Capital; Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Servicing Assets
Federal RegisterAug 10, 1998
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[Federal Register Volume 63, Number 153 (Monday, August 10, 1998)]
[Rules and Regulations]
[Pages 42668-42679]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21141]
[[Page 42667]]
_______________________________________________________________________
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Parts 3 and 6
Federal Reserve System
12 CFR Parts 208 and 225
Federal Deposit Insurance Corporation
12 CFR Part 325
Department of the Treasury
Office of Thrift Supervision
12 CFR Parts 565 and 567
_______________________________________________________________________
Risk-Based Capital Guidelines; Capital Adequacy Guidelines, and Capital
Maintenance: Servicing Assets; Final Rule
Federal Register / Vol. 63, No. 153 / Monday, August 10, 1998 / Rules
and Regulations
[[Page 42668]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 6
[Docket No. 98-10]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-0976]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC07
DEPARTMENT OF THE TREASURY
Office Of Thrift Supervision
12 CFR Parts 565 and 567
[Docket No. 98-68]
RIN 1550-AB11
Capital; Risk-Based Capital Guidelines; Capital Adequacy
Guidelines; Capital Maintenance: Servicing Assets
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC); the Board
of Governors of the Federal Reserve System (Board); the Federal Deposit
Insurance Corporation (FDIC); and the Office of Thrift Supervision
(OTS) (collectively, the Agencies) are amending their capital adequacy
standards for banks, bank holding companies, and savings associations
(collectively, institutions or banking organizations) to address the
regulatory capital treatment of servicing assets on both mortgage
assets and financial assets other than mortgages (nonmortgages). This
rule increases the maximum amount of servicing assets (when combined
with purchased credit card relationships (PCCRs)) that are includable
in regulatory capital from 50 percent to 100 percent of Tier 1 capital.
Servicing assets include the aggregate amount of mortgage servicing
assets (MSAs) and nonmortgage servicing assets (NMSAs). It also applies
a further sublimit of 25 percent of Tier 1 capital to the aggregate
amount of NMSAs and PCCRs. The rule also subjects the valuation of
MSAs, NMSAs, and PCCRs to a 10 percent discount. The final rule also
modifies certain terms used in the Agencies' capital rules to be more
consistent with the terminology found in accounting standards recently
prescribed by the Financial Accounting Standards Board (FASB) for the
reporting of these assets.
DATES: This final rule is effective October 1, 1998. The Agencies will
not object if an institution wishes to apply the provisions of this
final rule beginning on August 10, 1998.
FOR FURTHER INFORMATION CONTACT:
OCC: Gene Green, Deputy Chief Accountant (202/874-5180); Roger
Tufts, Senior Economic Adviser, or Tom Rollo, National Bank Examiner,
Capital Policy Division (202/874-5070); Mitchell Stengel, Senior
Financial Economist, Risk Analysis Division (202/874-5431); Saumya
Bhavsar, Attorney or Ronald Shimabukuro, Senior Attorney (202/874-
5090), Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency, 250 E Street, S.W., Washington, D.C.
20219.
Board: Arleen Lustig, Supervisory Financial Analyst (202/452-2987),
Arthur W. Lindo, Supervisory Financial Analyst, (202/452-2695) or
Thomas R. Boemio, Senior Supervisory Financial Analyst, (202/452-2982),
Division of Banking Supervision and Regulation. For the hearing
impaired only, Telecommunication Device for the Deaf (TDD), Diane
Jenkins (202) 452-3544, Board of Governors of the Federal Reserve
System, 20th and C Streets, N.W., Washington, D.C. 20551.
FDIC: For supervisory issues, Stephen G. Pfeifer, Examination
Specialist, (202/898-8904), Accounting Section, Division of
Supervision; for legal issues, Marc J. Goldstom, Counsel, (202/898-
8807), Legal Division.
OTS: Michael D. Solomon, Senior Program Manager for Capital Policy,
(202/906-5654), Christine Smith, Capital and Accounting Policy Analyst,
(202/906-5740), or Timothy J. Stier, Chief Accountant, (202/906-5699),
Vern McKinley, Senior Attorney, Regulations and Legislation Division
(202/906-6241), Office of Thrift Supervision, 1700 G Street, N.W.,
Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:
I. Background
This section describes the changes in accounting guidance that have
prompted the Agencies to amend their risk-based and leverage capital
rules with respect to servicing assets.
FAS 122
In May 1995, FASB issued Statement of Financial Accounting
Standards No. 122, ``Accounting for Mortgage Servicing Rights'' (FAS
122), which eliminated the distinction in generally accepted accounting
principles (GAAP) between originated mortgage servicing rights (OMSRs)
and purchased mortgage servicing rights (PMSRs). FAS 122 required that
these assets, together known as mortgage servicing rights (MSRs), be
treated as a single class of assets for financial statement purposes,
regardless of how the servicing rights were acquired.1 This
change allowed OMSRs to be reported as balance sheet assets for the
first time. Under FAS 122, OMSRs and PMSRs were treated the same for
reporting, valuation, and disclosure purposes. Among other things, FAS
122 imposed valuation and impairment criteria based on the
stratification of MSRs by their predominant risk characteristics. In
addition, prior to FAS 122, GAAP treated MSRs as intangible assets. FAS
122 eliminated this characterization as unnecessary because similar
characterizations as tangible or intangible are not applied to most
other assets.
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\1\ Mortgage servicing rights represent the contractual
obligations undertaken by an institution to provide the servicing
for mortgage loans owned by others, typically for a fee. Mortgage
servicing rights generally have value to the servicing institution
due to the present value of the expected net future cash flows for
servicing mortgage assets. PMSRs are mortgage servicing rights that
are purchased from other parties. The purchaser is not the
originator of the mortgages. OMSRs, on the other hand, generally
represent the servicing rights created when an institution
originates mortgage loans and subsequently sells the loans but
retains the servicing rights.
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The Agencies adopted FAS 122 for regulatory reporting purposes and
then issued a joint interim rule on the regulatory capital treatment of
MSRs with a request for public comment on August 1, 1995 (60 FR 39226).
The interim rule, which became effective upon publication, amended the
Agencies' capital adequacy standards for mortgage servicing rights and
intangible assets. It treated OMSRs in the same manner as PMSRs for
regulatory capital purposes. The interim rule permitted banking
organizations to include MSRs plus PCCRs in regulatory capital up to a
limit of 50 percent of Tier 1 capital.2 In addition, the
interim rule applied a 10 percent valuation discount (or ``haircut'')
to all MSRs and PCCRs. This haircut is statutorily required for
PMSRs.3 The interim rule did not
[[Page 42669]]
amend any other elements of the Agencies' capital rules.
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\2\ For OTS purposes, Tier 1 capital is the same as core
capital.
\3\ This 10 percent haircut is required by section 475 of the
Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) (12 U.S.C. 1828 note). Also see the Financial Institutions
Recovery, Reform, and Enforcement Act (FIRREA) (12 U.S.C. 1464(t))
for the statute applicable to thrifts. It applies to the fair value
of the MSRs so that the amount of MSRs recognized for regulatory
capital purposes does not exceed 90 percent of the fair value.
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FAS 125
In June 1996, FASB issued Statement of Financial Accounting
Standards No. 125, ``Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities' (FAS 125), the
servicing related provisions of which became effective on January 1,
1997. FAS 125, which superseded FAS 122, requires organizations to
recognize separate servicing assets (or liabilities) for the
contractual obligation to service financial assets (e.g., mortgage
loans, credit card receivables) that the entities have either sold or
securitized with servicing retained. Furthermore, servicing assets (or
liabilities) that are purchased (or assumed) as part of a separate
transaction must also be recognized under FAS 125.
FAS 125 also eliminates the previous distinction in GAAP between
normal servicing fees and excess servicing fees.4 FAS 125
reclassifies these cash flows into two assets: (a) servicing assets,
which are measured based on contractually specified servicing fees; and
(b) interest-only (I/O) strips receivable, which reflect rights to
future interest income from the serviced assets in excess of the
contractually specified servicing fees. In addition, FAS 125 generally
requires I/O strips and other financial assets (including loans, other
receivables, and retained interests in securitizations) to be measured
at fair value if they can be contractually prepaid or otherwise settled
in such a way that the holder would not recover substantially all of
its recorded investment.5 However, under FAS 125, no
servicing asset (or liability) need be recognized when a banking
organization securitizes assets, retains all of the resulting
securities, and classifies the securities as held-to-maturity in
accordance with FAS 115.
