Amendments Implementing Economic Growth and Regulatory Paperwork Reduction Act

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 560

[No. 97-28]

RIN 1550-AB05

Amendments Implementing Economic Growth and Regulatory Paperwork

Reduction Act

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) today is issuing a

final rule implementing provisions of the Economic Growth and

Regulatory Paperwork Reduction Act of 1996 (EGRPRA). Among other

actions, EGRPRA: expanded and clarified federal thrifts' lending and

investment authority; amended the Qualified Thrift Lender (QTL) test;

authorized OTS to grant anti-tying exceptions conforming to exceptions

granted to banks by the Board of Governors of the Federal Reserve

System (FRB); and modified OTS's oversight authority over bank holding

companies that own savings associations. Today's rule implements these

statutory changes in final form and enables thrifts to take advantage

of the expanded flexibility and burden reduction afforded by EGRPRA.

EFFECTIVE DATE: April 3, 1997.

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

Manager, (202) 906-5744, Supervision Policy; Ellen J. Sazzman, Counsel

(Banking and Finance), (202) 906-7133, or Karen Osterloh, Assistant

Chief Counsel, (202) 906-6639, Regulations and Legislation Division,

Chief Counsel's Office. For information about holding company issues,

contact Kevin A. Corcoran, Assistant Chief Counsel, (202) 906-6962,

Business Transactions Division, Chief Counsel's Office, Office of

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

SUPPLEMENTARY INFORMATION:

I. Background

On September 30, 1996, Congress enacted the EGRPRA 1 which

amended and clarified thrifts' lending and investment powers under

sections 5 and 10 of the Home Owners' Loan Act (HOLA).2 EGRPRA

confirmed that federal savings associations may engage in credit card

lending without limitation; enabled federal savings associations to

engage in education lending without investment restrictions; 3

increased the 10% of assets limitation on federal savings associations'

commercial lending to 20% of assets, provided that amounts in excess of

10% are used for small business loans as defined by the OTS Director;

and amended the QTL test to provide that investments in education,

small business, credit card, and credit card account loans are

includable

[[Page 15820]]

without limit for purposes of satisfying the QTL test.4

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\1\ P.L. 104-208, tit. 12, 110 Stat. 3009 (September 30, 1996).

\2\ 12 U.S.C. 1464, 1467a, respectively.

\3\ HOLA, Sec. 5, previously limited education loans to 5% of a

thrift's total assets. 12 U.S.C. 1464(c)(3)(A).

\4\ EGRPRA also permitted savings associations to substitute the

tax code's ``domestic building and loan association'' test for

compliance with the amended QTL test. See Section 2303(e) of EGRPRA.

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EGRPRA also authorized the OTS Director to issue regulations

granting exceptions to anti-tying provisions in section 5(q) of the

HOLA,5 provided the exceptions are consistent with the HOLA and

conform to exceptions granted by the FRB to banks. Finally, EGRPRA

eliminated OTS supervision of holding companies that control both a

bank and a savings association and that are registered as bank holding

companies with the FRB.

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\5\ 12 U.S.C. 1464(q).

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On November 27, 1996, OTS issued an interim final rule enabling

thrifts to take immediate advantage of the expanded flexibility and

burden reduction afforded by EGRPRA.6 The interim final rule

included definitions of credit card, credit card account, small

business, and small business loans. These definitions enabled thrifts

to apply the newly modified QTL test and to exercise new investment

authorities. OTS also streamlined its regulations by removing certain

unnecessary QTL provisions from the Code of Federal Regulations, and

added a new regulatory anti-tying exception that conformed to the FRB's

safe harbor for combined balance accounts. OTS requested comment on any

issues raised by the newly implemented regulations.

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\6\ 61 FR 60179 (November 27, 1996).

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II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

The public comment period on the interim final rule closed on

January 27, 1997. Nine commenters, including five financial institution

trade associations and four federal savings associations, responded to

the request for comment. Commenters generally supported OTS's efforts

to implement expeditiously EGRPRA's new provisions. Several commenters

suggested that OTS modify some provisions, including adopting a safe

harbor for loans to small businesses. Specific comments addressing

various sections are discussed where appropriate in the section by

section analysis below.

