Letters of Credit, Suretyship and Guaranty

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 541, 545, 560, 561

[No. 99-34]

RIN 1550-AB21

Letters of Credit, Suretyship and Guaranty

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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

regulations to clarify that a Federal savings association may act as

guarantor under section 5(b)(2) of the Home Owners' Loan Act (the

``HOLA''). Additionally, OTS is modifying restrictions on suretyship

and guaranty agreements issued under this section. The rule also

clarifies that a Federal savings association holds authority to issue

letters of credit and makes related technical amendments. OTS is also

amending various lending related definitions to either clarify

definitions or remove unnecessary or outdated definitions.

EFFECTIVE DATE: October 1, 1999.

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

Manager, (202) 906-5744, Supervision Policy; Raynette Gutrick,

Attorney, (202) 906-6265, Regulations and Legislation Division or Karen

Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations and

Legislation Division, Chief Counsel's Office, Office of Thrift

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

SUPPLEMENTARY INFORMATION:

I. Background

On September 18, 1998, OTS issued a Notice of Proposed Rulemaking

(``NPR'') clarifying a Federal savings association's authority to act

as guarantor under section 5(b)(2) of the HOLA (64 FR 49874). The

proposed rule included restrictions on suretyship and guaranty

agreements issued under this authority. OTS also proposed revisions

clarifying that Federal savings associations may issue letters of

credit. Finally, OTS sought comment on whether it should adopt a

regulation to address the escrow authority of Federal savings

associations.

This document finalizes the proposed changes, clarifies or removes

various related definitions that are outdated or unnecessary, and makes

other technical amendments.

II. Summary of Comments

The public comment period on the NPR closed on November 17, 1998.

Two Federal savings associations, two trade associations, a Federal

Home Loan Bank, and one individual filed comments on the NPR.

Four commenters addressed OTS's proposal clarifying the guaranty

authority for Federal savings associations and proposing restrictions

on suretyship and guaranty agreements under section 5(b)(2) of the

HOLA. Two commenters supported the proposed

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changes and two commenters suggested clarifications.

Two commenters supported the clarification of the authority of

Federal savings associations to issue letters of credit. Three

commenters opposed the issuance of a regulation addressing the escrow

authority of Federal savings associations. OTS has addressed the

specific comments in the section-by-section discussion below.

III. Section-by-Section Discussion

A. Suretyship and Guaranty \1\

Section 5(b)(2) of the HOLA provides ``[t]o such extent as the

Director may authorize in writing, a Federal savings association * * *

may be surety as defined by the Director.* * *'' 2 OTS's

current regulation at 12 CFR 545.103 authorizes Federal savings

associations to act as surety under this section, subject to specified

conditions.

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\1\ Letters of credit and other independent undertakings are

discussed in Section III. B. below.

\2\ 12 U.S.C. 1464(b)(2).

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Neither section 5(b)(2) of the HOLA nor current 545.103 address a

Federal savings association's authority to issue a

guaranty.3 Nonetheless, OTS and its predecessor, the Federal

Home Loan Bank Board (``FHLBB''), have recognized that the authority of

a Federal savings association to act as guarantor is subsumed within

section 5(b)(2) of the HOLA.4 To clarify this point, OTS

proposed to specifically authorize Federal savings associations to act

as guarantors. OTS also proposed to move the portion of the regulation

authorizing surety and guaranty agreements under section 5(b)(2) of the

HOLA from part 545 to the lending and investment regulation at part

560.

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\3\ Under a suretyship agreement, the surety is bound with its

principal to pay or perform an obligation to a third party. Black's

Law Dictionary 1441-42 (6th ed. 1990). Under a guaranty agreement,

on the other hand, the guarantor agrees to satisfy the obligation of

the principal to another only if the principal fails to pay or

perform. Id. at 705.

\4\ See e.g., 48 FR 23032, 23043 (May 23, 1983) (stating that

section 5(b)(2) of the HOLA empowers the FHLBB to authorize by

regulation the issuance of suretyship devices by Federal savings

associations for the purpose of guarantying the obligations of

others); FHLBB Op. Assoc. Gen. Counsel (July 5, 1983) (permitting

the association to act as surety or guarantor under section 5(b)(2)

of the HOLA). See also 12 CFR 545.16(a)(3) (``surety'' means surety

under real and/or personal suretyship, and includes guarantor).