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\4\ Prior to FAS 125, excess servicing fees arose only when an
organization sold loans but retained the servicing and received a
servicing fee that was in excess of a normal servicing fee. Excess
servicing fees receivable (ESFRs) represented the present value of
the excess servicing fees and were reported as a separate asset on
an institution's balance sheet.
\5\ These assets are to be measured at fair value like debt
securities that are classified as available-for-sale or trading
securities under FASB Statement No. 115, ``Accounting for Certain
Investments in Debt and Equity Securities'' (FAS 115).
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FAS 125 also adopts the valuation approach established in FAS 122
for determining the impairment of mortgage servicing assets (MSAs) and
extends this approach to all other servicing assets (i.e., servicing
assets on financial assets other than mortgages). Thus, impairment
should be assessed based on the stratification of servicing assets by
their predominant risk characteristics.
The Agencies issued interim guidance to banking organizations on
December 18, 1996, to ensure banking organizations' compliance with FAS
125 for reporting purposes when the servicing-related provisions became
effective on January 1, 1997. Under the interim guidance, the Agencies
also clarified that their existing rules on mortgage servicing applied
to all MSAs. Furthermore, consistent with their existing rules, the
OCC, FDIC, and the Board did not allow the inclusion of NMSAs for
regulatory capital purposes. The OTS included NMSAs in regulatory
capital, subject to the same 50 percent of Tier 1 capital aggregate
limit, 25 percent sublimit, and 10 percent haircut applicable to PCCRs.
II. Description of the Proposal
The Agencies issued a joint proposed rule on August 4, 1997 (62 FR
42006). The proposal raised three main questions: (1) Should the
Agencies continue to retain a limitation on the amount of mortgage
servicing assets that may be included in regulatory capital; (2) should
the Agencies continue to deduct NMSAs for regulatory capital purposes;
and, (3) should the Agencies impose regulatory capital limits on I/O
strips receivable not in the form of a security or on certain other
nonsecurity financial instruments subject to prepayment risk
(collectively, I/O strips receivable)?
Specifically, with respect to the first issue, the Agencies
proposed to increase the aggregate amount of MSAs and PCCRs that
banking organizations could include in regulatory capital from 50 to
100 percent of Tier 1 capital. In addition, they proposed to apply the
10 percent haircut to all MSAs. The proposal also continued to subject
PCCRs to a 10 percent haircut and a 25 percent of Tier 1 capital
sublimit.
With respect to the second issue, the Agencies proposed to exclude
from regulatory capital the amount of banking organizations' NMSAs.
Prior to the adoption of FAS 125, NMSAs generally were not recognized
as balance sheet assets for GAAP or regulatory reporting purposes.
With respect to the third issue, the Agencies requested comment on
two options for the capital treatment of I/O strips receivable. Under
Alternative A, I/O strips receivable, whether or not in the form of a
security, would be included in Tier 1 capital on an unlimited basis;
that is, they would not be subject to any Tier 1 capital deduction.
Under Alternative B, I/O strips receivable not in the form of a
security would be combined with the corresponding type of servicing
assets and subject to the same capital limitation and 10 percent
haircut (or capital deduction) that are applied to the related
servicing assets.
In addition, the Agencies specifically requested public comment on
a number of topics related to the proposal. The topics included the
reliability of the fair values of servicing assets, the appropriate
Tier 1 capital limitation for mortgage and NMSAs, and whether servicing
assets that are disallowed for regulatory capital purposes should be
deducted on a basis that is net of any associated deferred tax
liability.
III. Summary of Comments and Description of the Final Rule
Final Rule
After considering the public comments received and discussed below,
the Agencies have decided to amend their respective risk-based and
leverage capital rules as follows:
(a) All servicing assets and PCCRs that are includable in capital
are each subject to a 90 percent of fair value limitation (also known
as a ``10 percent haircut'').6
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\6\ The Agencies have chosen to use FAS 125 terminology when
referring to servicing assets and financial assets. The Agencies'
regulatory reports (Reports of Condition and Income for commercial
banks and FDIC-supervised savings banks, Thrift Financial Report
(TFR) for savings associations, and Consolidated Financial
Statements (FR Y-9C) for bank holding companies) also reflect FAS
125 definitions for the reporting of servicing assets. Consistent
with the foregoing, the FDIC has made an additional technical
clarification to its definition of ``mortgage servicing assets'' in
12 CFR 325.2(n) that conforms this definition more closely to the
definitions used in the Agencies' regulatory reports.
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(b) The aggregate amount of all servicing assets and PCCRs included
in capital cannot exceed 100% of Tier 1 capital.
(c) The aggregate amount of NMSAs and PCCRs included in capital
cannot exceed 25% of Tier 1 capital.
(d) All other intangible assets (other than qualifying PCCRs) must
be deducted from Tier 1 capital.
Amounts of servicing assets and PCCRs in excess of the amounts
allowable must be deducted in determining Tier 1 capital. Furthermore,
I/O strips receivable, whether or not in security form, are not subject
to any regulatory capital limitations under this rule.
[[Page 42670]]
Summary of Comments
The Agencies collectively received 35 comment letters on the
proposal during the comment period, which ended on October 3, 1997. The
commenters represented a diverse group of organizations that included:
Six banks, seven bank holding companies, seven Federal Reserve Banks,
seven thrifts, seven trade associations, and one government sponsored
enterprise. This final rule is similar in most respects to the
Agencies' proposal, but incorporates several changes in response to
comments received. The following analysis identifies and discusses the
major issues raised in the comments and the Agencies' responses to
these issues.
Capital Limitation for Mortgage Servicing Assets
The Agencies solicited comment on a proposal to increase the 50
percent of Tier 1 capital limit for MSAs and PCCRs to 100 percent of
Tier 1 capital and to retain a 25 percent sublimit for PCCRs. The
Agencies also requested comment on what the aggregate limit, if any,
should be for the inclusion of MSAs and PCCRs in regulatory capital.
The Agencies received 29 comments on this issue. Twenty-five of the 29
commenters supported increasing the 50 percent limit. Some of these
commenters supported the proposal's increase to 100 percent of Tier 1
capital. Others recommended a higher Tier 1 capital limitation (e.g.,
200 percent of capital), while still others recommended the complete
elimination of any limitation on the amount of MSAs included in Tier 1
capital.
Those commenters supporting an increase in, or elimination of, the
Tier 1 capital limit argued that the GAAP valuation and impairment
requirements for MSAs under FAS 125, which are based on the lower of
cost or market (LOCOM), are conservative. Therefore, they argued that
these standards provide safeguards against the risks associated with
these assets and preclude the need for regulatory capital limitations.
They further reasoned that the fair value of MSAs is readily available
in the active, mature market for MSAs. This information, in turn,
allows market participants to use market-based data on prepayment
speeds and discount rates to model the present values of MSAs using
discounted cash flow valuation techniques. Furthermore, they argued
that the use of the market-based data on prepayments, loan balances,
delinquencies, and servicing costs helps reduce the volatility of
reported values of servicing assets. Some of these commenters also
noted that software packages used to determine fair values of MSAs
enable servicers to more accurately value MSAs.
Several commenters who were in favor of eliminating the regulatory
capital limit on MSAs believed that the Agencies' capital guidelines
should focus on institutions' overall risk profiles rather than on
limitations for specific types of assets, such as MSAs which are often
hedged.
Furthermore, most commenters believed that the requirement to
deduct from Tier 1 capital all amounts of MSAs exceeding the percent of
Tier 1 capital limitation would continue to put insured institutions at
a competitive disadvantage vis-a-vis non-regulated/nonbank entities.
Such uninsured entities are not subject to the cost of this capital
limitation, which increases insured institutions' costs for performing
servicing and, in turn, limits the growth of their portion of the
servicing and securitization markets.
Other commenters noted that the Tier 1 capital limit should be
increased because the limit is considerably more constraining now than
it was prior to the issuance of FAS 122 and FAS 125 because FAS 122
required the capitalization of OMSRs and FAS 125 redefined MSAs to
include the bulk of ESFRs. The 50 percent limit was originally intended
only for PMSRs, but is now applied to OMSRs and the large majority of
what were formerly classified as ESFRs.
