Leasing

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 23

[Docket No. 96-28]

RIN 1557-AB45

Leasing

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

ACTION: Final rule.

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

revising its rules governing the personal property lease financing

transactions of national banks. This final rule, which is another

component of the OCC's Regulation Review Program, updates and

streamlines the rules. The final rule is substantively similar to the

OCC's proposal but incorporates modifications reflecting suggestions

made by commenters and further clarifies and simplifies the rule.

EFFECTIVE DATE: January 17, 1997.

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, Office of the

Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Introduction

The OCC is revising 12 CFR part 23, which governs personal property

lease financing transactions by national banks. This final rule 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 or revising 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 to more effectively convey the

standards the OCC seeks to apply.

As the OCC indicated in its notice of proposed rulemaking

(proposal), the agency's experience suggests that, while a wholesale

substantive rewrite of part 23 is not warranted,1 changes to

improve clarity and to provide some additional flexibility would be

appropriate. See 60 FR 46246 (Sept. 6, 1995). Accordingly, the proposal

shortened and streamlined part 23; reorganized many of its provisions;

added paragraph headings; and conformed its style to that of the OCC's

other rules. In addition, the OCC identified and specifically requested

comment on several areas where substantive changes to the regulation

might be appropriate, depending on the responses received.

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1 The OCC first adopted part 23 in mid-1991. 56 FR 28314

(June 20, 1991). Part 23 replaced an earlier OCC interpretive ruling

on lease financing transactions, which had been codified at 12 CFR

7.3400.

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The OCC received 11 comments in response to the proposal, which the

OCC has carefully considered in preparing this final rule. The

commenters included national banks, a national bank subsidiary, and

trade associations representing both banks and leasing companies. The

commenters generally supported the proposal, and a few suggested

further modifications or improvements. The final rule incorporates

suggestions made by some of the commenters, and the OCC has made

additional changes to clarify and simplify the regulatory text. The

final rule also makes other minor technical changes.

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

section description of the final rule and the significant changes from

the proposed version. A derivation table showing modifications from the

former part 23 appears at the conclusion of this preamble.

Background

National banks may engage in leasing activities pursuant to two

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

a national bank may acquire tangible and intangible personal property

for the purpose of, or in connection with leasing that property when

the lease is the functional equivalent of a loan (Section 24 (Seventh)

Leases).2 The OCC has interpreted the functional equivalency

requirement to mean that a Section 24 (Seventh) Lease must be a

``net,'' ``full-payout'' lease and any unguaranteed portion of the

estimated residual value of the leased property must not exceed 25% of

the original cost of the property. The ``net'' lease requirement means

that the lessor national bank may not be obligated to provide specified

services such as repairs or maintenance, or purchase insurance on the

lessee's behalf in connection with the leased property. The ``full-

payout'' requirement means that the bank must expect to recover the

full costs of acquiring the property to be leased and financing the

leasing transaction from sources that include rentals, estimated tax

benefits, and the estimated residual value of the property at the end

of the lease. For a Section 24(Seventh) Lease, however, the bank may

rely on the unguaranteed portion of the estimated residual value of the

leased property only to a limited extent--not more than 25% of the

original cost of the property. There is no percentage-of-assets limit

on a national bank's investment in Section 24 (Seventh) Leases.

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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) (M&M Leasing).

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

authority to engage in personal property lease financing. The

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

adding paragraph Tenth, which allows a national bank to invest in

tangible personal property, including vehicles, manufactured homes,

machinery, equipment, and furniture, for lease financing transactions

(CEBA Leases). Investment in personal property to be leased under the

authority of 12 U.S.C. 24(Tenth) may not exceed 10 percent of a

national bank's assets. A CEBA Lease also must be a ``net'' lease and a

``full-payout'' lease, but is not subject to a maximum estimated

residual value limit. Both Section 24(Seventh) Leases and CEBA Leases

are governed by standards set forth in part 23.

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

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

(explanation of purpose of CEBA's expansion of national banks'

leasing authority).

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Discussion

Subpart A--General Provisions

Authority, Purpose, and Scope (Sec. 23.1)

The proposal retained the authority provision of the former

regulation but added paragraphs describing the purpose of part 23 and

the scope of its respective subparts. The final rule retains the

structure described in the scope section of the part 23 proposal.

[[Page 66555]]

Subpart A contains definitions and standards applicable to both Section

24 (Seventh) Leases and CEBA Leases. Subpart B contains standards

unique to CEBA Leases, and subpart C contains standards unique to

Section 24 (Seventh) Leases. The scope section of the final rule also

is revised to state that part 23 applies to the acquisition of personal

property by a national bank for the purpose of, or in connection with,

the leasing of that property.

