Classification of Commercial Credit Exposures Notice for Public Comment on Interagency Proposal

15681

Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

DATES: Written comments should be

received on or before May 27, 2005, to

be assured of consideration.

ADDRESSES: Direct all written comments

to Glenn Kirkland, Internal Revenue

Service, room 6516, 1111 Constitution

Avenue, NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT:

Requests for additional information or

copies of the form and instructions

should be directed to Allan Hopkins, at

(202) 622–6665, or at Internal Revenue

Service, room 6516, 1111 Constitution

Avenue, NW., Washington, DC 20224,

or through the Internet, at

Allan.M.Hopkins@irs.gov.

SUPPLEMENTARY INFORMATION:

Title: Application for Change in

Accounting Method.

OMB Number: 1545–0152.

Form Number: 3115.

Abstract: Form 3115 is used by

taxpayers who wish to change their

method of computing their taxable

income. The form is used by the IRS to

determine if electing taxpayers have met

the requirements and are able to change

to the method requested.

Current Actions: There are no changes

being made to the form at this time.

Type of Review: Extension of a

currently approved collection.

Affected Public: Business or other for-

profit organizations, individuals, not-

for-profit organizations, and farms.

Estimated Number of Respondents:

25,000.

Estimated Time Per Respondent: 53

hrs., 33 min.

Estimated Total Annual Burden

Hours: 1,388,850.

The following paragraph applies to all

of the collections of information covered

by this notice:

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid OMB control number.

Books or records relating to a collection

of information must be retained as long

as their contents may become material

in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential,

as required by 26 U.S.C. 6103

ired to

respond to, a collection of information

unless the collection of information

displays a valid OMB control number.

Books or records relating to a collection

of information must be retained as long

as their contents may become material

in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential,

as required by 26 U.S.C. 6103.

Request for Comments: Comments

submitted in response to this notice will

be summarized and/or included in the

request for OMB approval. All

comments will become a matter of

public record. Comments are invited on:

(a) Whether the collection of

information is necessary for the proper

performance of the functions of the

agency, including whether the

information shall have practical utility;

(b) the accuracy of the agency’s estimate

of the burden of the collection of

information; (c) ways to enhance the

quality, utility, and clarity of the

information to be collected; (d) ways to

minimize the burden of the collection of

information on respondents, including

through the use of automated collection

techniques or other forms of information

technology; and (e) estimates of capital

or start-up costs and costs of operation,

maintenance, and purchase of services

to provide information.

Approved: March 18, 2005.

Glenn Kirkland,

IRS Reports Clearance Officer.

[FR Doc. E5–1376 Filed 3–25–05; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

[Docket No. 05–08]

Office of Thrift Supervision

[No. 2005–14]

FEDERAL RESERVE SYSTEM

[Docket No. OP–1227]

FEDERAL DEPOSIT INSURANCE

CORPORATION

Interagency Proposal on the

Classification of Commercial Credit

Exposures

AGENCIES: Office of the Comptroller of

the Currency, Treasury, (OCC); Board of

Governors of the Federal Reserve

System (Board); Federal Deposit

Insurance Corporation (FDIC); and

Office of Thrift Supervision, Treasury,

(OTS).

ACTION: Joint notice and request for

comment

–1227]

FEDERAL DEPOSIT INSURANCE

CORPORATION

Interagency Proposal on the

Classification of Commercial Credit

Exposures

AGENCIES: Office of the Comptroller of

the Currency, Treasury, (OCC); Board of

Governors of the Federal Reserve

System (Board); Federal Deposit

Insurance Corporation (FDIC); and

Office of Thrift Supervision, Treasury,

(OTS).

ACTION: Joint notice and request for

comment.

SUMMARY: The OCC, Board, FDIC, and

OTS (the agencies) request comment on

their proposal to revise the classification

system for commercial credit exposures.