Four commenters opposed the increase of MSAs to 100 percent of Tier
1 capital noting problems in estimating their value, including
difficulty in making assumptions regarding future loan repayments,
credit quality, and interest rates. In addition, these commenters
pointed out that a weak economy or significant changes in interest
rates could exacerbate problems of uncertainty in valuing MSAs, due, in
part, to changes in mortgage prepayment rates. One commenter noted that
despite continued growth in the market, it is concerned that community
banks holding relatively small amounts of these assets still face
significant difficulties in obtaining accurate valuations. These
commenters do not believe that, for their banking organizations,
adequate information is available overall to make appropriate
assumptions in calculating valuations and impairment.
The Agencies believe that increasing the limit of MSAs allowable in
Tier 1 capital from 50 to 100 percent is appropriate and that the
application of more rigorous valuation and impairment standards for
servicing assets pursuant to FAS 125 has improved the valuation of
these assets.7 FAS 125 has significantly changed the
treatment of mortgage servicing from when Congress through FIRREA
imposed PMSR limits on thrifts in 1989 and FDICIA imposed valuation
criteria on all banks' and thrifts' PMSRs in 1991.8
Furthermore, the volume of servicing assets that is traded regularly in
the market has greatly increased, making market-based data more readily
available and information on prepayment rates, delinquency rates, and
other servicing costs more accessible. However, the Agencies also
believe that more experience with institutions' application of the
valuation standard under FAS 125, as well as with the volatility of
these assets, is needed before considering the removal, or further
easing, of the Tier 1 capital limits. Therefore, as a result of
development of the mortgage servicing markets and the improved
valuation and impairment standards under FAS 122 and 125, the Agencies
are increasing the Tier 1 capital limit for MSAs from 50 to 100 percent
of Tier 1 capital.
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\7\ Among other things, FAS 125 requires banking organizations
to stratify their servicing assets based on one or more of their
predominant risk characteristics. Thus, declines in fair market
value of a particular stratum of servicing assets below cost must be
recognized under GAAP, while gains in the value of another stratum
of servicing assets may not offset losses experienced in other
strata. This methodology discourages banking organizations from
overvaluing their servicing portfolios because they will be required
to recognize larger declines if prepayments occur.
\8\ The current 50 percent of Tier 1 capital limit applies to
the aggregate amount of MSAs and PCCRs only. The final rule will
apply the 100 percent of Tier 1 capital limit to the aggregate
amount of MSAs, NMSAs, and PCCRs.
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Purchased Credit Card Relationships
The Agencies proposed no changes to the current regulatory capital
treatment of PCCRs, which are subject to the 100 percent of Tier 1
limit, to a 25 percent of Tier 1 capital sublimit, and to a 10 percent
haircut. Although the Agencies did not specifically request comment on
the capital treatment of PCCRs, except in the context of an aggregate
limit when combined with servicing assets, the Agencies received six
comments on the regulatory capital limitation of PCCRs. Generally,
these commenters supported removing all regulatory capital limits on
PCCRs, although a few supported some type of limitation. Since the
Agencies did not solicit comments, they are not taking any action at
this time.9
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\9\ Under the existing rules, only PCCRs are subject to the
sublimit of 25 percent of Tier 1 capital. Under the final rule, the
sublimit will apply to the aggregate amount of PCCRs and NMSAs.
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[[Page 42671]]
Nonmortgage Servicing Assets
The Agencies requested comment on whether servicing assets on
nonmortgage financial assets should be recognized in Tier 1 capital.
The Agencies received 18 comments addressing this issue. Five
commenters supported the proposal's full deduction of NMSAs from
regulatory capital because of valuation and market liquidity concerns.
The other commenters recommended that the Agencies place either no
limit on NMSAs or apply the proposed treatment for MSAs (i.e., 100
percent of Tier 1 capital).
The commenters opposing the proposal acknowledged that the market
for NMSAs is less developed than for MSAs, but believed that the
Agencies should not prevent the development of markets for NMSAs by
excluding these assets from regulatory capital. These commenters argued
that: (1) The rigorous valuation and impairment criteria of FAS 125 are
conservative and provide sufficient protection against overvaluation of
NMSAs; (2) NMSAs have less potential for volatility than MSAs because
they typically have shorter lives than MSAs and are not as sensitive to
changes in market interest rates; (3) fair values are obtainable for
NMSAs using discounted cash flow models or market surveys of similar
pricing arrangements; (4) excluding NMSAs from regulatory capital would
put financial institutions at a serious competitive disadvantage with
non-regulated entities; and (5) there is sufficient experience with
contractual servicing fees related to securitizations to enable
examiners to evaluate the appropriateness of such fees. Finally, these
commenters argued that, under FAS 125, the majority of banks with
substantial amounts of servicing assets and other nonsecurity financial
instruments related to securitizations generally have sophisticated
cost accounting systems and can clearly track their cost associated
with servicing the securitized receivables. Therefore, these commenters
contended that a fully developed public market in trading these
servicing portfolios is not necessary in determining their fair
value.10
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\10\ One commenter noted that OTS-regulated institutions are
currently allowed to include NMSAs in Tier 1 capital, subject to the
same haircut and 25 percent sublimit as PCCRs. Therefore, they
recommended a grandfathering provision for transactions that
occurred prior to any change in the regulatory capital treatment of
NMSAs. Under today's final rule, these grandfathering provisions are
unnecessary.
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The proposal also requested comment on what types of nonmortgage
financial assets (other than loans secured by first liens on 1- to 4-
family residential properties) banking organizations currently book as
servicing assets or I/O strips receivable. Seven commenters responded
to this question. These commenters noted the following types of
servicing assets: Commercial loans, automobile loans, credit card
receivables, unsecured installment loans, student loans, Small Business
Administration loans, home equity loans, commercial mortgages,
recreational vehicle loans, and marine loans.
After careful consideration of these comments, the Agencies have
decided to allow banking organizations to include NMSAs in Tier 1
capital, but subject the aggregate of NMSAs and PCCRs to the 25 percent
of Tier 1 sublimit and to the 10 percent haircut. The Agencies believe
that a conservative regulatory capital limit is appropriate until the
depth and maturity of this market develops further. This approach
allows banking organizations to include some prudently valued NMSAs in
Tier 1 capital calculations, while retaining the supervisory safeguards
that the Agencies believe are warranted in light of their concerns
about the potential valuation, liquidity, and volatility of these
assets.11
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\11\ While savings associations may include NMSAs in core (Tier
1) capital, they may not include such assets in tangible capital
under 12 U.S.C. 1464(t)(9)(C). See OTS final rule at 12 CFR
567.12(b)(2). In addition, OTS has revised its definition of
tangible equity under the prompt corrective action rule at 12 CFR
565.2(f). The revised rule reflects the fact that NMSAs are deducted
from tangible equity and other minor technical changes.
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Discounted Valuation (``Haircut'')
The final rule retains the interim rule's application of the
required 10 percent discount in valuing MSAs and PCCRs. Although the
Agencies did not specifically request comment on this issue, nine
commenters recommended elimination of the haircut. These commenters
acknowledged that the valuation discount is required by statute for
PMSRs, but advocated its elimination by legislative
change.12 At a minimum, some commenters recommended that the
haircut apply only to PMSRs, even though the application of the haircut
to PMSRs could be difficult because PMSRs are not reported as separate
assets under GAAP. These commenters argued that the haircut is an
arbitrary and ineffective way to protect against prepayment and other
risks. Instead, they believed that it is preferable to measure risks
associated with MSAs and PCCRs as part of banking organizations'
overall interest rate risk analyses. One commenter, however, supported
retaining the ten percent haircut because it injects an element of
conservatism into the regulatory capital measure. The final rule
retains the 10 percent haircut for MSAs and PCCRs and extends it to
NMSAs. The Agencies, however, may revisit this issue if Congress
revises the current statutory requirement.
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\12\ Section 115 of S. 1405, the Financial Regulatory Relief and
Economic Efficiency Act, currently pending, could, among other
things, provide discretion for the Agencies to reduce or eliminate
the ten percent haircut for PMSRs.