Definitions (Sec. 23.2)

The proposal added to part 23 a new section defining significant

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. These terms

are adopted substantially as proposed. The OCC has shortened the

definition of the term net lease by removing the explicit

acknowledgment that a national bank may lease improvements and

additions to the leased property to the lessee in accordance with any

applicable residual value requirements. The OCC believes that this

portion of the text was unnecessary because the activity it describes

is not otherwise prohibited by the regulation. Thus, the removal of

this language does not substantively alter a national bank's ability to

lease improvements and additions to its lessees.

As is explained in this discussion under ``Investment in personal

property,'' the final rule permits a national bank to acquire property

for leasing purposes even if the bank has not entered into a conforming

lease, a commitment to enter into a conforming lease, or an

indemnification agreement. For prudential reasons, however, this

authority is subject to an aggregate limit based on the bank's capital

and surplus. Accordingly, the OCC has added to the final rule a

definition of the term capital and surplus that is consistent with the

way this term is defined in other OCC regulations, such as 12 CFR part

32, which governs national banks' lending limits.

The OCC has also added to this section a revised definition of the

term affiliate that cross-references the definition of that term at

Sec. 23.6. The definition had appeared in Sec. 23.7 of the proposal.

The OCC proposed to define a full-payout lease as 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. The OCC asked

commenters to address whether the 25 percent limit contained in this

definition should be increased or modified. As discussed in the

proposal, the OCC had selected the 25 percent limit in 1979 based in

part on its experience at that time in examining and supervising banks

engaged in Section 24(Seventh) lease financing activities.4

Congress subsequently gave national banks authority to enter into CEBA

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

the aggregate cost of the personal property acquired for the purpose of

CEBA Lease transactions is restricted in aggregate amount to 10 percent

of a national bank's total consolidated assets). The proposal noted,

however, that national banks did not appear to be engaged in CEBA

leasing to the full extent of their statutory authority and it asked

whether, under these circumstances, a change in the residual value

limit for Section 24(Seventh) Leases was appropriate. Commenters

supporting a more flexible limit were asked to identify any increased

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

address that risk.

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

interpretive rule establishing estimated residual value limit of 25

percent for leases that serve as the functional equivalent of

loans).

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Five commenters addressed this issue. The majority favored no

modification to the limit, pointing out that whenever it is appropriate

to exceed the 25 percent limit, banks may use their CEBA leasing

authority instead. Based on the comments and the OCC's more recent

experience with national banks' lease financing activities, the OCC has

concluded that the 25 percent residual value limit for Section

24(Seventh) Leases does not inhibit national banks from competing

effectively with other providers of lease financing. The final rule

retains the 25 percent residual value requirement for Section

24(Seventh) Leases,5 but the requirement is relocated to subpart

C, which applies only to Section 24(Seventh) Leases.

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5 The 25 percent limit is the same as the limit that the

Federal Reserve Board (FRB) currently applies to full-payout

personal property leasing by bank holding companies (BHCs) and their

subsidiaries under Regulation Y (addressing the permissible non-

banking activities of BHCs). See 12 CFR 225.25(b)(5). The FRB,

however, has recently proposed revisions to Regulation Y that could

result in changes to its personal property leasing standards. See 61

FR 47242, 47251-52, 47273-74 (Sept. 6, 1996).

The Office of Thrift Supervision has recently increased its

analogous residual value limit from 20 percent to 25 percent. See 61

FR 50951, 50960 (Sept. 30, 1996).

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The OCC has concluded that combining the cost recovery requirement

with the residual value limit, which was the approach taken in the

proposed version of part 23, is confusing because it obscures the fact

that a bank must receive its acquisition and financing costs in order

for any lease, including a CEBA Lease, to be economically viable. The

OCC believes that part 23 will be easier to read and to use if the

requirement for cost recovery is separately stated in the subpart

applicable to both Section 24(Seventh) Leases and CEBA Leases, and the

percentage limit on residual value continues to appear in the subpart

addressing Section 24(Seventh) Leases, which are the only leases

subject to that limit. Accordingly, the OCC has revised the proposed

definition of the term full-payout lease. The final rule defines that

term to specify the sources on which a national bank may rely to

recover both its investment in the leased property and the estimated

cost of financing the property over the lease term. The 25 percent

residual value limit applicable to Section 24(Seventh) Leases is

relocated to Sec. 23.21 of the final rule.

Lease Requirements (Sec. 23.3)

The former rule and proposed Sec. 23.3 both required 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. The cost recovery

requirement applies both to CEBA Leases and to Section 24(Seventh)

Leases. As described in the preceding section, the final rule defines

the term full-payout lease to specify these three sources of cost

recovery. Thus, Sec. 23.3(a) of the final rule simply states the

requirement that all of a national bank's leases must be full-payout

leases. These changes in the final rule--the revised definition of

full-payout lease, the relocation of the 25 percent residual value

limit to subpart C, and the statement of the full-payout requirement in

Sec. 23.3(a)--do not change the substantive effect of the revisions as

proposed.