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Currently 545.103 imposes various conditions on the exercise of a

Federal savings association's authority under section 5(b)(2) of the

HOLA. Under these conditions, a Federal savings association may enter

into a surety agreement only if its performance under the agreement

would create an obligation authorized for investment and it takes and

maintains a perfected security interest in described collateral. In

addition, the current rule treats the obligation under the surety

agreement as a loan to the principal under the loans-to-one-borrower

limits and loans to insider restrictions.

OTS proposed several modifications to these existing conditions.

First, OTS proposed to revise the collateral requirements to reflect

changes to the Office of Comptroller of the Currency's (OCC) related

regulation on surety and guaranty agreements.5 Second, OTS

proposed to add a new provision requiring the association to limit its

obligations under the surety or guaranty agreement to a fixed amount

and a specified duration. The proposed rule also added definitions of

the terms suretyship and guaranty agreement.6

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\5\ 12 CFR 7.1017, as amended by 61 FR 4849 (February 9, 1996).

\6\ The agency proposed to delete certain provisions of existing

Sec. 545.103. For example, current Sec. 545.103(c) states that if a

Federal savings association is required to perform under the

suretyship agreement, it must treat the amount advanced as an

extension of credit, subject to investment limits and other

restrictions applicable to such an extension of credit. OTS has

deleted this paragraph because it duplicates Sec. 560.31(a).

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Four commenters addressed the proposed surety and guaranty

regulation. Two supported the proposed changes. Two other commenters

suggested clarifications and changes. These two commenters argued that

the text of the proposed rule assumes that all guaranties are repayable

and, thus, treats all guaranty agreements as if they were loans. The

commenters noted that many guaranty-type arrangements issued by savings

associations are not repayable. As examples of such arrangements, the

commenters cited letters of credit, recourse transactions, and various

other corporate undertakings in financial transactions. The commenters

urged OTS to adopt a rule recognizing the standard market practice of

non-repayable guaranties and similar arrangements, and clarifying that

these practices are not subject to the conditions contained in the

proposed rule.

OTS did not intend to deprive Federal thrifts of any existing

authority. Rather, like the existing rule, this provision is intended

to address only repayable guaranty and surety agreements issued under

section 5(b)(2) of the HOLA.7 Federal savings associations

hold other authority to issue other guaranties and guaranty-like

arrangements. For example, a Federal savings association may sell loans

with recourse,8 issue letters of credit and other

independent undertakings,9 and act as a surety for public

deposits.10 Further, a Federal savings association may

execute signature guaranties,11 may act as a surety with

respect to its lost or destroyed Government National Mortgage

Association (GNMA) certificate,12 and may offer performance

guaranties on low down payment mortgage loans that it originates or

purchases and insures with a private mortgage insurer.13 OTS

did not intend to limit these authorities or to subject these

authorities to the conditions contained in the proposed rule.

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\7\ See FHLBB Op. Gen. Counsel (March 5, 1985) (Section 545.103

``addresses the situation where the association for a fee backs the

obligation of another to a third party; the party contracting for

the association to pledge to pay its debt would be liable to the

association for repayment should the association have to make

payment to the third party under the surety agreement.'')

\8\ See 47 FR 4049, 4051 (January 28, 1982).

\9\ See today's final rule at Sec. 560.50.

\10\ 12 CFR 545.16.

\11\ See FHLBB Op. Gen. Counsel (August 11, 1981) (``The

authority to guarant[y] customer signatures is both implied in and

incidental to the express objects and powers of Federal associations

as set forth in the HOLA and the Federal charter.'').

\12\ See FHLBB Op. Gen. Counsel (March 5, 1985) (``This is a

form of offering the association's assets generally in support of

its obligations which appears to be incidental to its authority to

enter into the GNMA transaction and to give security.'').

\13\ See OTS Op. Chief Counsel (October 2, 1998) (This activity

``is subsumed within the residential real property lending authority

of Federal savings associations in section 5(c)(1)(B) of the [HOLA],

and is a power incident to this authority.'').

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OTS has revised its final rule to clarify this point. The final

rule clarifies that a Federal savings association may enter into a

repayable suretyship or guaranty agreement under section 5(b)(2) of the

HOLA, subject to the conditions listed in Sec. 560.60.