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Interest-Only Strips Receivable
The Agencies proposed, and requested public comment on, two options
for the capital treatment of I/O strips receivable. Under Alternative
A, I/O strips receivable, whether or not in the form of a security,
would be included in Tier 1 capital on an unlimited basis, that is,
they would not be deducted from Tier 1 capital regardless of the amount
of such holdings. Under Alternative B, I/O strips receivable not in the
form of a security would be subject to the same capital limitations and
10 percent haircut that are applied to the related type of servicing
assets. The Agencies also asked for comment on whether the definition
of I/O strips receivable that could be subject to such capital
limitations under Alternative B should be expanded to include certain
other financial assets not in security form that have substantial
prepayment risks (as defined in FAS 125).
The Agencies received 19 comments on the treatment of I/O strips
receivable. Fourteen commenters supported Alternative A, contending
that I/O strips receivable should not be subject to a Tier 1 capital
limit. They asserted that I/O strips receivable associated with
servicing assets are indistinguishable from I/O strip securities and
should be treated consistently with other I/O strip securities, which
are not subject to Tier 1 capital limitations. In addition, these
commenters believed that, because the income stream of I/O strips
receivable is not dependent on a banking organization servicing the
underlying loans, I/O strips receivable should not necessarily be
subject to the same capital requirement applied to the servicing assets
on the same type of loans. Some commenters noted that banking
organizations' interest rate risk models currently measure and assess
the risk of I/O strips, which provide a better analytical foundation
for establishing capital requirements than imposing rigid percentage-
of-capital limitations. Other commenters stated
[[Page 42672]]
that I/O strips receivable often serve as a credit enhancement to
securities holders and therefore already are subject to the capital
treatment for recourse obligations and direct credit substitutes.
Five commenters supported Alternative B. The reasons cited by these
commenters included the difficulty of valuing I/O strips receivable
because they are not securities, not rated, and not registered. These
commenters also cited the lack of an active, liquid market because
these assets are relatively new financial assets. One commenter argued
that if I/O strips receivable are not subject to the same capital
limitation as their related servicing assets, banking organizations may
be inclined to avoid capital limitations by negotiating contracts that
classify more of the cash flows as I/O strips receivable instead of
servicing assets.
Based on the comments received and a further analysis of the
issues, the Agencies have decided to adopt Alternative A. The Agencies
agree that I/O strips receivable associated with servicing assets are
sufficiently similar to I/O strip securities, which are not subject to
a capital deduction requirement under current rules, to warrant
consistent treatment. Furthermore, the agencies also recognize the
prudential effects of banking organizations' relying on their own risk
assessment and valuation tools, particularly their interest-rate risk,
market risk, and other analytical models. Accordingly, the Agencies
will not apply a regulatory capital limitation to I/O strips receivable
or non-security financial instruments under the final rule.
Nevertheless, the Agencies will continue to review banking
organizations' valuation of I/O strips receivable, evaluate
concentrations of these assets relative to the organizations'
regulatory capital levels, and determine whether cash flows are being
correctly classified as either I/O strips receivable or servicing
assets. As with other assets, the Agencies may, on a case-by-case
basis, require banking organizations that the Agencies determine have
high concentrations of these assets relative to their capital, or are
otherwise at risk from these assets, to hold additional capital
commensurate with their risk exposure.
In addition, the Agencies will continue to apply the capital
treatment for assets sold with recourse to those arrangements where I/O
strips receivable are used as a credit enhancement to absorb credit
risk on the underlying loans that have been sold.
Other Issues
Excess Servicing Fees Receivables
The proposal requested comment on the appropriate capital treatment
for amounts previously designated as ESFRs if a banking organization
still maintains this breakdown for income tax or other purposes. The
Agencies requested comment on ESFRs because, for tax purposes, banking
organizations may continue to report ESFRs separately from servicing
assets. The agencies were exploring whether any banking organizations
that report ESFRs for tax purposes would similarly want to report ESFRs
separately for regulatory capital purposes.
The Agencies received nine comments on this question. The
commenters generally supported according ESFRs the same capital
treatment as I/O strips receivable, because both ESFRs and I/O strips
receivable can be sold separately from the servicing asset, or treating
ESFRs like other servicing assets. If ESFRs are treated like I/O strips
receivable, the commenters thought that they should not be subject to
any regulatory capital limitations or valuation discounts. Other
commenters noted that the Agencies' proposed increase of servicing
assets to 100 percent is a meaningful liberalization because more
assets, including many ESFRs, may fall within the scope of the limit.
One commenter, however, recommended a 200 percent capital limit.
Under this final capital rule, banking organizations should follow
FAS 125 in reporting cash flows as either servicing assets or I/O
strips receivable. Some cash flows that were previously categorized as
ESFRs, particularly ESFRs not related to residential mortgage loans,
will be classified as I/O strips receivable. On the other hand, some
excess servicing fees may become part of the contractually specified
servicing fees under FAS 125. The Agencies' decision to increase the
Tier 1 capital limitation from 50 to 100 percent should mitigate the
capital effects of including such ESFRs in servicing assets.
Hedging the Servicing Assets Portfolio
The proposal requested comment on what effect efforts to hedge the
MSA portfolio should have on the application of capital limitations to
various types of servicing assets. Thirteen commenters addressed this
question. Two commenters believed that efforts to hedge the mortgage
servicing asset portfolio should not impact the capital limitations for
these assets. Alternatively, six commenters supported the incorporation
of hedging into banking organizations' capital computations. Two of
these commenters recommended a method of incorporating hedging into the
capital calculation by allowing institutions to include directly hedged
servicing assets in Tier 1 capital without any regulatory capital
limitation. One commenter noted that the Agencies should defer a
decision on this issue until FASB completes its guidance on hedging.
The Agencies recognize the important function of hedging servicing
assets due to the inherent volatility of these assets. Banking
organizations with substantial portfolios of servicing assets generally
should hedge these portfolios. However, because the Agencies have not
had sufficient experience with institutions' hedging of servicing and
other assets covered by FAS 125, the Agencies are not adjusting the
capital limitations in this final rule to adjust for hedging. The
Agencies may revisit this issue when they evaluate any changes that
FASB may make to hedge accounting under GAAP.
Net of Tax
The proposal asked for comment on whether servicing assets that are
disallowed for regulatory capital purposes should be deducted on a
basis that is net of any associated deferred tax liability. Several
commenters addressed this issue. Those commenters unanimously agreed
that servicing assets and PCCRs deducted from Tier 1 capital under this
rule should be deducted on a basis that is net of any associated
deferred tax liability. Thus, this final rule gives banking
organizations the option to deduct otherwise disallowed servicing
assets on a basis that is net of any associated deferred tax
liability.13 Any deferred tax liability used in this manner
would not be available for the organization to use in determining the
amount of net deferred tax assets that may be included for the purposes
of Tier 1 capital calculations.
---------------------------------------------------------------------------
\13\ The OTS' current rule addresses the net of tax issue and
the OTS has made minor technical changes to its final rule text. The
OTS is also reviewing its TFR instructions implementing this
provision to better accord with this rulemaking.
---------------------------------------------------------------------------
Tangible Equity
No comments were received on conforming the terminology in the
definition of tangible equity found in each Agency's regulation for
Prompt Corrective Action to reflect the FAS 125 conceptual changes for
measuring servicing assets. Therefore, the term ``mortgage servicing
assets'' will replace ``mortgage servicing rights'' in the
[[Page 42673]]
definition of tangible equity in each Agency's Prompt Corrective Action
regulation.14
---------------------------------------------------------------------------
\14\ See OTS changes to tangible equity at footnote number 11.
---------------------------------------------------------------------------
III. Regulatory Flexibility Act Analysis
OCC Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Comptroller of the Currency certifies that this final rule would not
have a significant economic impact on a substantial number of small
entities in accord with the spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.). Accordingly, a regulatory
flexibility analysis is not required. The adoption of this final rule
would reduce the regulatory burden of small businesses by aligning the
terminology in the capital adequacy standards more closely to newly-
issued generally accepted accounting principles and by relaxing the
capital limitation on servicing assets. The economic impact of this
final rule on banks, regardless of size, is expected to be minimal.
Board Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Board certifies that this final rule would not have a significant
economic impact on a substantial number of small entities in accord
with the spirit and purposes of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.). Accordingly, a regulatory flexibility analysis is
not required. The effect of this final rule would be to reduce the
regulatory burden of banks and bank holding companies by aligning the
terminology in the capital adequacy guidelines more closely to newly-
issued generally accepted accounting principles and by relaxing the
capital limitation on servicing assets. In addition, because the risk-
based and leverage capital guidelines generally do not apply to bank
holding companies with consolidated assets of less than $150 million,
this final rule will not affect such companies.