The proposal also added to the regulation a new paragraph

containing an explicit statement of the requirement that a national

bank may engage in a lease financing transaction, and in activities

incidental to the transaction, provided the lease is a net lease. The

incidental activities clause in proposed

[[Page 66556]]

Sec. 23.4(a) reflected the OCC's long-standing interpretations

authorizing national banks to engage in activities incidental to

leasing. The proposal also confirmed the OCC's position that there is

no safety or soundness reason for treating activities incidental to

leasing differently depending on the underlying source of statutory

authority for the leasing transaction, and that a national bank may

therefore engage in approved incidental activities with respect both to

Section 24(Seventh) Leases and CEBA Leases. Since both the ``full-

payout'' requirement and the ``net'' lease requirement apply to Section

24(Seventh) Leases and CEBA Leases, Sec. 23.3(a) of the final rule

contains the general requirement that a national bank may acquire

personal property for the purpose of, or in connection with leasing

that property, provided the lease qualifies as a full-payout lease and

a net lease. Section 23.3(a) also provides that national banks may

engage in activities that are incidental to permissible personal

property acquisition and leasing transactions.

In the proposal, the OCC did not include a list of permissible

activities incidental to leasing, but it invited commenters to address

the desirability of retaining a case-by-case approach to determining

permissible incidental activities. Six commenters responded to this

request. All but one commenter urged that the OCC retain the case-by-

case approach because any ``laundry list'' appearing in the regulation

would become out of date quickly. The OCC agrees with the commenters

that a list would soon become obsolete and will therefore retain the

case-by-case approach.

The OCC also requested comment on whether it should, on a case-by-

case basis, permit national banks to acquire and lease real estate when

the real estate acquisition and lease is incidental to a personal

property lease financing transaction. The incidental leasing of real

estate could occur, for example, in a so-called ``facility'' leasing

transaction, which one commentator has described as follows:

[A] facility is a ``stand-alone'' complex that functions either

as a separate operating unit or as a discrete component of an

integrated operating system. A facility has at least four basic

components: An interest in the real property site upon which the

rest of the facility is situated; improvements to the site, usually

including a structure of some sort; equipment or other tangible

personal property, usually the asset actually being financed in the

transaction; and intangible property such as contracts, licenses, or

other ancillary rights and benefits that are necessary or desirable

for the operation or support of the other components of the

facility. A facility is practicably immovable as an entirety.\6\

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\6\ Anthony D. Schlesinger, Special Concerns in Facility

Leveraged Lease Transactions, 1 Equipment Leasing--Leveraged Leasing

987, 987 (B. Fritch, A. Reisman & I. Shrank eds. 1988) (Practicing

Law Institute Publication No. A3-1406).

The six commenters who addressed this issue urged that the OCC

permit real estate leasing if it is incidental to the lease financing

of personal property. The commenters asserted that, in a competitive

leasing environment, national banks and national bank-owned leasing

companies suffer a competitive disadvantage with respect to certain

types of transactions--particularly facility lease financing

arrangements--if they are prohibited from acquiring and leasing real

estate in all circumstances.

The commenters also thought that acquiring and leasing real estate

as a component of a personal property lease financing transaction would

better protect the bank's collateral interest in the leased property

and therefore enhance the safety and soundness of the transaction. For

example, they said, improvements to fuel storage facilities,

manufacturing facilities or other installed equipment have a greater

collateral value ``in place, in use'' than they would have if they were

removed and re-sold in the event of default. Thus, if a lessee defaults

under a personal property lease of this type, a lessor bank having the

right to foreclose on and sell or re-lease the personal property in

place on the site or in the building is in a better financial position

than a bank that must remove the equipment and dispose of it

separately.

The OCC agrees that under some circumstances real estate leasing

may be an incidental component of a personal property leasing

transaction. Therefore, consistent with its decision to retain a case-

by-case approach to activities incidental to leasing generally, the OCC

will determine the permissibility of personal property lease financing

transactions that have a real estate leasing component based upon the

facts of a given lease financing transaction (or multiple lease

financing transactions, if they present essentially similar facts).

This will enable the OCC to review any safety or soundness or other

supervisory concerns that particular transactions may present.

The OCC notes that the activities incidental to leasing that it has

authorized to date for national banks acting as lessors include

providing management, marketing, and administrative services and

offering credit life insurance to lessees.\7\ 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 providing lease consulting services

such as financial advice; providing management, brokerage, and finder

services; and performing lease servicing for third parties.\8\

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\7\ See, e.g., Letter from H. Joe Selby, First Deputy

Comptroller for Operations, Nov. 24, 1976 (unpublished); Letter from

Peter Liebesman, Assistant Director, Legal Advisory Services

Division, Jan. 14, 1985 (unpublished). Copies of unpublished OCC

staff interpretive letters are available (in redacted form) upon

request from the Communications Division, 250 E Street, SW.,

Washington, DC 20219 (202) 874-4700.