As noted in the NPR, OTS modeled its rule on the OCC's rule on

surety and guaranty agreements at 12 CFR 7.1017. The OCC's regulation

states that:

A national bank may lend its credit, bind itself as a surety to

indemnify another, or otherwise become a guarantor, if: (a) The bank

has a substantial interest in the performance of the transaction

involved * * *; or (b) The transaction is for the benefit of a

customer and the bank obtains from the customer a segregated deposit

that is sufficient in amount to cover the bank's total potential

liability.

One commenter observed that the proposed rule incorporated paragraph

(b), but did not incorporate paragraph (a) of the OCC's rule. Thus, the

commenter noted that OCC does not require a national bank to

collateralize the transaction or meet collateral requirements listed in

paragraph (b), if the bank holds a substantial interest. The commenter,

therefore, asserted that OTS has imposed more rigorous

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requirements than OCC, causing the thrift charter to be less attractive

than the national bank charter.

OCC appears to have included the ``substantial interest'' provision

to clarify the authority of national banks in light of judicial

precedent limiting their ability to issue guaranties for others based

on a lack of express authority to national banks to guarantee the acts

of third parties.14 Despite this limitation, national banks

may provide guaranties that are ``entered into for the furtherance of

their own rights or as an incident to the transaction of business.''

15 Interpretative Ruling 7.1017 was ``intended to provide a

general statement of this incidental powers exception to the general

prohibition against national banks' entering guarantees.''

16 Because the HOLA expressly authorizes thrifts to enter

into suretyship and guaranty agreements,17 it is unnecessary

to include a similar clarification in OTS's authorizing rule.

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\14\ See OCC Unpublished Interpretative Letter (June 4, 1993)

citing Dunn v. McCoy, 113 F.2d 587, 588 (3d Cir. 1940); Kimen v.

Atlas Exch. Nat'l Bank, 92 F.2d 615, 617 (7th Cir. 1937), cert.

denied, 303 U.S. 650 (1938); Border Nat'l Bank v. American Nat'l

Bank, 282 F. 73, 77 (5th Cir.), cert. denied and appeal dismissed,

260 U.S. 701 (1922); Bowen v. Needles Nat'l Bank, 94 F. 925, 927

(9th Cir. 1899), cert. denied, 176 U.S. 682 (1900).

\15\ OCC Interpretative Letter 376 (October 22, 1986), citing

Dunn, 113 F.2d at 589.

\16\ OCC Unpublished Interpretative Letter (June 4, 1993).

\17\ See 12 U.S.C. 1464(b)(2) and infra notes 2-4 and

accompanying text.

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Moreover, OTS believes that a new paragraph incorporating

incidental powers concepts would duplicate other existing OTS

regulations. Like national banks, federal savings associations hold

powers incident to their express powers, as set forth in the

HOLA.18 OTS regulations at 12 CFR 544.1 and 552.3 already

state that a Federal savings association may ``exercise all the

express, implied, and incidental powers conferred'' by the HOLA. In

light of this general recognition of incidental powers under the HOLA,

OTS has not restated the widely recognized incidental powers concepts

in this authorizing rule.

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\18\ See OTS Op. Acting Chief Counsel (March 25, 1994) at 7-8

and (October 17, 1994) at 4-5.

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In the proposed rule, OTS asked whether the OTS rule should

specifically authorize other types of suretyship, guaranty, or similar

arrangements beyond those covered in the proposed rule. One commenter

recommended that OTS adopt a rule based on the OCC's former rule at 12

CFR 7.7015 (1996), which permitted a national bank to engage in check

guaranty plans under which it will honor checks drawn on it up to a

certain amount. OCC determined that this arrangement is essentially a

credit agreement and, therefore, a permissible activity.

OTS believes that the HOLA expressly authorizes these check

guaranty plans. A check guaranty plan is an arrangement where an

institution holds out to the public that it will honor checks drawn

upon it up to a certain amount by a depositor who displays a check

guaranty card. A check guaranty plan is, in essence, an agreement by a

Federal savings association to pay deposits out of an account or extend

credit up to a predetermined amount to a depositor when insufficient

funds are available to honor a check drawn on a depositor's

account.19 In the latter case, such a commitment to lend is

within the express powers of Federal savings associations under section

5(c)(1)(A) of the HOLA, which permits a Federal savings association to

make ``loans specifically related to transaction accounts.''