FDIC Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that this final rule
would not have a significant economic impact on a substantial number of
small entities. Accordingly, a regulatory flexibility analysis is not
required. The amendment concerns capital requirements for servicing
assets held by depository institutions of any size. More specifically,
it changes the current capital treatment of servicing assets by
allowing depository institutions to include more of their servicing
assets in Tier 1 capital. It would also reduce regulatory burden on the
depository institutions (including small businesses) by aligning the
terminology used in the capital adequacy guidelines more closely to
newly-issued generally accepted accounting principles. The economic
impact of this final rule on banks, regardless of size, is expected to
be minimal.
OTS Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS certifies that this final rule would not have a significant
economic impact on a substantial number of small entities. The
amendment concerns capital requirements for servicing assets which may
be entered into by depository institutions of any size. The effect of
the final rule would be to reduce regulatory burden on depository
institutions by aligning the terminology used in the capital adequacy
standards more closely to newly-issued generally accepted accounting
principles and by relaxing the capital limitation on servicing assets.
The economic impact of this final rule on savings associations,
regardless of size, is expected to be minimal.
IV. Early Compliance
Subject to certain exceptions, 12 U.S.C. 4802(b) provides that new
regulations and amendments to regulations prescribed by a Federal
banking agency which impose additional reporting, disclosures, or other
new requirements on an insured depository institution shall take effect
on the first day of a calendar quarter which begins on or after the
date on which the regulations are published in final form. However,
section 4802(b) also permits persons who are subject to such
regulations to comply with the regulation before its effective date.
Accordingly, the Agencies will not object if an institution wishes to
apply the provisions of this final rule beginning with the date it is
published in the Federal Register.
V. Paperwork Reduction Act
The Agencies have determined that this final rule would not create
or change any collection of information pursuant to the provisions of
the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
VI. OCC and OTS Executive Order 12866 Statement
The Comptroller of the Currency and the Director of the OTS have
determined that this final rule is not a significant regulatory action
under Executive Order 12866. Accordingly, a regulatory impact analysis
is not required.
VII. OCC and OTS Unfunded Mandates Act Statement
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this amendment to the capital adequacy standards would relax the
capital limitation on servicing assets and PCCRs. Further, the
amendment moves toward greater consistency with FAS 125 in an effort to
reduce the burden of complying with two different standards. Thus, no
additional cost of $100 million or more, to State, local, or tribal
governments or to the private sector will result from this final rule.
Accordingly, the OCC and the OTS have not prepared a budgetary impact
statement nor specifically addressed any regulatory alternatives.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 6
National banks, Prompt corrective action.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 325
Administrative practice and procedure, Banks, banking, Capital
[[Page 42674]]
adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
12 CFR Part 565
Administrative practice and procedure, Capital, Savings
associations.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings
associations.
Authority and Issuance
Office of the Comptroller of the Currency
12 CFR Chapter I
For the reasons set out in the joint preamble, parts 3 and 6 of
chapter I of title 12 of the Code of Federal Regulations are amended as
set forth below:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.
2. Section 3.100 is amended by revising paragraph (c)(2) and by
removing the words ``mortgage servicing rights'' in paragraphs (e)(7)
and (g)(2) and adding ``mortgage servicing assets'' in their place to
read as follows:
Sec. 3.100 Capital and surplus.
* * * * *
(c) * * *
(2) Mortgage servicing assets;
* * * * *
3. In appendix A to part 3, paragraph (c)(14) of section 1. is
revised to read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions
* * * * *
(c) * * *
(14) Intangible assets include mortgage and non-mortgage
servicing assets (but exclude any interest only (IO) strips
receivable related to these mortgage and nonmortgage servicing
assets), purchased credit card relationships, goodwill, favorable
leaseholds, and core deposit value.
* * * * *
4. In appendix A to part 3, paragraphs (c) introductory text,
(c)(1), and (c)(2) of section 2 are revised to read as follows:
* * * * *
Section 2. Components of Capital.
* * * * *
(c) Deductions from Capital. The following items are deducted
from the appropriate portion of a national bank's capital base when
calculating its risk-based capital ratio:
(1) Deductions from Tier 1 Capital. The following items are
deducted from Tier 1 capital before the Tier 2 portion of the
calculation is made:
(i) Goodwill;
(ii) Other intangible assets, except as provided in section
2(c)(2) of this appendix A; and
(iii) Deferred tax assets, except as provided in section 2(c)(3)
of this appendix A, that are dependent upon future taxable income,
which exceed the lesser of either:
(A) The amount of deferred tax assets that the bank could
reasonably expect to realize within one year of the quarter-end Call
Report, based on its estimate of future taxable income for that
year; or
(B) 10% of Tier 1 capital, net of goodwill and all intangible
assets other than mortgage servicing assets, non-mortgage servicing
assets, and purchased credit card relationships, and before any
disallowed deferred tax assets are deducted.
(2) Qualifying intangible assets. Subject to the following
conditions, mortgage servicing assets, nonmortgage servicing assets
6 and purchased credit card relationships need not be
deducted from Tier 1 capital:
---------------------------------------------------------------------------
\6\ Intangible assets are defined to exclude any IO strips
receivable related to these mortgage and non-mortgage servicing
assets. See section 1(c)(14) of this appendix A. Consequently, IO
strips receivable related to mortgage and non-mortgage servicing
assets are not required to be deducted under section 2(c)(2) of this
appendix A. However, these IO strips receivable are subject to a 100
percent risk weight under section 3(a)(4) of this appendix A.
---------------------------------------------------------------------------
(i) The total of all intangible assets that are included in Tier
1 capital is limited to 100 percent of Tier 1 capital, of which no
more than 25 percent of Tier 1 capital can consist of purchased
credit card relationships and non-mortgage servicing assets in the
aggregate. Calculation of these limitations must be based on Tier 1
capital net of goodwill and all identifiable intangible assets,
other than mortgage servicing assets, nonmortgage servicing assets
and purchased credit card relationships.
(ii) Banks must value each intangible asset included in Tier 1
capital at least quarterly at the lesser of:
(A) 90 percent of the fair value of each intangible asset,
determined in accordance with section 2(c)(2)(iii) of this appendix
A; or
(B) 100 percent of the remaining unamortized book value.
(iii) The quarterly determination of the current fair value of
the intangible asset must include adjustments for any significant
changes in original valuation assumptions, including changes in
prepayment estimates.
(iv) Banks may elect to deduct disallowed servicing assets on a
basis that is net of any associated deferred tax liability. Deferred
tax liabilities netted in this manner cannot also be netted against
deferred tax assets when determining the amount of deferred tax
assets that are dependent upon future taxable income.
* * * * *
PART 6--PROMPT CORRECTIVE ACTION
1. The authority citation for part 6 continues to read as follows:
Authority: 12 U.S.C. 93a, 1831o.
2. Section 6.2 is amended by revising paragraph (g) to read as
follows:
Sec. 6.2 Definitions.
* * * * *
(g) Tangible equity means the amount of Tier 1 capital elements in
the OCC's Risk-Based Capital Guidelines (appendix A to part 3 of this
chapter) plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus) minus all intangible assets except
mortgage servicing assets to the extent permitted in Tier 1 capital
under section 2(c)(2) in appendix A to part 3 of this chapter.
* * * * *
Dated: July 17, 1998.
Julie L. Williams,
Acting Comptroller of the Currency.
Federal Reserve System
12 CFR Chapter II
For the reasons set forth in the joint preamble, the Board of
Governors of the Federal Reserve System amends parts 208 and 225 of
chapter II of title 12 of the Code of Federal Regulations as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as
follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1823(j), 1828(o),
1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 3310, 3331-
3351 and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-
4(c)(5), 78q, 78q-l, and 78w; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106, and 4128.
2. Section 208.41, as revised at 63 FR 37652 effective October 1,
1998, is amended by revising paragraph (f) to read as follows:
Sec. 208.41 Definitions for purposes of this subpart.
* * * * *
(f) Tangible equity means the amount of core capital elements as
defined in the Board's Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure (Appendix A to this part), plus the amount of
outstanding cumulative perpetual preferred stock (including related
surplus), minus all intangible assets except mortgage
[[Page 42675]]
servicing assets to the extent that the Board determines that mortgage
servicing assets may be included in calculating the bank's Tier 1
capital.