B. Section-by-Section Analysis

Section 560.3--Definitions of Credit Card and Credit Card Account

Section 2303(g) of EGRPRA requires the OTS Director to issue

regulations defining the term ``credit card'' in order to enable

thrifts to apply the newly modified QTL test.7 This modified QTL

test permits loans ``made through credit cards or credit card

accounts'' to be counted as qualified thrift investments (QTI) without

restriction. The definition of ``credit card'' and ``credit card

account'' also provides federal thrifts with guidance in exercising

their authority to ``invest in, sell, or otherwise deal in * * * loans

made through credit cards or credit card accounts'' under section 5(c)

of the HOLA. As revised by section 2303(b) of EGRPRA, section 5(c)

authorizes federal thrifts to engage in credit card lending without any

percentage of assets investment limitation.8 Commenters generally

agreed that it was appropriate for OTS to consistently define ``credit

card'' and ``credit card account'' for both section 5(c) and section

10(m) of the HOLA.

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\7\ See 12 U.S.C. 1467a(m).

\8\ EGRPRA, section 2303(b), amending HOLA Sec. 5(c), to be

codified at 12 U.S.C. 1464(c)(1)(T).

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Credit card. OTS based the regulatory definition of ``credit card''

on the plain language definition of ``credit card'' in Black's Law

Dictionary.9 Four commenters addressed the substance of this

definition. Two commenters supported the use of the Black's Law

Dictionary definition. These commenters asserted that this definition

is easy to understand and consistent with EGRPRA's goal of providing

thrifts greater investment flexibility. Two other commenters suggested

that OTS employ the similar, but not identical, definition of ``credit

card'' in the FRB's Truth in Lending Regulation at 12 CFR Part 226

(Regulation Z). Regulation Z defines credit card as ``any card, plate,

coupon book, or other single credit device that may be used from time

to time to obtain credit.'' 12 CFR 226.2(a)(15). These commenters noted

that the banking industry is familiar with Regulation Z and that

uniform regulations would reduce the complexity of Federal regulation

of the banking industry.

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\9\ Black's Law Dictionary 367 (6th ed. 1990).

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To enhance uniformity and consistency among the federal banking

agencies, the OTS has adopted the definition of ``credit card'' in

Regulation Z for purposes of the final EGRPRA amendments.

Credit Card Account. The interim rule defined ``credit card

account'' as a credit account established in conjunction with the

issuance of, or the extension of credit through, a credit card. The

term includes loans made to consolidate credit card debt, including

credit card debt held by other lenders, and participation certificates,

securities and similar instruments secured by credit card receivables.

Two commenters supported including investments in loan pools that

issue securities backed by credit card loans in the definition. These

commenters noted that HOLA specifies that ``any reference to a loan

[herein] * * * includes an interest in such loan * * *'' 10 and,

thus, implicitly includes securities backed by credit card accounts and

receivables. One commenter argued that the inclusion of securities

backed by credit card loans is beyond congressional intent because such

debt instruments are essentially securities rather than loans.

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\10\ 12 U.S.C. 1464(c)(6)(B).

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OTS and its predecessor agency have long authorized federal savings

associations to make a loan secured by an assignment of loans to the

extent that the thrift may make or purchase the underlying

loans.11 Thus, the final rule continues to provide that loans made

through credit cards and credit card accounts encompass investments in

loan pools that issue securities backed by credit card loans.

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\11\ 12 CFR 560.31(c), as added 61 FR 50951, 50974 (September

30, 1996).

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Two commenters agreed with OTS's inclusion of credit card debt

consolidation loans in the definition of ``credit card account.'' These

commenters argued that such loans are, in economic substance, credit

card loans. One commenter requested OTS to clarify that consolidation

loans include other consumer debt such as personal or automobile loans.

Another commenter argued against the inclusion of credit card debt

consolidation loans, asserting that credit card debt consolidation

loans, in essence, are consumer installment loans that may include non-

credit card debt.

OTS believes that, in enacting EGRPRA, Congress intended to give

thrifts the flexibility for innovation with respect to the terms and

conditions of particular credit card products. Accordingly, OTS

believes that a broad definition of credit card account within the

limits of safety and soundness is consistent with congressional intent

of EGRPRA and HOLA. Additionally, OTS does not consider loans that are

used to consolidate other consumer debt such as personal or automobile

loans to be credit card debt consolidation loans and would object to a

thrift's treatment of loans consolidating both credit card and non-

credit card related debt as a credit card account loan. Accordingly,

the definition of credit card account is unchanged in the final rule.