\8\ See, e.g., 12 CFR 7.1002; OCC Interpretive Ltr. No. 567

(Oct. 29, 1991) reprinted in [1991-92 Transfer Binder] Fed. Banking

L. Rep. (CCH) para.83,337; Letter from Wallace S. Nathan, District

Counsel, Oct. 28, 1985 (unpublished); Letter from Peter Liebesman,

Assistant Director, Legal Advisory Services Division, June 15, 1981

(unpublished). See also OCC Interpretive Ltr. No. 741 (Aug. 19,

1996) reprinted in [Current Binder] Fed. Banking L. Rep. (CCH)

para.81-105. Copies of the unpublished letters are available from

the Communications Division, see note 7 above.

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Finally, Sec. 23.3(b) includes provisions (proposed as

Sec. 23.4(b)) specifying the conditions under which a national bank may

take appropriate action to protect its interests and the distress

clause permitting a national bank to take certain actions to salvage or

protect its investment. Section 23.3(b) of the final rule has been

shortened and slightly revised, but these changes do not change the

substantive effect of the provision.

Investment in Personal Property (Sec. 23.4)

Like the former rule, proposed Sec. 23.5(a) specifically authorized

a national bank to acquire personal property to be leased after the

bank had entered into either a legally binding agreement indemnifying

the bank against loss in connection with the acquisition or a legally

binding commitment to enter into a conforming lease. The purpose of

this provision was to prevent the speculative acquisition of personal

property. The OCC believes, however, that measures other than flatly

prohibiting a national bank from acquiring property before the leasing

arrangements are essentially completed will provide adequate safeguards

against speculation. Accordingly, Sec. 23.4(b) of the final rule

authorizes a national bank to acquire property to be leased in the

absence of a commitment to enter into a conforming lease, or an

indemnification agreement, if the bank satisfies certain conditions

demonstrating that the acquisition of property is not speculative.

These

[[Page 66557]]

conditions require that: (1) The acquisition of the property either be

consistent with the leasing business then conducted by the bank or with

a business plan for the expansion of the bank's existing leasing

business or for entry into the leasing business; and (2) the bank's

aggregate investment in property under this provision not exceed 15

percent of the bank's capital and surplus.

The 15 percent limit applies to all property acquired under

Sec. 23.4(b) of the final rule, whether the lease will be entered into

pursuant to 12 U.S.C. 24(Seventh) or 24(Tenth). However, property

acquired under this provision does not count toward the 10 percent

volume limitation on CEBA Leases until the bank enters into a

conforming lease, a legally binding commitment to lease, or an

indemnification agreement pursuant to Sec. 23.10 of the final rule.

The OCC has also added to Sec. 23.4(a) of the final rule an

explicit statement that a national bank may acquire property after

entering into a conforming lease, as well as after entering into a

lease commitment or an indemnification agreement. The OCC has

incorporated this change, which was requested by a commenter, to

clarify the flexibility available under the regulation.

The former rule required 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. 23.2(e) defined

off-lease property as property that reverts to a bank's possession or

control upon the expiration of a lease or upon the default of the

lessee. Proposed Sec. 23.5(b) was substantively the same as the former

rule, but it specifically provided that the two-year holding period

runs either from the date the lease expires (including any renewals or

extensions with the same lessee) or the date of the lessee's default.

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

holding period limitation.

Extension of off-lease holding period. The preamble to the proposal

indicated that the OCC was considering whether to extend the holding

period for off-lease property but lacked data on the experiences

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

kinds of off-lease property within the two-year holding period. The

proposal did not change the holding period but requested comment on

four issues:

(1) Should the holding period 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 would be 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 proposal also invited banks to provide specific comment on

their experiences in attempting to sell or re-lease specific kinds of

off-lease personal property with respect to the issue of extending the

holding period.

Seven commenters responded. One commenter thought that in most

cases the two-year holding period is appropriate. The others offered

various suggestions for liberalizing the regulation, including:

Extending the holding period for specific assets--such as airplanes,

rail cars, vessels, oil rigs, machine tools, manufacturing equipment--

characterized as ``historically cyclic''; extending the holding period

generally but with conditions, such as requiring banks to make diligent

sales efforts or obtain annual appraisals of the off-lease assets;

substituting the holding period regulations applicable to other real

estate owned property (OREO) for the existing provision; 9 or

simply extending the holding period in cases of market distress.

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\9\ 12 U.S.C. 29 requires a national bank to dispose of OREO

within five years from the date of acquisition and authorizes the

OCC, under certain circumstances, to grant a bank an additional five

years in which to dispose of the property.

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In light of the discussion provided by the commenters on this

point, the OCC concludes that it is appropriate to provide for a longer

holding period for off-lease property. Section 23.4(c) of the final

rule adopts a five-year holding period generally and provides for the

holding period to be extended for up to an additional five years if the

bank provides a clearly convincing demonstration as to why any

additional holding period is necessary. The initial five-year rule is

consistent with the time prescribed for the disposition of OREO, but

the OCC expects that a bank will usually be able to dispose of off-

lease personal property more quickly than real estate. Accordingly, the

OCC will require a ``clearly convincing'' demonstration of necessity in

order to justify any extension of the holding period for off-lease

property beyond five years.