* * * * *
3. In Appendix A to part 208, sections II.B.1.b.i. through
II.B.1.b.v. are revised to read as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
* * * * *
II. * * *
B. * * *
1. Goodwill and other intangible assets * * *
b. Other intangible assets. i. All servicing assets, including
servicing assets on assets other than mortgages (i.e., nonmortgage
servicing assets) are included in this Appendix A as identifiable
intangible assets. The only types of identifiable intangible assets
that may be included in, that is, not deducted from, a bank's
capital are readily marketable mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card
relationships. The total amount of these assets included in capital,
in the aggregate, can not exceed 100 percent of Tier 1 capital.
Nonmortgage servicing assets and purchased credit card relationships
are subject to a separate sublimit of 25 percent of Tier 1
capital.14
---------------------------------------------------------------------------
\14\ Amounts of servicing assets and purchased credit card
relationships in excess of these limitations, as well as
identifiable intangible assets, including core deposit intangibles,
including favorable leaseholds, are to be deducted from a bank's
core capital elements in determining Tier 1 capital. However,
identifiable intangible assets (other than mortgage servicing assets
and purchased credit card relationships) acquired on or before
February 19, 1992, generally will not be deducted from capital for
supervisory purposes, although they will continue to be deducted for
applications purposes.
---------------------------------------------------------------------------
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships, Tier 1 capital is defined as the sum of core
capital elements, net of goodwill, and net of all identifiable
intangible assets other than mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships,
regardless of the date acquired, but prior to the deduction of
deferred tax assets.
iii. The amount of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that a
bank may include in capital shall be the lesser of 90 percent of
their fair value, as determined in accordance with this section, or
100 percent of their book value, as adjusted for capital purposes in
accordance with the instructions in the commercial bank Consolidated
Reports of Condition and Income (Call Reports). If both the
application of the limits on mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships and the
adjustment of the balance sheet amount for these assets would result
in an amount being deducted from capital, the bank would deduct only
the greater of the two amounts from its core capital elements in
determining Tier 1 capital.
iv. Banks may elect to deduct disallowed servicing assets on a
basis that is net of any associated deferred tax liability. Deferred
tax liabilities netted in this manner cannot also be netted against
deferred tax assets when determining the amount of deferred tax
assets that are dependent upon future taxable income.
v. Banks must review the book value of all intangible assets at
least quarterly and make adjustments to these values as necessary.
The fair value of mortgage servicing assets, nonmortgage servicing
assets, and purchased credit card relationships also must be
determined at least quarterly. This determination shall include
adjustments for any significant changes in original valuation
assumptions, including changes in prepayment estimates or account
attrition rates. Examiners will review both the book value and the
fair value assigned to these assets, together with supporting
documentation, during the examination process. In addition, the
Federal Reserve may require, on a case-by-case basis, an independent
valuation of a bank's intangible assets.
* * * * *
4. In Appendix A to part 208, section II.B.4. is revised to read as
follows:
* * * * *
II. * * *
B. * * *
4. Deferred tax assets. The amount of deferred tax assets that
is dependent upon future taxable income, net of the valuation
allowance for deferred tax assets, that may be included in, that is,
not deducted from, a bank's capital may not exceed the lesser of (i)
the amount of these deferred tax assets that the bank is expected to
realize within one year of the calendar quarter-end date, based on
its projections of future taxable income for that year,20
or (ii) 10 percent of Tier 1 capital. The reported amount of
deferred tax assets, net of any valuation allowance for deferred tax
assets, in excess of the lesser of these two amounts is to be
deducted from a bank's core capital elements in determining Tier 1
capital. For purposes of calculating the 10 percent limitation, Tier
1 capital is defined as the sum of core capital elements, net of
goodwill, and net of all other identifiable intangible assets other
than mortgage and nonmortgage servicing assets and purchased credit
card relationships, before any disallowed deferred tax assets are
deducted. There generally is no limit in Tier 1 capital on the
amount of deferred tax assets that can be realized from taxes paid
in prior carry-back years or from future reversals of existing
taxable temporary differences, but, for banks that have a parent,
this may not exceed the amount the bank could reasonably expect its
parent to refund.
---------------------------------------------------------------------------
\ 20\ To determine the amount of expected deferred-tax assets
realizable in the next 12 months, an institution should assume that
all existing temporary differences fully reverse as of the report
date. Projected future taxable income should not include net
operating-loss carry-forwards to be used during that year or the
amount of existing temporary differences a bank expects to reverse
within the year. Such projections should include the estimated
effect of tax-planning strategies that the organization expects to
implement to realize net operating losses or tax-credit carry-
forwards that would otherwise expire during the year. Institutions
do not have to prepare a new 12-month projection each quarter.
Rather, on interim report dates, institutions may use the future-
taxable-income projections for their current fiscal year, adjusted
for any significant changes that have occurred or are expected to
occur.
---------------------------------------------------------------------------
* * * * *
5. In Appendix B to part 208, section II.b. is revised to read as
follows:
Appendix B to Part 208--Capital Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
* * * * *
II. * * *
b. A bank's Tier 1 leverage ratio is calculated by dividing its
Tier 1 capital (the numerator of the ratio) by its average total
consolidated assets (the denominator of the ratio). The ratio will
also be calculated using period-end assets whenever necessary, on a
case-by-case basis. For the purpose of this leverage ratio, the
definition of Tier 1 capital as set forth in the risk-based capital
guidelines contained in Appendix A of this part will be
used.2 As a general matter, average total consolidated
assets are defined as the quarterly average total assets (defined
net of the allowance for loan and lease losses) reported on the
bank's Reports of Condition and Income (Call Reports), less
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of Tier 1 capital;
amounts of nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, are in excess of 25 percent of
Tier 1 capital; all other identifiable intangible assets; any
investments in subsidiaries or associated companies that the Federal
Reserve determines should be deducted from Tier 1 capital; and
deferred tax assets that are dependent upon future taxable income,
net of their valuation allowance, in excess of the limitation set
forth in section II.B.4 of Appendix A of this part.3
---------------------------------------------------------------------------
\2\ Tier 1 capital for state member banks includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, and qualifying noncumulative perpetual preferred
stock. In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage
servicing assets and purchased credit card relationships that, in
the aggregate, exceed 25 percent of Tier 1 capital; other
identifiable intangible assets; and deferred tax assets that are
dependent upon future taxable income, net of their valuation
allowance, in excess of certain limitations. The Federal Reserve may
exclude certain investments in subsidiaries or associated companies
as appropriate.
\3\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. in Appendix A of this part.
---------------------------------------------------------------------------
* * * * *
[[Page 42676]]
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In Appendix A to part 225, sections II.B.1.b.i. through
II.B.1.B.v. are revised to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
* * * * *
II. * * *
B. * * *
1. Goodwill and other intangible assets * * *
b. Other intangible assets. i. All servicing assets, including
servicing assets on assets other than mortgages (i.e., nonmortgage
servicing assets) are included in this Appendix A as identifiable
intangible assets. The only types of identifiable intangible assets
that may be included in, that is, not deducted from, an
organization's capital are readily marketable mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relationships. The total amount of these assets included in capital,
in the aggregate, cannot exceed 100 percent of Tier 1 capital.
Nonmortgage servicing assets and purchased credit card relationships
are subject, in the aggregate, to a sublimit of 25 percent of Tier 1
capital.15
---------------------------------------------------------------------------
\15\ Amounts of mortgage servicing assets, nonmortgage servicing
assets, and purchased credit card relationships in excess of these
limitations, as well as all other identifiable intangible assets,
including core deposit intangibles and favorable leaseholds, are to
be deducted from an organization's core capital elements in
determining Tier 1 capital. However, identifiable intangible assets
(other than mortgage servicing assets, and purchased credit card
relationships) acquired on or before February 19, 1992, generally
will not be deducted from capital for supervisory purposes, although
they will continue to be deducted for applications purposes.