OTS reiterates that Sec. 560.30 of OTS's regulations, which

implements the statutory credit card authority, permits

[[Page 15821]]

federal thrifts to engage in the full range of credit card operations

authorized by HOLA. Under this regulation, however, OTS reserves the

right to establish investment limits on a case-by-case basis if an

institution's concentration in credit-card-related loans presents a

safety and soundness concern.12 As with any expansion of a line of

business, institutions that expand their credit card lending pursuant

to today's rule must do so in a safe and sound manner. Institutions

planning any significant increase in these types of loans should

prepare thorough business plans, acquire the necessary personnel and

expertise, and establish adequate systems to identify and control risks

associated with these products. OTS will monitor these lending

activities, utilizing off-site surveillance and the on-site examination

process.

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\12\ 12 CFR 560.30, n. 5, 61 FR 50951, 50973 (September 30,

1996).

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Section 560.3--Definitions of Small Business and Small Business Loans

Section 2303(g) of EGRPRA requires the OTS Director to issue

regulations defining ``small business'' for the purposes of the newly

modified QTL test, which permits savings association to count small

business loans as QTI without restriction under section 10(m) of the

HOLA. Section 2303(c) of EGRPRA also directs the OTS Director to define

``small business loans'' in connection with the newly amended section

5(c) of the HOLA, which expands federal thrifts' commercial lending

authority from 10% to 20% of assets, provided the amount in excess of

10% of assets is used solely for small business loans.13

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\13\ Federal thrifts have long been authorized to make loans

secured by business or agricultural real estate in amounts up to

400% of capital, 12 U.S.C. 1464(c)(2)(B). Prior to EGRPRA, federal

thrifts could only make additional secured and unsecured loans to

businesses and farms in amounts up to 10% of total assets. 12 U.S.C.

1464(c)(2)(A).

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To promote a harmonious interpretation of the statute, the interim

final regulation defined ``small business'' and ``small business loan''

once for purposes of both HOLA provisions. OTS tied these regulatory

definitions to the eligibility criteria established by the Small

Business Administration (SBA) under section 3(a) of the Small Business

Act, 15 U.S.C. 632(a), as implemented by SBA's regulations at 13 CFR

Part 121. OTS specifically solicited comment whether these SBA

standards were the most appropriate basis for the definitions of small

business or small business loans under the HOLA. The OTS also solicited

comment on whether the agency should, for the sake of simplicity,

include in its definition a de minimis safe harbor based on annual

sales or some other criteria.14

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\14\ The SBA Reauthorization Act of 1994, 15 U.S.C.

632(a)(2)(C), provides that unless specifically authorized by

statute, no federal agency may prescribe a size standard for

categorizing a business concern as a small business unless such size

standard is made subject to public notice and comment, makes certain

size determinations, and is approved by the SBA Administrator. OTS

solicited comment regarding whether EGRPRA Sec. 2303(g) constitutes

a specific authorization within the meaning of 15 U.S.C.

632(a)(2)(C). Commenters addressing this issue believed that EGRPRA

gave OTS authorization to define ``small business'' for purposes of

the HOLA. Section 2303(g) of EGRPRA requires the Director to ``issue

such regulations as may be necessary to define the term `small

business' '' for the purposes of the QTL requirements at section

10(m) of the HOLA. Similarly, under section 5(c)(2)(A) of the HOLA,

as amended by section 2303(c) of EGRPRA, savings associations are

authorized to invest in ``small business loans, as that term is

defined by the Director.'' OTS believes that these statutes

constitute specific authorizations to define ``small business''

within the meaning of 15 U.S.C. 632(a)(2)(C).

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Of the seven commenters addressing the small business definitions,

four supported the use of SBA's regulatory definitions (either alone or

in combination with a de minimis safe harbor). These commenters

indicated that most lenders and small businesses are familiar with

SBA's size eligibility standards, and asserted that the use of SBA's

standards would promote regulatory uniformity among the agencies and

would reduce regulatory compliance burdens.

Three other commenters contended that thrifts are unfamiliar with

SBA's size eligibility standards. These commenters also asserted that

the SBA definitions are too complex to apply in day-to-day commercial

lending decisions since the SBA's criteria require knowledge of the

borrower's precise line of business, as categorized and subcategorized

by SBA's regulations. For some businesses, SBA's regulations rely on a

firm's number of employees. For other businesses, the SBA definitions

are based on the company's asset size or annual receipts. These

commenters contended that the application of SBA definitions would

require thrifts to gather additional data unrelated to lending

decisions, and to make time-consuming determinations of SBA industrial

classifications. They concluded that the use of the SBA definitions

would impose additional burdens on thrifts' commercial lending

activities, and would limit thrifts' incentive to pursue small business

lending, contrary to the spirit of EGRPRA.