20 OTS regulation at 12 CFR 560.30, which implements this

section of the HOLA, specifically states that transaction account loans

include overdrafts.21 Thus, the HOLA and OTS regulations

already authorize a Federal savings association to offer a plan that

provides a line of credit on the customer's checking account. Since a

Federal savings association may make overdraft loans, it is not

necessary to expressly authorize check guaranty plans in the revised

suretyship and guaranty provisions.22

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\19\ OCC reached a similar conclusion that check guaranty plans

are essentially a loan commitment. See 12 CFR 7.7015 (1996).

\20\ 12 U.S.C. 1464(c)(1)(A). Moreover, section 12 of the HOLA

expressly authorizes a Federal savings association to advertise,

subject to OTS regulations.

\21\ While loans on transactional accounts under section

5(c)(1)(A) of the HOLA are not subject to percentage of assets

limitation, OTS implementing regulation indicates that

``[overdrafts] on commercial deposit or transaction accounts shall

be considered to be commercial loans for the purposes of determining

the association's percentage of assets limitations.'' 12 CFR 560.30,

footnote 20.

\22\ OTS notes that OCC removed the interpretive ruling on check

guaranty plans from its regulations in 1996 because the ruling was

unnecessary or repetitive. 61 FR 4849, 4860 (February 9, 1996).

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Today's final rule also includes several changes to the proposed

rule. First, OTS has moved the conditions on the exercise of this

surety and guaranty authority from its proposed location at

Sec. 560.115 to the authorizing provision at Sec. 560.60.23

Second, OTS has made minor clarifying revisions to the text of the

rule. For example, OTS has revised the provision addressing real estate

collateral at Sec. 560.60(c)(1)(i) to require an evaluation or

appraisal of real estate consistent with OTS appraisal regulation at 12

CFR 564.3. OTS has also replaced the phrase ``prior mortgage'' in

Sec. 560.60(c)(1)(i) with the phrase ``any existing senior mortgages''

to clarify this provision.

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\23\ OTS originally placed these conditions in subpart B of part

560 to ensure that similar guaranty and surety agreements by state-

chartered savings associations would be subject to cited conditions.

A state-chartered savings association may not engage as principal in

any type of activity that is not permissible for a Federal savings

association, unless the FDIC has made certain determinations

regarding the risk of the transactions. See 12 U.S.C. 1831e(a)

(1989). Accordingly, this purpose will be preserved by placing the

restrictions in the authorizing provision at Sec. 560.60.

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B. Letters of Credit and Other Independent Undertakings

Proposed 560.50 would clarify that Federal savings associations are

authorized to issue letters of credit, and may issue such other

independent undertakings as are approved by OTS, subject to

restrictions in existing 560.120.24 Three commenters

addressed proposed 560.50. Two of these commenters supported OTS's

proposal. The third commenter submitted information regarding

international practices relating to standby letters of credit. Today's

final rule adopts proposed 560.50 without change.

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\24\ The broad scope of the term ``independent undertakings''

and its recent evolution require close supervision and review when

such undertakings fall outside the more traditional activities

generally known as letters of credit. OTS approval may take the form

of legal opinions, general guidance, or case-by-case approvals,

depending on how the undertakings are presented to the agency. See

63 FR 49874, 49875-76 (September 18, 1998).

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Today's final rule also makes several technical and clarifying

revisions to 560.120, a related rule on Letters of Credit and Other

Undertakings to Pay Against Documents. First, OTS has redrafted

paragraph (a) to be more concise. Second, OTS is revising footnote 1 to

indicate that the U.N. General Assembly adopted in 1995 and the United

States signed in 1997, the United Nations Convention on Independent

Guarantees and Standby Letters of Credit. Third, OTS is revising

560.120(b)(2)(ii) to clarify that the precautions on allowing credit

assessments when an independent undertaking is renewed apply only to

automatic renewals. Discretionary renewals implicitly allow the savings

association to make any necessary credit assessment before renewing.

Fourth, OTS is updating a telephone number in footnote 1.

OTS did not address these changes in the NPR. Because these changes

are technical, rather than substantive, OTS has concluded that notice

and public comment on these changes is

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unnecessary and contrary to the public interest.25

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\25\ See 5 U.S.C. 553(b)(B).

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C. Escrow Accounts

In the NPR, OTS requested comment on the escrow authority of

Federal savings associations. OTS has long recognized that the

authority of Federal savings associations to make loans includes the

authority to establish an escrow account in connection with a

loan.26 However, OTS questioned whether it should clarify

the scope of Federal savings associations' authority to handle escrow

accounts that are not related to loans. OTS did not propose any new

regulatory text on escrow accounts. Rather, it requested comment on

this issue. OTS specifically asked commenters to address whether OTS

should place any restriction on the exercise of the escrow authority.