---------------------------------------------------------------------------
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships, Tier 1 capital is defined as the sum of core
capital elements, net of goodwill, and net of all identifiable
intangible assets and similar assets other than mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relationships, regardless of the date acquired, but prior to the
deduction of deferred tax assets.
iii. The amount of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that a
bank holding company may include in capital shall be the lesser of
90 percent of their fair value, as determined in accordance with
this section, or 100 percent of their book value, as adjusted for
capital purposes in accordance with the instructions to the
Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C Report). If both the application of the limits on mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships and the adjustment of the balance sheet amount
for these intangibles would result in an amount being deducted from
capital, the bank holding company would deduct only the greater of
the two amounts from its core capital elements in determining Tier 1
capital.
iv. Bank holding companies may elect to deduct disallowed
servicing assets on a basis that is net of any associated deferred
tax liability. Deferred tax liabilities netted in this manner cannot
also be netted against deferred tax assets when determining the
amount of deferred tax assets that are dependent upon future taxable
income.
v. Bank holding companies must review the book value of all
intangible assets at least quarterly and make adjustments to these
values as necessary. The fair value of mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card
relationships also must be determined at least quarterly. This
determination shall include adjustments for any significant changes
in original valuation assumptions, including changes in prepayment
estimates or account attrition rates. Examiners will review both the
book value and the fair value assigned to these assets, together
with supporting documentation, during the inspection process. In
addition, the Federal Reserve may require, on a case-by-case basis,
an independent valuation of an organization's intangible assets or
similar assets.
* * * * *
3. In Appendix A to part 225, section II.B.4. is revised to read as
follows:
* * * * *
II. * * *
B. * * *
4. Deferred tax assets. The amount of deferred tax assets that
is dependent upon future taxable income, net of the valuation
allowance for deferred tax assets, that may be included in, that is,
not deducted from, a banking organization's capital may not exceed
the lesser of (i) the amount of these deferred tax assets that the
banking organization is expected to realize within one year of the
calendar quarter-end date, based on its projections of future
taxable income for that year,23 or (ii) 10 percent of
Tier 1 capital. The reported amount of deferred tax assets, net of
any valuation allowance for deferred tax assets, in excess of the
lesser of these two amounts is to be deducted from a banking
organization's core capital elements in determining Tier 1 capital.
For purposes of calculating the 10 percent limitation, Tier 1
capital is defined as the sum of core capital elements, net of
goodwill, and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets, and
purchased credit card relationships, before any disallowed deferred
tax assets are deducted. There generally is no limit in Tier 1
capital on the amount of deferred tax assets that can be realized
from taxes paid in prior carryback years or from future reversals of
existing taxable temporary differences.
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\23\ To determine the amount of expected deferred tax assets
realizable in the next 12 months, an institution should assume that
all existing temporary differences fully reverse as of the report
date. Projected future taxable income should not include net
operating loss carryforwards to be used during that year or the
amount of existing temporary differences a bank holding company
expects to reverse within the year. Such projections should include
the estimated effect of tax planning strategies that the
organization expects to implement to realize net operating losses or
tax credit carryforwards that would otherwise expire during the
year. Institutions do not have to prepare a new 12 month projection
each quarter. Rather, on interim report dates, institutions may use
the future taxable income projections for their current fiscal year,
adjusted for any significant changes that have occurred or are
expected to occur.
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* * * * *
4. In Appendix D to part 225, section II.b. is revised to read as
follows:
Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Tier 1 Leverage Measure
* * * * *
II. * * *
b. A banking organization's Tier 1 leverage ratio is calculated
by dividing its Tier 1 capital (the numerator of the ratio) by its
average total consolidated assets (the denominator of the ratio).
The ratio will also be calculated using period-end assets whenever
necessary, on a case-by-case basis. For the purpose of this leverage
ratio, the definition of Tier 1 capital as set forth in the risk-
based capital guidelines contained in Appendix A of this part will
be used.3 As a general matter, average total consolidated
assets are defined as the quarterly average total assets (defined
net of the allowance for loan and lease losses) reported on the
organization's Consolidated Financial Statements (FR Y-9C Report),
less goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of Tier 1 capital;
amounts of nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, are in excess of 25 percent of
Tier 1 capital; all other identifiable intangible assets; any
investments in subsidiaries or associated companies that the Federal
Reserve determines should be deducted from Tier 1
[[Page 42677]]
capital; and deferred tax assets that are dependent upon future
taxable income, net of their valuation allowance, in excess of the
limitation set forth in section II.B.4 of Appendix A of this
part.4
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\3\ Tier 1 capital for banking organizations includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, qualifying noncumulative perpetual preferred stock,
and qualifying cumulative perpetual preferred stock. (Cumulative
perpetual preferred stock is limited to 25 percent of Tier 1
capital.) In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage
servicing assets and purchased credit card relationships that, in
the aggregate, exceed 25 percent of Tier 1 capital; all other
identifiable intangible assets; and deferred tax assets that are
dependent upon future taxable income, net of their valuation
allowance, in excess of certain limitations. The Federal Reserve may
exclude certain investments in subsidiaries or associated companies
as appropriate.
\4\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. in Appendix A of this part.
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* * * * *
By order of the Board of Governors of the Federal Reserve
System, August 3, 1998.
Jennifer J. Johnson,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
For the reasons set forth in the joint preamble, part 325 of
Chapter III of Title 12 of the Code of Federal Regulations is amended
as follows:
PART 325--CAPITAL MAINTENANCE
1. The authority citation for part 325 is revised to read as
follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).
2. In Sec. 325.2, paragraph (n) is revised to read as follows:
Sec. 325.2 Definitions.
* * * * *
(n) Mortgage servicing assets means those assets (net of any
related valuation allowances) that result from contracts to service
loans secured by real estate (that have been securitized or are owned
by others) for which the benefits of servicing are expected to more
than adequately compensate the servicer for performing the servicing.
For purposes of determining regulatory capital under this part,
mortgage servicing assets will be recognized only to the extent that
the assets meet the conditions, limitations, and restrictions described
in Sec. 325.5 (f).
* * * * *
Sec. 325.2 [Amended]
3. In Sec. 325.2, paragraph (s) is amended by removing the words
``mortgage servicing rights'' and adding in their place the words
``mortgage servicing assets'' each time they appear.
4. In Sec. 325.2, paragraphs (t) and (v) are amended by removing
the words ``mortgage servicing rights'' and adding in their place the
words ``mortgage servicing assets, nonmortgage servicing assets,'' each
time they appear.
5. In Sec. 325.5, paragraph (f) is revised to read as follows:
Sec. 325.5 Miscellaneous.
* * * * *
(f) Treatment of mortgage servicing assets, purchased credit card
relationships, and nonmortgage servicing assets. For purposes of
determining Tier 1 capital under this part, mortgage servicing assets,
purchased credit card relationships, and nonmortgage servicing assets
will be deducted from assets and from common stockholders' equity to
the extent that these items do not meet the conditions, limitations,
and restrictions described in this section. Banks may elect to deduct
disallowed servicing assets on a basis that is net of any associated
deferred tax liability. Any deferred tax liability netted in this
manner cannot also be netted against deferred tax assets when
determining the amount of deferred tax assets that are dependent upon
future taxable income and calculating the maximum allowable amount of
these assets under paragraph (g) of this section.
(1) Valuation. The fair value of mortgage servicing assets,
purchased credit card relationships, and nonmortgage servicing assets
shall be estimated at least quarterly. The quarterly fair value
estimate shall include adjustments for any significant changes in the
original valuation assumptions, including changes in prepayment
estimates or attrition rates. The FDIC in its discretion may require
independent fair value estimates on a case-by-case basis where it is
deemed appropriate for safety and soundness purposes.
(2) Fair value limitation. For purposes of calculating Tier 1
capital under this part (but not for financial statement purposes), the
balance sheet assets for mortgage servicing assets, purchased credit
card relationships, and nonmortgage servicing assets will each be
reduced to an amount equal to the lesser of:
(i) 90 percent of the fair value of these assets, determined in
accordance with paragraph (f)(1) of this section; or
(ii) 100 percent of the remaining unamortized book value of these
assets (net of any related valuation allowances), determined in
accordance with the instructions for the preparation of the
Consolidated Reports of Income and Condition (Call Reports).
(3) Tier 1 capital limitation. The maximum allowable amount of
mortgage servicing assets, purchased credit card relationships, and
nonmortgage servicing assets, in the aggregate, will be limited to the
lesser of:
(i) 100 percent of the amount of Tier 1 capital that exists before
the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, any disallowed
nonmortgage servicing assets, and any disallowed deferred tax assets;
or
(ii) The sum of the amounts of mortgage servicing assets, purchased
credit card relationships, and nonmortgage servicing assets determined
in accordance with paragraph (f)(2) of this section.