Six of the seven commenters suggested that OTS adopt a safe harbor

in place of or as an alternative to the SBA definitions. These

commenters reasoned that a safe harbor threshold would provide

additional flexibility in qualifying businesses as eligible for small

business loan categorization. The commenters suggested a variety of

safe harbor standards, expressed in terms of annual receipts, number of

employees, and/or loan amount of a business borrower.

One commenter noted that savings associations are required to

report the aggregate number of loans made to businesses with gross

annual revenues of $1 million or less pursuant to the OTS's Community

Reinvestment Act (CRA) regulations.15 This commenter also asserted

that FRB Regulation B,16 which implements the Women's Business

Ownership Act of 1988, also uses the $1 million annual receipts

standard to determine whether a business constitutes a small business.

For consistency, the commenter suggested that OTS adopt the same

standard. A second commenter, a bank trade association, did not support

the safe harbor, but also recommended that if OTS decided to establish

a threshold, it should use the $1 million sales standard to be

consistent with the CRA and FRB regulations.

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\15\ 12 CFR 563e.42(b)(1)(iv). Small business loans for purposes

of the CRA regulations, however, are defined by reference to the

Thrift Financial Report, which is based on the amount of the loan.

See 12 CFR 563e.12(t).

\16\ 12 CFR 202.9(a)(3).

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A third commenter preferred a safe harbor of $20 million in annual

sales. This commenter represented that this amount was within the range

of dollar amounts that SBA currently uses in its definitions. The

commenter also observed that small businesses with $20 million or less

in annual sales typically employed fewer employees and borrowed smaller

amounts.

Two commenters suggested that OTS adopt a safe harbor based on

annual receipts or the number of employees of a business. In other

words, if a business has $5 million or less in annual receipts or 500

or fewer employees, it should automatically be deemed a small business

regardless of its line of business. These commenters indicated that

these thresholds were predominant among the myriad business types

included in SBA regulations.

Finally, one commenter suggested that OTS define small business

loans as business loans of $1 million or less that are made to

borrowers that do not have more than 1,000 employees at the time such

loans were made. This commenter explained that large and medium sized

businesses are unlikely to negotiate

[[Page 15822]]

loans of $1 million or less and described the 1,000-employee level as

the most representative level of employment in SBA regulations.

After reviewing these comments, OTS has determined to adopt

alternative standards for determining when an extension of credit

qualifies as a ``small business loan'' for purposes of thrifts' small

business lending authority and the QTL test. OTS believes that this

alternative approach will afford thrifts maximum flexibility to

participate in small business lending activities consistent with safety

and soundness.

First, OTS will continue to tie its definition of ``small

business'' to the eligibility criteria established by SBA and

implemented by SBA's regulations at 13 CFR Part 121. A loan to a

business qualifying as a ``small business'' under SBA's regulations

will qualify as a ``small business loan'' for purposes of HOLA

Sec. 5(c) lending authority and as a ``loan to a small business'' for

purposes of the QTL test at HOLA Sec. 10(m). For lenders and small

businesses familiar with SBA's size eligibility standards, this

alternative will provide a well-established mechanism for thrifts to

expand their small business lending. By relying on SBA's definition,

OTS also will promote regulatory uniformity among the agencies and will

lessen the regulatory compliance burden on the small business

community.

As an alternative mechanism, OTS is adopting a safe harbor

threshold based on loan amount. Under the final rule, a loan of $1

million or less will generally be deemed a small business loan (or a

loan to a small business) for purposes of thrifts' small business

lending authority and the QTL test. This safe harbor provides thrifts

with a simple, easy to apply, mechanism for qualifying loans as small

business loans. This standard should enhance small business lending

without adding an unnecessary layer of complexity to day-to-day

commercial lending.

OTS believes that a threshold loan amount would be an appropriate

safe harbor. OTS already uses a $1 million loan amount to define small

business loan for purposes of its CRA regulations.17 OTS also

relies on a $1 million loan threshold for purposes of reporting small

business loans to Congress pursuant to requirements of the Federal

Deposit Insurance Corporation Improvement Act (FDICIA).18 OTS's

Thrift Financial Report (TFR) currently requires thrifts to annually

report ``Loans to Small Businesses and Small Farms'' described in the

TFR instructions as business loans in the amount of $1 million or

less.19 Furthermore, as noted by at least one commenter, large and

medium sized businesses are unlikely to negotiate loans of $1 million

or less. Indeed, a recently issued FRB report states that ``[s]urvey

data indicates a high correlation between loan size and borrower size,

and most small loans likely are to small businesses.'' 20

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\17\ 12 CFR 563e.12(t). The CRA regulations of the other federal

banking agencies contain the same definition.