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\26\ See 61 FR 50951, 50961 (September 30, 1996).

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Three commenters opposed the adoption of any regulation addressing

the escrow authority of Federal savings associations. These commenters

argued that current guidance in the escrow area is

sufficient.27 Commenters also feared that additional

restrictions on the exercise of escrow authority, particularly for

escrow accounts related to loans, could lead to confusion with other

regulations.28

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\27\ See 61 FR 50951, 50961 (September 30, 1996)(the authority

to hold escrow accounts related to loans); OTS Regulatory Handbook:

Trust Activities, Sec. 140 (1992) and Op. Chief Counsel (October 17,

1995) (the authority to engage in fiduciary activities involving

non-discretionary activities such as escrow or safekeeping services

or acting as a custodian or paying agent); and OTS Op. Chief Counsel

(August 19, 1998) (the authority to hold an escrow account for funds

representing down-payments on vacations for a Federal savings

association customer, a vacation organizer).

\28\ See e.g., the Real Estate Settlement Procedures Act at 12

U.S.C. 2601 et seq. and the implementing regulations at 24 CFR 3500

et seq.

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In light of these comments, OTS will not adopt a regulation on

escrow authority in this rulemaking. OTS will continue to answer any

questions that arise in this area on a case-by-case basis.

IV. Related Definitions

In connection with today's final rule, OTS has removed or revised

certain lending-related definitions in parts 541 and 561 and elsewhere.

These revisions fulfill, in part, promises made in the final lending

and investment regulation in 1996. In that rulemaking, OTS recognized

that its regulations include similar, but not identical, terms in

various regulatory provisions. OTS indicated that it would review its

definitions and would minimize or eliminate the potential for confusion

in a later rulemaking.29

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\29\ See e.g., 61 FR 50951, 50953, 50959 (September 30, 1996).

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OTS did not address the possibility of these changes in the NPR.

Nonetheless, OTS has concluded that additional notice and public

comment on these changes is unnecessary and contrary to the public

interest.30 OTS has not made any substantive revisions in

this final rule. Rather, OTS has simply removed some unused terms, and

made other minor technical or clarifying changes to other definitions.

OTS has made the following revisions:

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\30\ See 5 U.S.C. 553(b)(B).

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A. Guaranteed Loan, Guaranteed Obligation, and Insured Loan

The current OTS rules at Parts 541 and 561 include one definition

of ``guaranteed obligation'' (561.21), two definitions of ``guaranteed

loan'' (541.13 and 561.20), and two definitions of ``insured loan''

(541.17 and 561.25). The FHLBB originally adopted these definitions

between 1949 and 1968 to implement various lending and investments

authorities then applicable to Federal savings

associations.31 Neither OTS nor the FHLBB substantively

revised these definitions after 1971. OTS merely adopted these

definitions without change when it transferred and re-codified FHLBB

regulations in 1989.32

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\31\ See 14 FR 3981 (July 16, 1949); 23 FR 9891 (December 23,

1958); 33 FR 16555 (November 14, 1968).

\32\ 54 FR 49411 (November 30, 1989).

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The current definitions of the cited terms conflict. For example,

541.13 defines ``guaranteed loan'' as a loan guaranteed under the

Servicemen's Readjustment Act of 1944 or chapter 37 of title 38, United

States Code, as amended. Section 561.20, on the other hand, defines

``guaranteed loan'' as a loan guaranteed under ``(a) The Servicemen's

Readjustment Act of 1944 or chapter 37 of title 38, United States Code;

(b) The New Communities Act of 1968; (c) Section 221 or section 224 of

the Foreign Assistance Act of 1961, as in effect prior to December 30,

1969; or (d) section 221 or section 222 of the Foreign Assistance Act

of 1961, as in effect on December 30, 1969, and thereafter.'' The two

definitions of insured loans are similarly inconsistent.33

These inconsistencies have arisen over time as the statutes and

regulations affecting savings associations have been reorganized and

recodified.

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\33\ Compare 12 CFR 541.17 with 12 CFR 561.25.