Section 23.4(c) of the final rule retains the requirement that off-

lease property be valued at the lower of fair market or book value. The

OCC notes that, consistent with generally accepted accounting

principles, this valuation should occur promptly after the property

comes off-lease.

Commencement of off-lease holding period. As indicated earlier in

this discussion, the holding period for off-lease property commences on

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

default, depending on the reason that the national bank takes

possession or control of the leased property. This language conveys

that the holding period begins when the bank is in a position to

dispose of or re-lease the property, that is, when it takes possession

or control.

Five commenters, however, asked for further clarification on when

the holding period commences in the event the lessee defaults before

the expiration of the term of the lease. Some commenters pointed out

that while the preamble to the proposal and the proposed definition of

off-lease property refer to a national bank's taking possession or

control of the leased property, the proposed regulatory text itself did

not contain the ``possession or control'' language. Moreover, as the

commenters pointed out, actual possession or control of an asset alone

may not allow the bank to dispose of it or re-lease it. In foreclosure

or bankruptcy situations, the bank may need to obtain a court order

establishing its legal right to do so.

The OCC agrees with the commenters that the provision requires

clarification and adjustment to cover situations such as bankruptcy or

foreclosure. Section 23.4(c) of the final rule therefore provides that

the OCC will measure the five-year period beginning on the date that

the national bank obtains the legal right to possession or control of

the asset. This date could be the date that the lease expires or the

date that the lessee defaults if, for example, the national bank has a

clear contractual right to repossess the property at that time and the

lessee does not physically impede it from doing so. Where the bank must

establish its legal right to the property, however, the five-year

period will begin when the bank has completed that step. The OCC notes

that this treatment is consistent with the way it administers the

holding period for OREO.10

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\10\ See 12 CFR 34.82 (b) and (c) (five-year holding period for

OREO does not begin until after ownership of property is transferred

to the bank; in foreclosure situations in states with statutory

rights of redemption, holding period does not begin until statutory

redemption period has expired).

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[[Page 66558]]

Section 23.4(d) of the final rule reflects minor technical changes

from the proposal to conform with the revised off-lease holding period

provision in Sec. 23.4(c).

Requirement for Separate Records (Sec. 23.5)

Proposed Sec. 23.6 retained the requirement in the former rule that

national banks maintain separate records for CEBA Leases and Section

24(Seventh) Leases. The OCC received no comments on this provision and

adopts it as proposed, except to renumber it as Sec. 23.5.

Application of Lending Limits; Restrictions on Transactions With

Affiliates (Sec. 23.6)

Like the former rule, proposed Sec. 23.7 subjected lease financing

transactions to lending limits and transactions-with-affiliates

restrictions. The proposal, however, clarified that the transactions-

with-affiliates restrictions apply only if the lessee is an affiliate

of the lessor bank. In any other case, lending limits restrictions

apply. The proposal also retained the reservation of the OCC's

authority to impose other limits or restrictions.

One commenter requested that the OCC state specifically that

nonrecourse debt is excluded from the value of the leased property in

computing the appropriate lending limit position. This commenter noted

that although the regulatory text did not address the point, the

preamble to the former rule specifically addressed the issue.11

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\11\ See 56 FR 28314, 28316 (June 20, 1991) (preamble to part 23

final rule).

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This issue typically arises in leveraged lease transactions, that

is, transactions in which a national bank borrows from a third-party

creditor a portion of the funds necessary to purchase the property to

be leased. In these cases, the third-party creditor's loan to the bank

is often on a nonrecourse basis, so that the creditor looks only to the

lease payments and its security interest in the leased property as the

source of repayment for its loan to the bank and does not rely on the

general credit of the bank. In this type of transaction, the bank's

exposure to loss in the event of the lessee's default is mitigated to

the extent that the bank has used outside funding to finance the

transaction. For this reason, the OCC permits a national bank to use

the recorded investment in a lease net of any nonrecourse debt the bank

has incurred to finance the acquisition of the asset to be leased, for

the purpose of measuring whether the bank's leases comport with the

appropriate lending limits. This treatment is also consistent with

generally accepted accounting principles.

The commenter is therefore correct about the treatment of

nonrecourse debt. The final rule states that for the purpose of

measuring compliance with the lending limits, a national bank records

the investment in a lease net of any nonrecourse debt the bank has

incurred to finance the acquisition of the leased asset. The OCC has

revised Sec. 23.7 to this effect, and renumbered it as Sec. 23.6 in the

final rule.