\18\ FDICIA Sec. 122, 12 USC 1817 note, requires the federal

banking agencies to collect annually from insured institutions

information on small business and small farm lending as the agencies

may need to assess the availability of credit to these sectors of

the economy. The Bank Call Report contains the same $1 million loan

threshold for bank reporting purposes.

\19\ Pursuant to TFR instructions, loans to small farms are

considered to be farm loans with ``original amounts'' of $500,000 or

less.

\20\ ``Information on Depository Credit for Small Businesses and

Small Farms'' (October 1996) p. 1. FDICIA Sec. 477, 12 USC 251,

requires the FRB to collect and publish annually information on the

availability of credit to small businesses and small farms.

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Accordingly, the final rule defines small business loans and loans

to small businesses, in part, by cross-reference to the TFR

instructions. The use of these loan thresholds is consistent with OTS

regulatory and reporting requirements and, additionally, does not pose

any threat to safety and soundness.21

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\21\ OTS may reevaluate this threshold after thrifts have had

some experience with its application.

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The final rule defines small business loans and loans to small

businesses to include a loan (including a group of loans to one

borrower) that meets the original amount restrictions and other

criteria for loans to small businesses and small farms under the TFR.

Savings associations must combine and report multiple loans to one

borrower on an aggregate basis, rather than as separate loans in

determining whether the loans fall within the threshold. Accordingly,

multiple loans made by a savings association to the same borrower would

not qualify as small business loans or loans to small businesses, if

the aggregated loans would exceed the TFR threshold amounts.

OTS determined not to base the safe harbor threshold on annual

receipts or sales. Unlike loan amount, which information is readily

available to thrifts, the concept of annual receipts or sales may

require some careful and potentially complex determinations with regard

to the amount and timing of income.22 OTS also determined not to

base the safe harbor threshold on employee level. Unlike loan amount,

thrifts do not necessarily obtain data regarding employee level as part

of the typical loan underwriting process. Nor is this information

readily available to thrifts. Employee levels are also subject to

greater fluctuation and more difficult to substantiate than loan

amount.

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\22\ See 13 CFR 121.104, which defines ``annual receipts'' for

SBA purposes.

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OTS believes that the alternative mechanisms for qualifying

borrowers for small business loans will provide thrifts with the

flexibility needed to pursue small business lending. This approach

should also increase available credit to small businesses by creating

incentives for thrifts to expand small business lending in a safe and

sound manner.

Sections 563.50, 563.51, 563.52--Revisions to the QTL Test

Section 2303 (e) and (g) of EGRPRA substantially amended the QTL

test. As a result of these statutory reforms, savings associations can

now engage in substantial small business, agricultural, credit card,

educational, and other consumer lending and remain in QTL

compliance.23

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\23\ For a more complete discussion of EGRPRA's amendments to

the QTL test as well as the federal thrifts' branching authority,

refer to the preamble to the interim final rule, 61 FR 60179-60180.

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The interim final rule did not codify the statutory amendments in

OTS regulations. Instead, OTS removed all QTL provisions from its

regulations and chose to rely directly on section 10(m) of the HOLA to

govern this area. OTS believed that HOLA's detailed QTL requirements,

combined with relevant handbook guidance and the new regulatory

definitions discussed above, provide adequate direction to the thrift

industry and OTS examination staff with respect to QTL compliance. This

approach is consistent with OTS's effort to streamline its regulations

and remove duplicative requirements pursuant to section 303 of the

Community Development and Regulatory Improvement Act of 1994

(CDRIA).24

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\24\ 12 U.S.C. 4803.

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No commenter addressed this issue. Accordingly, OTS is adopting its

final rule without change.

Section 563.36--Tying Restrictions

Section 5(q) of the HOLA prohibits a savings association from,

inter alia, varying the price charged for a product or service (the

tying product) based on whether the customer obtains an additional

product or service (the tied product) offered by the association or its

service corporation or affiliate, unless the additional product or

service is a loan, discount, deposit or trust service (``traditional

bank products''). The Bank Holding Company Act Amendments of 1970 (BHCA

Amendments) contain a similar anti-tying provision applicable

[[Page 15823]]

to banks and authorizes the FRB to grant exemptions by regulation or

order from such provisions.25 Prior to EGRPRA, the HOLA did not

grant exemptive authority to OTS.