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OTS regulations use the three cited terms only in the lending and

investment chart at 560.30. This chart expressly cross-references the

explicit statutory citation for each type of guaranteed loan,

guaranteed obligation, or insured loan. These cross-references

completely and accurately define the scope of the lending and

investment authority of Federal savings associations. Accordingly, OTS

has concluded that these definitions are unnecessary and potentially

confusing, and has deleted these provisions.

B. Open-End Consumer Credit and Closed-End Consumer Credit

The current rules at 561.36 and 561.10 define open-end consumer

credit and closed-end consumer credit by a cross-reference to

Regulation Z (12 CFR 226.2). OTS regulations use these two phrases only

in 560.3 (definition of consumer loan). Accordingly, OTS has deleted

the definitions of open-end and closed-end consumer credit, and has

revised 560.3 to include appropriate cross-references to Regulation Z.

OTS has also made a minor technical change to the definition of

consumer loan at 560.3. The existing consumer loan definition excludes

``credit extended in connection with credit cards and bona fide

overdraft loans.'' OTS excluded these loans to reflect the fact that

credit card loans and overdraft loans are not subject to the 35 percent

of asset limitation applicable to consumer loans under section 5 of the

HOLA.34 OTS notes, however, that other types of loans may

meet the technical definition of consumer loan at 560.3, but may also

be made without limitation under other sections of the HOLA. Examples

include educational loans and home improvement loans.35 OTS

has revised the rule to indicate that the term consumer loan does not

include credit extended in connection with credit card loans, bona fide

overdraft loans, and other loans that the savings association has

designated as made under investment or lending authority other than

section 5(c)(2)(D) of the HOLA.36

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\34\ See 61 FR 50951, 50959 (September 30, 1996). A Federal

thrift's aggregate investments in consumer loans, corporate debt

securities, and commercial paper are subject to a 35 percent of

assets limitation.

\35\ 12 U.S.C. 1464(c)(1)(J) and (c)(1)(U).

\36\ See 12 CFR 560.31.

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C. Residential Real Estate and Related Definitions

OTS has also made minor revisions to the definition of residential

real estate and related definitions. Two changes consolidate defined

terms. For example, 541.3 defines the phrase ``combination of home and

business property'' as a home used in part for business. OTS

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regulations use this phrase twice--once in the definition of

residential real estate at 541.23 and once in the definition of home

loan at 560.3. The final rule deletes 541.3 and modifies 541.23 and

560.3 accordingly.

Similarly, 541.4 defines the phrase ``combination of residential

real estate and business property involving only minor or incidental

business use'' as residential real estate for which no more than twenty

percent of the total appraised value of the real estate is attributable

to the business use. OTS regulations use this phrase only in the

definition of residential real estate at 541.23. OTS has deleted 541.4

and has revised 541.23 to include the phrase.

In addition, 541.23 currently defines residential real estate, in

part, as ``homes (including condominiums and cooperatives).'' OTS has

clarified the parenthetical phrase to include ``a dwelling unit in a

multi-family residential property such as a condominium or a

cooperative.'' 37

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\37\ OTS has made a related change to the definition of home

loan at 12 CFR 560.3.

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D. Miscellaneous Definitions

Section 561.23 defines the term ``home mortgage.'' OTS regulations

use this term only within the phrase ``home mortgage loan'' in part

563e--Community Reinvestment. OTS has separately defined ``home

mortgage loan'' for part 563e by a cross-reference to the Federal

Reserve Board's Regulation C--Home Mortgage Disclosure.38

Since OTS rules do not use the term ``home mortgage'' elsewhere, OTS

has deleted this definition as superfluous.

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\38\ See 12 CFR 563e.12(l), which cross-references 12 CFR 203.2.

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OTS regulations define the phrase ``normal lending territory'' at

561.32, but do not use this term anywhere. This definition appears to

be a remnant of provisions found in former section 5(c) of the HOLA,

which generally restricted real estate lending by a Federal savings

association to property located in the state in which the association's

home office was located, or within 100 miles of the home

office.39 OTS has deleted this term as unnecessary.

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\39\ 12 U.S.C. 1464(c)(1976).

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The rules define ``cooperative housing development'' at 541.6. This

term, however, is also not used in OTS regulations. OTS has, therefore,

deleted this definition.

OTS rules at 561.11 define ``closing date'' as ``any annual or

semiannual closing date.'' Three OTS regulations use this term. The

cited definition is clearly inapplicable in two of these regulations.