Applicability of Consumer Leasing Act (Removed)

The former rule stated that nothing in part 23 could 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 proposed to remove this provision because other consumer protection

laws and regulations may also apply to personal property lease

financing activities, making the cross-reference potentially misleading

and confusing. The OCC received no comments on this portion of the

proposal and Sec. 23.6 of the former rule is removed. This change does

not affect the applicability of the CLA or any other consumer credit

laws to national banks' lease financing activities, however. National

banks still must know and comply with the full range of requirements

that govern these activities.

Subpart B--CEBA Leases

Provisions Applicable to CEBA Leases (Secs. 23.10, 23.11, and 23.12)

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

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

authorizing investment in personal property in connection with CEBA

Leases, the limits placed on a national bank's exercise of its 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 in 1991. The substance of these provisions as

proposed was the same as the former rule.

The OCC received one comment on these provisions. The commenter who

asked that the rule specifically address the exclusion of nonrecourse

debt in connection with the computation of lending limits for leases

also asked that nonrecourse debt be specifically excluded in measuring

compliance with the 10 percent of assets limitation applicable to CEBA

Leases. The OCC has permitted this treatment since it promulgated part

23 in 1991. Section 23.10 of the final rule states this position.

This commenter also asked whether the OCC intended any meaningful

distinction between ``tangible personal property'' as used in proposed

Sec. 23.8 and ``personal property'' as used in proposed Sec. 23.11. The

reference to ``tangible personal property'' in proposed Sec. 23.8

derives from the statutory language authorizing CEBA Leases. Section

24(Tenth) requires that CEBA Leases must be leases for tangible

personal property. A national bank wishing to acquire and lease

intangible personal property, such as patents, copyrights or other

forms of intellectual property, must rely on its authority under

section 24(Seventh). For these reasons, the final rule continues to use

the phrase ``tangible personal property'' with respect to CEBA Leases.

With respect to Section 24(Seventh) Leases, the final rule refers to

tangible or intangible personal property. The OCC received no comments

on proposed Secs. 23.9 and 23.10, and adopts them as proposed, except

to renumber them as Secs. 23.11 and 23.12.

Subpart C--Section 24(Seventh) Leases

General rule (Sec. 23.20)

Proposed Sec. 23.11 stated the general rule authorizing national

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

The OCC received no comments on this section, other than the request

for clarification, noted in this discussion under ``Provisions

applicable to CEBA Leases,'' with respect to the use of two different

terms in proposed Secs. 23.8 and 23.11. The OCC adopts this section

with minor changes from the proposal, except that it removes as

redundant the requirements in proposed Sec. 23.11 that the lease must

be a full-payout and net lease, and renumbered the section as

Sec. 23.20.

Estimated Residual Value (Sec. 23.21)

Proposed Sec. 23.12 contained provisions that apply to a national

bank's reliance on or estimate of residual value in Section 24(Seventh)

leasing transactions. These provisions were substantively the same as

the requirements of the former rule, including: (1) A provision that

the amount of any estimated residual value guaranteed by a

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

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

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

[[Page 66559]]

guarantee and can document its determination; (2) a requirement that

the estimated residual value amounts be reasonable given the type of

property leased and other 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; and (3) a provision that, 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 OCC received no comments on this section. The OCC made the

following revisions in the final rule: Renumbered it as Sec. 23.21,

moved the 25% residual value limit that had appeared in proposed

Sec. 23.2(c) to this section for the reason discussed in this preamble

under ``Definitions,'' and removed the last sentence of proposed

Sec. 23.12(a), which stated that the bank must depend primarily on the

creditworthiness of the lessee (and any guarantor) and not on the

residual value of the leased property. The OCC removed this sentence

because it is redundant in light of the relocation of the 25 percent

limit which appears in the final version of this section. The

restrictions on Section 24(Seventh) leasing in subparts A and C are

designed to ensure that the bank depends primarily on the credit of the

lessee, and not on the residual value of the leased property at the end

of the lease term.

Transition Rule (Sec. 23.22)

The former rule and proposed Sec. 23.13 provide that leases

executed before June 12, 1979, which 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, are not subject to part 23, and

prescribe rules for renewing those leases. The OCC received no comments

on this section and it remains unchanged, except for renumbering it as

Sec. 23.22.

Derivation Table

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

regulation, if any, upon which the final rule is based.]

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

Revised provision Original provision Comments

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

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

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

(g), (h).

Sec. 23.2(e)................... Sec. 23.1(b)....... Modified.

Sec. 23.2(f)................... Sec. 23.2(a)....... Modified.

Sec. 23.3(a)................... .................... Added.

Sec. 23.3(b)................... Sec. 23.2(b), (c), Modified.

(d).

Sec. 23.4(a)................... Sec. 23.3(a)....... Modified.

Sec. 23.4(b)................... .................... Added.

Sec. 23.4(c)................... Sec. 23.3(b)....... Modified.

Sec. 23.4(d)................... Sec. 23.3(c)....... Modified.

Sec. 23.5...................... Sec. 23.4.......... Modified.

Sec. 23.6...................... Sec. 23.5.......... Modified.