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\25\ 12 U.S.C. 1972.

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Section 2216 of EGRPRA amended section 5(q) of the HOLA to

authorize the OTS Director to issue regulations or orders permitting

exceptions to the anti-tying prohibitions. These exceptions must not be

contrary to the purposes of section 5(q) of the HOLA, and must conform

to exceptions granted by the FRB to banks under the BCHA Amendments.

When the interim rule was issued, the FRB had promulgated four

regulatory exceptions. For the reasons discussed in the interim rule,

the OTS determined that there was no need to issue regulatory

exceptions comparable to three of these exceptions.26 These

included FRB exceptions permitting: (1) a bank holding company, bank,

or nonbank subsidiary to vary the consideration charged for a

traditional bank product on the condition or requirement that a

customer also obtain a traditional bank product from an affiliate;

27 (2) a bank holding company, bank or nonbank subsidiary to vary

the consideration charged for securities brokerage services on the

condition or requirement that a customer also obtain a traditional bank

product from that bank holding company or bank or nonbank subsidiary,

or from any affiliate of such company; 28 and (3) a bank holding

company or nonbank subsidiary to vary the consideration for any

extension of credit, lease or sale of property of any kind, or service,

on the condition or requirement that the customer obtain some

additional credit, property or service from itself or a nonbank

affiliate.29 Four commenters addressed the three FRB exemptions.

All agreed that comparable OTS exceptions were unnecessary. The final

rule is unchanged on this point.

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\26\ For a more detailed discussion of the three FRB exemptions

and the OTS decision not to promulgate similar regulatory

exemptions, see 61 FR 60181-82.

\27\ 12 CFR 225.7(b)(1) (1996).

\28\ 12 CFR 225.7(b)(2) (1996).

\29\ 12 CFR 225.7(b)(3) (1996).

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The fourth FRB exception permits banks to vary the consideration

for any product or package of products based on a customer's

maintenance of a combined minimum balance in certain products specified

by the bank varying the consideration (defined as ``eligible

products''), if (i) that bank offers deposits, and all such deposits

are eligible products, and (ii) balances in deposits count at least as

much as non-deposit products toward the minimum balance.30

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\30\ 12 CFR 225.7(b)(4) (1996).

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This regulatory exception permits banks to offer discounts to

customers maintaining a combined minimum balance in deposit and non-

deposit accounts, including brokerage and mutual fund accounts. As

such, this regulatory ``safe harbor'' authorizes tying arrangements

that, absent an exception, would be prohibited for savings

associations, because the tied products would not necessarily be

traditional bank products. In addition, savings and loan holding

companies or affiliates are prohibited from offering such arrangements

where one of the products involved is a savings association product

(other than a traditional bank product).

The interim final rule included a comparable ``safe harbor''

exception for savings associations, savings and loan holding companies,

and affiliates.31 OTS concluded that this exception was not

contrary to the purposes of section 5(q) of the HOLA because it did not

present the anti-competitive effects that the HOLA's anti-tying

provisions were intended to eliminate. Rather, the safe harbor enabled

savings associations and their affiliates to offer a greater variety of

banking products and services to their customers, and could enhance

competition in the market place. This exception also ensured parity

between savings associations and banks by enabling these institutions

to offer a comparable range of products and services and, thus,

enhanced competition among financial institutions consistent with the

purposes of section 5(q) and the BHCA Amendments.

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\31\ The exception authority granted to OTS by amended HOLA

Sec. 5(q) is indirectly applicable to savings and loan holding

companies and affiliates, because HOLA Sec. 10(n) provides that, in

connection with transactions involving the products or services of a

savings and loan holding company or affiliate and those of an

affiliated savings association, Sec. 5(q) shall apply to savings and

loan holding companies and their affiliates in the same manner as if

they were savings associations.

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The OTS anti-tying exception at 12 CFR 563.36 conforms to the FRB's

``safe harbor'' for combined balance discounts. This safe harbor

permits savings associations and their affiliates to offer discounts to

customers maintaining certain combined minimum balance accounts. OTS

also indicated that it may permit other exceptions under section 5(q)

on a case-by-case basis upon determination that the exception is not

contrary to the purposes of section 5(q), conforms to an exception

granted by the FRB, and is consistent with safe and sound practices.