See 12 CFR 563b.7(g)(5) (the closing date of a public offering) and 12

CFR 567.4(a)(4) (the closing date for a response to a notice of intent

to issue a capital directive). The remaining regulation at 563b.3(f)(5)

uses closing date within the phrase ``annual closing date.'' OTS,

therefore, has removed this term as superfluous.

V. Executive Order 12866

The Director of OTS has determined that this final rule does not

constitute a ``significant regulatory action'' for the purpose of

Executive Order 12866.

VI. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS

certifies that this final rule will not have a significant economic

impact on a substantial number of small entities. Today's final rule

will not impose any additional burdens or requirements on small

entities. Rather, the final rule simply clarifies the authority of

Federal savings associations to act as guarantor and to issue letters

of credit. This final rule also streamlines lending related definitions

or removes unnecessary or outdated definitions. While the final rule

also restricts the circumstances under which savings associations may

enter into surety and guaranty agreements, the restrictions are the

minimum necessary for safe and sound operations and should not impose a

significant burden on small savings associations.

VII. Unfunded Mandates Act of 1995

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. OTS has determined that the

final rule will not result in expenditures by state, local, or tribal

governments or by the private sector of $100 million or more.

Accordingly, this rulemaking is not subject to section 202 of the

Unfunded Mandates Act.

List of Subjects

12 CFR Part 541

Savings associations.

12 CFR Part 545

Accounting, Consumer protection, Credit, Electronic funds

transfers, Investments, Reporting and recordkeeping requirements,

Savings associations.

12 CFR Part 560

Consumer protection, Investments, Manufactured homes, Mortgages,

Reporting and recordkeeping requirements, Savings associations,

Securities.

12 CFR Part 561

Savings associations.

Accordingly, the Office of Thrift Supervision amends chapter V,

title 12, Code of Federal Regulations as set forth below:

PART 541--DEFINITIONS

1. The authority citation for part 541 continues to read as

follows:

Authority: 12 U.S.C. 1462a, 1463, 1464.

Secs. 541.3, 541.4, 541.6, 541.13, 541.17 [Removed]

2. Sections 541.3, 541.4, 541.6, 541.13, and 541.17 are removed.

3. Section 541.23 is revised to read as follows:

Sec. 541.23 Residential real estate.

The terms residential real estate or residential real property

mean:

(a) Homes (including a dwelling unit in a multi-family residential

property such as a condominium or a cooperative);

(b) Combinations of homes and business property (i.e., a home used

in part for business);

(c) Other real estate used for primarily residential purposes other

than a home (but which may include homes);

(d) Combinations of such real estate and business property

involving only minor business use (i.e., where no more than 20 percent

of the total appraised value of the real estate is attributable to the

business use);

(e) Farm residences and combinations of farm residences and

commercial farm real estate;

(f) Property to be improved by the construction of such structures;

or

(g) Leasehold interests in the above real estate.

PART 545--[AMENDED]

PART 560--LENDING AND INVESTMENT

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

follows:

[[Page 46565]]

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

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

Sec. 545.103 [Redesignated as Sec. 560.60]

5. Section 545.103 is redesignated as Sec. 560.60 and revised to

read as follows:

Sec. 560.60 Suretyship and guaranty.

Pursuant to section 5(b)(2) of the HOLA, a Federal savings

association may enter into a repayable suretyship or guaranty

agreement, subject to the conditions in this section.

(a) What is a suretyship or guaranty agreement? Under a suretyship,

a Federal savings association is bound with its principal to pay or

perform an obligation to a third person. Under a guaranty agreement, a

Federal savings association agrees to satisfy the obligation of the

principal only if the principal fails to pay or perform.

(b) What requirements apply to suretyship and guaranty agreements

under this section? A Federal savings association may enter into a

suretyship or guaranty agreement under this section, subject to each of

the following requirements:

(1) The Federal savings association must limit its obligations

under the agreement to a fixed dollar amount and a specified duration.

(2) The Federal savings association's performance under the

agreement must create an authorized loan or other investment.

(3) The Federal savings association must treat its obligation under

the agreement as a loan to the principal for purposes of Secs. 560.93

and 563.43 of this chapter.

(4) The Federal savings association must take and maintain a

perfected security interest in collateral sufficient to cover its total

obligation under the agreement.

(c) What collateral is sufficient? (1) The Federal savings

association must take and maintain a perfected security interest in

real estate or marketable securities equal to at least 110 percent of

its obligation under the agreement, except as provided in paragraph

(c)(2) of this section.