(4) Tier 1 capital sublimit. In addition to the aggregate
limitation on mortgage servicing assets, purchased credit card
relationships, and nonmortgage servicing assets set forth in paragraph
(f)(3) of this section, a sublimit will apply to purchased credit card
relationships and nonmortgage servicing assets. The maximum allowable
amount of purchased credit card relationships and nonmortgage servicing
assets, in the aggregate, will be limited to the lesser of:
(i) Twenty-five percent of the amount of Tier 1 capital that exists
before the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, any disallowed
nonmortgage servicing assets, and any disallowed deferred tax assets;
or
(ii) The sum of the amounts of purchased credit card relationships
and nonmortgage servicing assets, determined in accordance with
paragraph (f)(2) of this section.
* * * * *
Sec. 325.5 [Amended]
6. In Sec. 325.5, paragraph (g)(2)(i)(B) is amended by removing the
words ``any disallowed mortgage servicing rights'' and adding in their
place the words ``any disallowed mortgage servicing assets, any
disallowed nonmortgage servicing assets''.
7. In Sec. 325.5, paragraph (g)(5) is amended by removing the words
``mortgage servicing rights'' and adding in their place the words
``mortgage servicing assets, nonmortgage servicing assets''.
Appendix A to Part 325--[Amended]
8. In appendix A to part 325, the words ``mortgage servicing
rights'' are removed and the words ``mortgage servicing assets,
nonmortgage servicing assets'' are added each time they appear in
section I.A.1., section I.B.(1) and footnote 8 to section I.B.(1),
section II.C., and Table I--Definition of Qualifying Capital and
footnote 2 to Table I.
[[Page 42678]]
Appendix B to Part 325--[Amended]
9. In appendix B to part 325, section IV.A. and footnote 1 to
section IV.A. are amended by removing the words ``mortgage servicing
rights'' and adding in their place the word ``mortgage servicing
assets, nonmortgage servicing assets'' each time they appear.
Dated at Washington, D.C., this 7th day of July, 1998.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Office of Thrift Supervision
12 CFR Chapter V
For the reasons set forth in the joint preamble, the Office of
Thrift Supervision amends parts 565 and 567 of chapter V of title 12 of
the Code of Federal Regulations as follows:
PART 565--PROMPT CORRECTIVE ACTION
1. The authority citation for part 565 continues to read as
follows:
Authority: 12 U.S.C. 1831o.
2. Section 565.2 is amended by revising paragraph (f) to read as
follows:
Sec. 565.2 Definitions.
* * * * *
(f) Tangible equity means the amount of a savings association's
core capital as computed in part 567 of this chapter plus the amount of
its outstanding cumulative perpetual preferred stock (including related
surplus), minus intangible assets as defined in Sec. 567.1 of this
chapter and nonmortgage servicing assets that have not been previously
deducted in calculating core capital.
* * * * *
PART 567--CAPITAL
3. The authority citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
4. Section 567.1 is amended by revising the definition for
Intangible assets to read as follows:
Sec. 567.1 Definitions.
* * * * *
Intangible assets. The term intangible assets means assets
considered to be intangible assets under generally accepted accounting
principles. These assets include, but are not limited to, goodwill,
core deposit premiums, purchased credit card relationships, and
favorable leaseholds. Servicing assets are not intangible assets, and
interest-only strips receivable and other nonsecurity financial
instruments are not intangible assets under this definition.
* * * * *
5. Section 567.5 is amended by revising paragraph (a)(2)(ii) to
read as follows:
Sec. 567.5 Components of capital.
(a) * * *
(2) * * *
(ii) Servicing assets that are not includable in core capital
pursuant to Sec. 567.12 of this part are deducted from assets and
capital in computing core capital.
* * * * *
6. Section 567.6 is amended by revising paragraphs (a)(1)(iv)(L)
and (a)(1)(iv)(M) to read as follows:
Sec. 567.6 Risk-based capital credit risk-weight categories.
(a) * * *
(1) * * *
(iv) * * *
(L) Certain nonsecurity financial instruments including servicing
assets and intangible assets includable in core capital under
Sec. 567.12 of this part;
(M) Interest-only strips receivable;
* * * * *
7. Section 567.9 is amended by revising paragraph (c)(1) to read as
follows:
Sec. 567.9 Tangible capital requirement.
* * * * *
(c) * * *
(1) Intangible assets, as defined in Sec. 567.1 of this part, and
servicing assets not includable in tangible capital pursuant to
Sec. 567.12 of this part.
* * * * *
6. Section 567.12 is amended by revising the section heading and
paragraphs (a) through (f) to read as follows:
Sec. 567.12 Intangible assets and servicing assets.
(a) Scope. This section prescribes the maximum amount of intangible
assets and servicing assets that savings associations may include in
calculating tangible and core capital.
(b) Computation of core and tangible capital. (1) Purchased credit
card relationships may be included (that is, not deducted) in computing
core capital in accordance with the restrictions in this section, but
must be deducted in computing tangible capital.
(2) In accordance with the restrictions in this section, mortgage
servicing assets may be included in computing core and tangible capital
and nonmortgage servicing assets may be included in core capital.
(3) Intangible assets, as defined in Sec. 567.1 of this part, other
than purchased credit card relationships described in paragraph (b)(1)
of this section and core deposit intangibles described in paragraph
(g)(3) of this section, are deducted in computing tangible and core
capital.
(c) Market valuations. The OTS reserves the authority to require
any savings association to perform an independent market valuation of
assets subject to this section on a case-by-case basis or through the
issuance of policy guidance. An independent market valuation, if
required, shall be conducted in accordance with any policy guidance
issued by the OTS. A required valuation shall include adjustments for
any significant changes in original valuation assumptions, including
changes in prepayment estimates or attrition rates. The valuation shall
determine the current fair value of assets subject to this section.
This independent market valuation may be conducted by an independent
valuation expert evaluating the reasonableness of the internal
calculations and assumptions used by the association in conducting its
internal analysis. The association shall calculate an estimated fair
value for assets subject to this section at least quarterly regardless
of whether an independent valuation expert is required to perform an
independent market valuation
(d) Value limitation. For purposes of calculating core capital
under this part (but not for financial statement purposes), purchased
credit card relationships and servicing assets must be valued at the
lesser of:
(1) 90 percent of their fair value determined in accordance with
paragraph (c) of this section; or
(2) 100 percent of their remaining unamortized book value
determined in accordance with the instructions for the Thrift Financial
Report.
(e) Core capital limitation--(1) Aggregate limit. The maximum
aggregate amount of servicing assets and purchased credit card
relationships that may be included in core capital shall be limited to
the lesser of:
(i) 100 percent of the amount of core capital computed before the
deduction of any disallowed servicing assets and disallowed purchased
credit card relationships; or
(ii) The amount of servicing assets and purchased credit card
relationships determined in accordance with paragraph (d) of this
section.
(2) Reduction by deferred tax liability. Associations may elect to
deduct disallowed servicing assets on a basis
[[Page 42679]]
that is net of any associated deferred tax liability.
(3) Sublimit for purchased credit card relationships and non
mortgage-related servicing assets. In addition to the aggregate
limitation in paragraph (e)(1) of this section, a sublimit shall apply
to purchased credit card relationships and non mortgage-related
servicing assets. The maximum allowable amount of these two types of
assets combined shall be limited to the lesser of:
(i) 25 percent of the amount of core capital computed before the
deduction of any disallowed servicing assets and purchased credit card
relationships; or
(ii) The amount of purchased credit card relationships and non
mortgage-related servicing assets determined in accordance with
paragraph (d) of this section.
(f) Tangible capital limitation. The maximum amount of mortgage
servicing assets that may be included in tangible capital shall be the
same amount includable in core capital in accordance with the
limitations set by paragraph (e) of this section. All nonmortgage
servicing assets are deducted in computing tangible capital.
* * * * *
Dated: July 6, 1998.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-21141 Filed 8-7-98; 8:45 am]
BILLING CODE 4810-33-P (25%); 6210-01-P (25%); 6714-01-P (25%); 6720-
01-P (25%).
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