Sec. 23.6.......... Removed.

Sec. 23.10..................... Sec. 23.7.......... Modified.

Sec. 23.11..................... Sec. 23.8.......... Modified.

Sec. 23.12..................... Sec. 23.9.......... Modified.

Sec. 23.20..................... Sec. 23.10......... Modified.

Sec. 23.21..................... Sec. 23.11......... Modified.

Sec. 23.22..................... Sec. 23.12......... Modified.

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

Regulatory Flexibility Act

It is hereby certified that this 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

final rule will reduce the regulatory burden on national banks,

regardless of size, by simplifying and clarifying existing regulatory

requirements.

Paperwork Reduction Act of 1995

The OCC invites comments on:

(1) Whether the collections of information contained in this notice

of final rule are necessary for the proper performance of OCC

functions, including whether the information has practical utility;

(2) The accuracy of the estimate of the burden of the information

collections;

(3) Ways to enhance the quality, utility, and clarity of the

information to be collected;

(4) Ways to minimize the burden of the information collections on

respondents, including through the use of automated collection

techniques or other forms of information technology; and

(5) Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of services to provide information.

Respondents/recordkeepers are not required to respond to the

foregoing collections of information unless this displays a currently

valid OMB control number.

The collections of information contained in this final rule have

been approved by the Office of Management and Budget (OMB) through June

30, 1997, in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)), under OMB Control No. 1557-0206. Comments on the

collections of information should be sent to the Office of Management

and Budget, Paperwork Reduction Project (1557-0206), Washington, DC

20503, with a copy to the Legislative and Regulatory Activities

Division, Office of the Comptroller of the Currency, 250 E Street, SW.,

Washington, DC 20219. The OCC will submit the collections of

information contained in this final rule for renewal of OMB approval

following publication of this final rule.

The collections of information in this final rule are found in 12

CFR 23.4(c) and 23.5. These collections of information are necessary in

order for a national bank to submit a request to the OCC for permission

to extend the holding period of off-lease property, to maintain records

according to generally accepted accounting principles and Federal law,

and to ensure bank safety and soundness. The likely respondents/

recordkeepers are national banks.

Estimated average annual burden hours per respondent/recordkeeper:

2.8.

Estimated number of respondents and/or recordkeepers: 660.

Estimated total annual reporting and recordkeeping burden: 1,820.

Start-up costs to respondents: None.

Executive Order 12866

OMB has concurred with the OCC's determination that this final rule

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 final rule

will not result in expenditures by State, local, and tribal

governments, or by the private sector, of $100 million or more in any

one year. Accordingly, a budgetary impact statement is not required

under section 202 of the Unfunded Mandates Reform Act of 1995. As

discussed in the preamble, this final rule has the effect of reducing

burden and increasing the efficiency of lease financing transactions

undertaken by national banks.

List of Subjects in 12 CFR Part 23

Banks, banking, Lease financing transactions, Leasing, National

banks, Reporting and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the preamble, part 23 of chapter I of

title 12 of the Code of Federal Regulations is revised to read as

follows:

[[Page 66560]]

PART 23--LEASING

Subpart A--General Provisions

Sec.

23.1 Authority, purpose, and scope.

23.2 Definitions.

23.3 Lease requirements.

23.4 Investment in personal property.

23.5 Requirement for separate records.

23.6 Application of lending limits; restrictions on transactions

with affiliates.

Subpart B--CEBA Leases

23.10 General rule.

23.11 Lease term.

23.12 Transition rule.

Subpart C--Section 24(Seventh) Leases

23.20 General rule.

23.21 Estimated residual value.

23.22 Transition rule.

Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 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) or 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. This part applies to the acquisition of personal

property by a national bank for the purpose of, or in connection with,

the leasing of that property.

Sec. 23.2 Definitions.

(a) Affiliate means an affiliate as described in Sec. 23.6.

(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 forth in appendix A to 12 CFR part 3

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

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 described in paragraph (b)(1) of this section, as

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

filed under 12 U.S.C. 161.

(c) CEBA Lease means a personal property lease authorized under 12

U.S.C. 24(Tenth).

(d) 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.

(e) Full-payout lease means a lease in which the national bank

reasonably expects 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 lease term.

(f) Net lease means a lease under which the national 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) Parts or accessories for the leased property;

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

property is being serviced;

(4) Payment of insurance for the lessee, except where the lessee

has failed in its contractual obligation to purchase or maintain

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.

(g) Off-lease property means property that reverts to a national

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

default of the lessee.

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

authorized under 12 U.S.C. 24(Seventh).

Sec. 23.3 Lease requirements.

(a) General requirements. A national bank may acquire personal

property for the purpose of, or in connection with leasing that

property, and may engage in activities incidental thereto, if the lease

qualifies as a full-payout lease and a net lease.