Three commenters supported OTS's adoption of this safe harbor

exception. These commenters also agreed with OTS's decision to permit

other exceptions on a case-by-case basis. Commenters believed that this

flexible approach could expand the variety of products offered to

customers in a rapidly changing marketplace and would enable thrifts to

take full advantage of their holding company structure.

OTS's interim final rule did not require that all products offered

pursuant to the safe harbor must be separately available for purchase.

Although this condition applied to the FRB safe harbor,32 the FRB

had proposed to eliminate the condition in a proposed rule issued

September 6, 1996.33 OTS indicated it would reexamine this issue

if the FRB's final rule did not eliminate the condition.

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\32\ 12 CFR 225.7(c)(1)(1996).

\33\ 61 FR 47242 (September 6, 1996).

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At least one commenter, a bank trade association, criticized the

safe harbor for combined minimum balance accounts because it did not

require that all products be offered separately for sale, contrary to

the FRB safe harbor. Another commenter contended that there was no need

for all items in a combined balance to be separately offered because

there may be a rational economic need to offer certain products and

services in a package form and that not offering each product

separately does not necessarily raise anticompetitive issues.

In its final rule issued on February 28, 1997, the FRB in fact

eliminated the separate availability requirement for combined balance

discounts.34 Accordingly the OTS is adopting the antitying safe

harbor in its interim rule without change.

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\34\ 62 FR 9290, 9323 (February 28, 1997).

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In the interim rule, OTS also solicited comment as to whether the

agency should adopt regulatory amendments parallel to additional

revisions proposed by the FRB. The FRB had proposed to rescind the

provision in its regulation that extended the tying prohibitions to

bank holding companies and their nonbank affiliates,35 and had

proposed that bank holding companies and their nonbank affiliates could

engage in tying practices other than discounting, such as conditioning

the availability of a

[[Page 15824]]

product on the purchase of another product.36

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\35\ 12 CFR 225.7(a)(1996). Other aspects of the FRB's new rule

need not be discussed here because they concern practices not

prohibited for savings associations and their affiliates.

\36\ The FRB noted that any tying arrangements permitted under

these changes would be subject to the general provisions of the

antitrust laws.

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OTS requested comment on whether savings and loan holding companies

and their non-bank affiliates should also be completely exempted from

the tying restrictions. As noted above, the provision of law applying

the tying restriction to savings and loan holding companies is

statutory, not regulatory (as is the case for bank holding companies).

Thus, OTS also requested comment on whether it would have legal

authority to grant a complete exemption from section 10(n) of the HOLA.

Several commenters addressed this issue. Commenters generally

agreed that OTS does not have authority to eliminate entirely

restrictions on tying by savings and loan holding companies, because

OTS does not have authority to grant exemptions from section 10(n) of

the HOLA. However, none of the commenters disputed that OTS has

authority to grant exceptions to savings associations pursuant to OTS's

authority under section 5(q) of the HOLA to savings and loan holding

companies.

The FRB, in its final rule, adopted its proposal to rescind that

agency's regulatory extension of the tying prohibitions to bank holding

companies and their nonbank affiliates.37 Pursuant to section

10(n) of the HOLA, OTS does not presently appear to have the authority

to except savings and loan holding companies and their affiliates

entirely from all tying restrictions. Because OTS cannot completely

except savings associations and their affiliates from tying

prohibitions, OTS cannot adopt an exception precisely conforming to the

FRB's elimination of regulatory restrictions on tying by bank holding

companies. Nevertheless, the effects of OTS's inability to grant

exceptions from section 10(n) are limited for two reasons. First, as

previously noted, the section 10(n) restrictions do not apply unless

the tying arrangement involves a savings association. Second, the

exceptions promulgated under new section 5(q)(6) apply to savings and

loan holding companies (and affiliates) as if they were savings

associations.

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\37\ 62 FR at 9312-9315, 9323.

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As a final matter, one commenter noted that OTS has published no

policies or guidance concerning the tying restrictions applicable to

savings associations and their holding companies. This commenter

recommended that OTS issue such a policy statement or guidance. This

commenter suggested that the guidance should reflect OTS's position

that section 5(q) permits the arrangements addressed in the first three

FRB exceptions set forth at 12 CFR 225.7, and should contain examples

of permissible practices under these exceptions. This commenter also

suggested that FRB orders on tying arrangements could be used by

thrifts as guidance.

OTS will consider these suggestions, particularly if thrifts

indicate a need for such assistance after implementation of this final

rule. In light of the differences between anti-tying statutes

applicable to savings associations and banks, OTS does not believe it

appropriate to adopt automatically orders issued by the FRB.