(i) If the collateral is real estate, the Federal savings

association must establish the value by a signed appraisal or

evaluation in accordance with part 564 of this chapter. In determining

the value of the collateral, the Federal savings association must

factor in the value of any existing senior mortgages, liens or other

encumbrances on the property, except those held by the principal to the

suretyship or guaranty agreement.

(ii) If the collateral is marketable securities, the Federal

savings association must be authorized to invest in that security taken

as collateral. The Federal savings association must ensure that the

value of the security is 110 percent of the obligation at all times

during the term of agreement.

(2) The Federal savings association may take and maintain a

perfected security interest in collateral which is at all times equal

to at least 100 percent of its obligation, if the collateral is:

(i) Cash;

(ii) Obligations of the United States or its agencies;

(iii) Obligations fully guarantied by the United States or its

agencies as to principal and interest; or

(iv) Notes, drafts, or bills of exchange or bankers' acceptances

that are eligible for rediscount or purchase by a Federal Reserve Bank.

6. Section 560.3 is amended by revising the definitions of

``Consumer loans'' and ``Home loans'' to read as follows:

Sec. 560.3 Definitions.

* * * * *

Consumer loans include loans for personal, family, or household

purposes and loans reasonably incident thereto, and may be made as

either open-end or closed-end consumer credit (as defined at 12 CFR

226.2(a) (10) and (20)). Consumer loans do not include credit extended

in connection with credit card loans, bona fide overdraft loans, and

other loans that the savings association has designated as made under

investment or lending authority other than section 5(c)(2)(D) of the

HOLA.

* * * * *

Home loans include any loans made on the security of a home

(including a dwelling unit in a multi-family residential property such

as a condominium or a cooperative), combinations of homes and business

property (i.e., a home used in part for business), farm residences, and

combinations of farm residences and commercial farm real estate.

* * * * *

7. Section 560.50 is added to subpart A to read as follows:

Sec. 560.50 Letters of credit and other independent undertakings--

authority.

A Federal savings association may issue letters of credit and may

issue such other independent undertakings as are approved by OTS,

subject to the restrictions in Sec. 560.120.

8. Section 560.120 is amended by revising the first two sentences

of paragraph (a) and paragraph (b)(2)(ii) to read as follows:

Sec. 560.120 Letters of credit and other independent undertakings to

pay against documents.

(a) General authority. A savings association may issue and commit

to issue letters of credit within the scope of applicable laws or rules

of practice recognized by law. It may also issue other independent

undertakings within the scope of such laws or rules of practice

recognized by law, that have been approved by OTS (approved

undertaking).1 * * *

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\1\ Samples of laws or rules of practice applicable to letters

of credit and other independent undertakings include, but are not

limited to: the applicable version of Article 5 of the Uniform

Commercial Code (UCC) (1962, as amended 1990) or revised Article 5

of the UCC (as amended 1995) (available from West Publishing Co., 1/

800/328-4880); the Uniform Customs and Practice for Documentary

Credits (International Chamber of Commerce (ICC) Publication No.

500) (available from ICC Publishing, Inc., 212/206-1150; the United

Nations Convention on Independent Guarantees and Standby Letters of

Credit (adopted by the U.N. General Assembly in 1995 and signed by

the U.S. in 1997) (available from the U.N. Commission on

International Trade Law, 212/963-5353); and the Uniform Rules for

Bank-to-Bank Reimbursements Under Documentary Credits (ICC

Publication No. 525) (available from ICC Publishing, Inc., 212/206-

1150).

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(b) * * *

(2) * * *

(ii) In the event that the undertaking provides for automatic

renewal, the terms for renewal should allow the savings association to

make any necessary credit assessment prior to renewal;

* * * * *

PART 561--DEFINITIONS

9. The authority citation for part 561 continues to read as

follows:

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

Secs. 561.10, 561.11, 561.20, 561.21, 561.23, 561.25, 561.32,

561.36 [Removed]

10. Sections 561.10, 561.11, 561.20, 561.21, 561.23, 561.25,

561.32, and 561.36 are removed.

Dated: August 19, 1999.

By the Office of Thrift Supervision.

Richard M. Riccobono,

Deputy Director.

[FR Doc. 99-21993 Filed 8-25-99; 8:45 am]

BILLING CODE 6720-01-P