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

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

threatens its financial position by increasing its exposure to loss,

then the bank may:

(i) Take reasonable and appropriate action, including the actions

specified in Sec. 23.2(f), to salvage or protect the value of the

leased property or its interests arising under the lease; and

(ii) Acquire or perfect title to the leased property pursuant to

any existing rights.

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

include any provision in a lease, or make any additional agreement, 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 a third party to provide any of the services enumerated in

Sec. 23.2(f) to the lessee at the expense of the lessee.

Sec. 23.4 Investment in personal property.

(a) General rule. A national bank may acquire specific property to

be leased only after the bank has entered into:

(1) A conforming lease;

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

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

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

lease.

(b) Exception. A national bank may acquire property to be leased

without complying with the requirements of paragraph (a) of this

section, if:

(1) The acquisition of the property is consistent with the leasing

business then conducted by the bank or is consistent with a business

plan for expansion of the bank's existing leasing business or for entry

into the leasing business; and

(2) The bank's aggregate investment in property held pursuant to

this paragraph (b) does not exceed 15 percent of the bank's capital and

surplus.

(c) 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 off-lease property or re-

lease it under a conforming lease as soon as practicable. Liquidation

or re-lease must occur not later than five years from the date that the

bank acquires the legal right to possession or control of the property,

except the OCC may extend the period for up to an additional five

years, if the bank provides a clearly convincing demonstration why any

additional holding period is necessary. The bank must value off-lease

property at the lower of current fair market value or book value

promptly after the property becomes off-lease property.

(d) Bridge or interim leases. During the holding period allowed by

paragraph (c) of this section, a national bank may enter into a short-

term bridge or interim lease pending the liquidation of off-lease

property or the re-lease of the property under a conforming lease. A

short-term bridge or interim lease must be a net lease, but need not

[[Page 66561]]

comply with any requirement of subpart B or C of this part.

Sec. 23.5 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. 23.6 Application of lending limits; restrictions on transactions

with affiliates.

A lease entered into pursuant to this part is subject to the

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

affiliate of the bank, 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. The term affiliate

means an affiliate as defined in 12 U.S.C. 371c or 371c-1, as

applicable. For the purpose of measuring compliance with the lending

limits prescribed by 12 U.S.C. 84, a national bank records the

investment in a lease net of any nonrecourse debt the bank has incurred

to finance the acquisition of the leased asset.

Subpart B--CEBA Leases

Sec. 23.10 General rule.

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

tangible personal property, including vehicles, manufactured homes,

machinery, equipment, or furniture, for the purpose of, or in

connection with leasing that property, if the aggregate book value of

the property does not exceed 10 percent of the bank's consolidated

assets and the related lease is a conforming lease. For the purpose of

measuring compliance with the 10 percent limit prescribed by this

section, a national bank records the investment in a lease entered into

pursuant to this subpart net of any nonrecourse debt the bank has

incurred to finance the acquisition of the leased asset.

Sec. 23.11 Lease term.

A CEBA Lease must have an initial term of not less than 90 days. A

national bank may acquire property subject to an existing lease with a

remaining maturity of less than 90 days if, at its inception, the lease

was a conforming lease.

Sec. 23.12 Transition rule.

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

may continue to be administered in accordance with the lease terms in

effect as of that date. For purposes of applying the lending limits and

the restrictions on transactions with affiliates described in

Sec. 23.6, however, a national bank that enters into a new extension of

credit to a customer, including a lease, on or after July 22, 1991,

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:

(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 leased property.

Subpart C--Section 24(Seventh) Leases

Sec. 23.20 General rule.

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

tangible or intangible personal property, including vehicles,

manufactured homes, machinery, equipment, furniture, patents,

copyrights, and other intellectual property, for the purpose of, or in

connection with leasing that property, if the related lease is a

conforming lease representing a noncancelable obligation of the lessee

(notwithstanding the possible early termination of that lease).

Sec. 23.21 Estimated residual value.

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

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

the requirements of a full-payout lease, for purposes of this subpart:

(1) Must be reasonable in light of the nature of the leased

property and all circumstances relevant to the transaction; and

(2) Any unguaranteed amount must not exceed 25 percent of the

original cost of the property to the bank.

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

any estimated residual value guaranteed by the manufacturer, the

lessee, or other 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.

(c) Leases to government entities. A bank's calculations of

estimated residual value in connection with leases of personal property

to Federal, State, or local governmental entities may be based on

future transactions or renewals that the bank reasonably anticipates

will occur.

Sec. 23.22 Transition rule.

(a) Exclusion. A Section 24(Seventh) Lease entered into prior to

June 12, 1979, may continue to be administered in accordance with the

lease terms in effect as of that date. For purposes of applying the

lending limits and the restrictions on transactions with affiliates

described in Sec. 23.6, however, a national bank that enters into a new

extension of credit to a customer, including a lease, on or after June

12, 1979, 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 leased property.

Dated: December 10, 1996.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 96-31967 Filed 12-17-96; 8:45 am]

BILLING CODE 4810-33-P