Sections 574.1, 574.2, 574.3, 575.2, 583.20, 584.2a--Regulation of

Holding Companies

Section 2203 of EGRPRA eliminated OTS supervision of holding

companies that control both a bank and a thrift, and are registered as

a bank holding company with the FRB under the BHCA of 1956.38

Accordingly, the interim final rule included: (1) revisions to OTS

acquisition of control and holding company regulations to conform to

EGRPRA's amendments to the Savings and Loan Holding Company Act; (2) an

exception to the acquisition of control regulations clarifying that

when a person acquires control of a bank holding company and the person

is required to file a change of control notice with the FRB, no change

of control notice is required to be filed with OTS; and (3) minor

revisions to the Mutual Holding Company regulations to reflect the OTS

position that section 2203 of EGRPRA does not affect its authority to

regulate mutual holding companies, including mutual holding companies

that have acquired a bank.

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\38\ 12 U.S.C. 1841 et seq.

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The one commenter addressing the issue concurred with OTS's

implementation of EGRPRA. Accordingly, OTS adopts the described

modifications without change.

III. Administrative Procedure Act

OTS has determined that the 30-day delay of effectiveness

provisions of the Administrative Procedure Act (APA), 5 U.S.C. 553, may

be waived in this rulemaking. Section 553(d) of the APA permits waiver

of the 30 day delayed effective date requirement for, inter alia, good

cause or where a rule relieves a restriction. OTS finds that good cause

exists because the rule is substantially identical to the interim final

rule that has been in effect since November 1996. The rule relieves

various lending, investment, and tying restrictions for thrifts and

merely conforms OTS regulations to EGRPRA's statutory changes.

Accordingly, the final rule will be immediately effective upon

publication in the Federal Register.

IV. Executive Order 12866

OTS has determined that this final rule does not constitute a

``significant regulatory action'' for the purposes of Executive Order

12866.

V. Regulatory Flexibility Act

Because no notice of proposed rulemaking is required for this rule,

the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.

do not apply. The final rule does not impose any additional burdens or

requirements upon small entities and reduces burdens on all savings

associations. The regulatory amendments implement statutory changes to

the HOLA that relieve various lending, investment, and tying

restrictions on thrifts and otherwise conform OTS regulations to

EGRPRA.

VI. Unfunded Mandates Act of 1995

OTS 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 more than $100 million in any one year.

Accordingly, a budgetary impact statement is not required under section

202 of the Unfunded Mandates Act of 1995, Pub. L. 104-4, 109 Stat. 48

(1995).

VII. Effective Date

Section 302 of the Riegle Community Development and Regulatory

Improvement Act of 1994 (CDRIA), 12 U.S.C. 4802, requires that new

regulations and amendments to regulations that impose additional

reporting, disclosures, or other new requirements take effect on the

first date of the calendar quarter following publication of the rule

unless, among other things, the agency determines, for good cause, that

the regulations should become effective on a day other than the first

day of the next quarter. OTS believes that CDRIA does not apply to this

final rule because it imposes no new burden on thrifts. For these

reasons, OTS has determined that an immediate effective date is

appropriate for this final rule.

List of Subjects 12 CFR Part 560

Consumer protection, Investments, Manufactured homes, Mortgages,

Reporting and recordkeeping

[[Page 15825]]

requirements, Savings associations, Securities.

Accordingly, the Office of Thrift Supervision hereby amends title

12, chapter V of the Code of Federal Regulations by adopting as final

the interim rule published at 61 FR 60179 (November 27, 1996), with the

following changes.

PART 560--LENDING AND INVESTMENT

1. The authority citation for part 560 continues to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,

1828, 3803, 3806; 42 U.S.C. 4106.

2. Section 560.3 is amended by revising the introductory text and

the definitions for credit card and small business loans and loans to

small businesses to read as follows:

Sec. 560.3 Definitions.

For purposes of this part and any determination under 12 U.S.C.

1467a(m):

* * * * *

Credit card is any card, plate, coupon book, or other single credit

device that may be used from time to time to obtain credit.

* * * * *

Small business loans and loans to small businesses include any loan

to a small business as defined in this section; or a loan (including a

group of loans to one borrower) that meets the original amount

restrictions and other criteria for ``loans to small businesses and

small farms'' as defined in the instructions for preparation of the

Thrift Financial Report.

Dated: March 24, 1997.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97-8011 Filed 4-2-97; 8:45 am]

BILLING CODE 6720-01-P