal 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 notice of proposed rulemaking (NPRM) likely to

result in a rule that includes a Federal mandate that may result in the

annual expenditure of $100 million or more in any one year by State,

local, and tribal governments, in the aggregate, or by the private

sector. If a budgetary impact statement is required, section 205 of the

Unfunded Mandates Act requires an agency to identify and consider a

reasonable number of alternatives before promulgating an NPRM. The OCC

has determined that the 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, the OCC has not

prepared a budgetary impact statement or specifically addressed the

regulatory alternatives considered. As discussed in the preamble, the

proposal would clarify certain provisions of the current rule and

provide additional flexibility to a

[[Page 37229]]

national bank to extend credit for the purpose of protecting personal

property that secures a loan from the bank.

List of Subjects in 12 CFR Part 32

National banks, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the preamble, part 32 of chapter I of

title 12 of the Code of Federal Regulations is proposed to be amended

as set forth below:

PART 32--LENDING LIMITS

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

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

2. In Sec. 32.2, paragraphs (b) and (j)(2)(i) are revised to read

as follows:

Sec. 32.2 Definitions.

* * * * *

(b) Capital and surplus means--

(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's

risk-based capital standards set out in Appendix A to part 3 of this

chapter as reported in the bank's Consolidated Report of Condition and

Income as filed under 12 U.S.C. 161; plus

(2) The balance of a bank's allowance for loan and lease losses not

included in the bank's Tier 2 capital, for purposes of the calculation

of risk-based capital under Appendix A to part 3 of this chapter, as

reported in the bank's Consolidated Report of Condition and Income as

filed under 12 U.S.C. 161.

* * * * *

(j) * * *

(2) * * *

(i) Additional funds advanced for the benefit of a borrower by a

bank for payment of taxes, insurance, utilities, security, and

maintenance and operating expenses to the extent necessary to preserve

real or personal property securing the loan, consistent with safe and

sound banking practices, but only if the advance is for the protection

of the bank's interest in the collateral, and provided that such

amounts must be treated as an extension of credit if a new loan or

extension of credit is made to the borrower;

* * * * *

Sec. 32.3 [Amended]

3. Paragraph (c)(4)(ii)(B) of Sec. 32.3 is amended in the last

sentence by removing the term ``take over'' and adding in lieu thereof

``pay on the obligation''.

4. Paragraph (c)(6)(ii)(B) of Sec. 32.3 is amended by adding the

word ``periodically'' before the word ``revalue''.

5. Section 32.4 is revised to read as follows:

Sec. 32.4 Calculation of lending limits.

(a) Calculation date. For purposes of determining compliance with

12 U.S.C. 84 and this part, a bank shall determine its lending limit as

of the most recent of the following dates--

(1) The last day of the preceding calendar quarter; or

(2) The date on which there is a change in the bank's capital

category for purposes of 12 U.S.C. 1831o and Sec. 6.3 of this chapter.

(b) Effective date. (1) A bank's lending limit calculated in

accordance with paragraph (a)(1) of this section will be effective as

of the earlier of the following dates--

(i) The date on which the bank's Consolidated Report of Condition

and Income (Call Report) is submitted; or

(ii) The date on which the bank's Call Report is required to be

submitted.

(2) A bank's lending limit calculated in accordance with paragraph

(a)(2) of this section will be effective on the date that the limit is

to be calculated.

(c) More frequent calculations. If the OCC determines for safety

and soundness reasons that a bank should calculate its lending limit

more frequently than required by paragraph (a) of this section, the OCC

may provide written notice to the bank directing the bank to calculate

its lending limit at a more frequent interval, and the bank shall

thereafter calculate its lending limit at that interval until further

notice.

Dated: June 24, 1996.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 96-18021 Filed 7-16-96; 8:45 am]

BILLING CODE 4810-33-P