The proposal will replace the current

commercial loan classification system

categories ‘‘special mention,’’

‘‘substandard,’’ and ‘‘doubtful’’ with a

two-dimensional based framework. The

proposed framework would be used by

institutions and supervisors for the

uniform classification of commercial

and industrial loans; leases; receivables;

mortgages; and other extensions of

credit made for business purposes by

federally insured depository institutions

and their subsidiaries (institutions),

based on an assessment of borrower

creditworthiness and estimated loss

severity. The proposed framework

would not modify the interagency

classification of retail credit as stated in

the ‘‘Uniform Retail Credit

Classification and Account Management

Policy Statement,’’ issued in February

2000. However, by creating a new

treatment for commercial loan

exposures, the proposed framework

would modify Part I of the ‘‘Revised

Uniform Agreement on the

Classification of Assets and Appraisal of

Securities Held by Banks and Thrifts’

issued in June 2004.

This proposal is intended to enhance

the methodology used to systematically

assess the level of credit risk posed by

individual commercial extensions of

credit and the level of an institution’s

aggregate commercial credit risk.

DATES: Comments must be received by

June 30, 2005.

ADDRESSES: Interested parties are

invited to submit written comments to

any or all of the agencies

in June 2004.

This proposal is intended to enhance

the methodology used to systematically

assess the level of credit risk posed by

individual commercial extensions of

credit and the level of an institution’s

aggregate commercial credit risk.

DATES: Comments must be received by

June 30, 2005.

ADDRESSES: Interested parties are

invited to submit written comments to

any or all of the agencies. All comments

will be shared among the agencies.

Comments should be directed to:

OCC: You should include OCC and

Docket Number 05–08 in your comment.

You may submit comments by any of

the following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• OCC Web Site: http://

www.occ.treas.gov. Click on ‘‘Contact

the OCC,’’ scroll down and click on

‘‘Comments on Proposed Regulations.’’

• E-mail address:

regs.comments@occ.treas.gov.

• Fax: (202) 874–4448.

• Mail: Office of the Comptroller of

the Currency, 250 E Street, SW., Mail

Stop 1–5, Washington, DC 20219.

• Hand Delivery/Courier: 250 E

Street, SW., Attn: Public Information

Room, Mail Stop 1–5, Washington, DC

20219.

Instructions: All submissions received

must include the agency name (OCC)

and docket number or Regulatory

Information Number (RIN) for this

notice of proposed rulemaking. In

general, OCC will enter all comments

received into the docket without

change, including any business or

personal information that you provide.

You may review comments and other

related materials by any of the following

methods:

• Viewing Comments Personally: You

may personally inspect and photocopy

comments at the OCC’s Public

Information Room, 250 E Street, SW.,

Washington, DC. You can make an

appointment to inspect comments by

calling (202) 874–5043.

• Viewing Comments Electronically:

You may request e-mail or CD–ROM

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rsonally: You

may personally inspect and photocopy

comments at the OCC’s Public

Information Room, 250 E Street, SW.,

Washington, DC. You can make an

appointment to inspect comments by

calling (202) 874–5043.

• Viewing Comments Electronically:

You may request e-mail or CD–ROM

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15682

Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

1 The supervisory categories currently used by the

agencies are:

Special Mention: A ‘‘special mention’’ asset has

potential weaknesses that deserve management’s

close attention. If left uncorrected, these potential

weaknesses may result in deterioration of the

repayment prospects for the asset or in the

institution’s credit position at some future date.

Special mention assets are not adversely classified

and do not expose an institution to sufficient risk

to warrant adverse classification.

Substandard: A ‘‘substandard’’ asset is

inadequately protected by the current sound worth

and paying capacity of the obligor or by the

collateral pledged, if any. Assets so classified must

have a well-defined weakness, or weaknesses that

jeopardize the liquidation of the debt. They are

characterized by the distinct possibility that the

institution will sustain some loss if the deficiencies

are not corrected.

Doubtful: An asset classified ‘‘doubtful’’ has all

the weaknesses inherent in one classified

substandard with the added characteristic that the

weaknesses make collection or liquidation in full,

on the basis of currently known facts, conditions,

and values, highly questionable and improbable.

Loss: An asset classified ‘‘loss’’ is considered

uncollectible, and of such little value that its

continuance on the books is not warranted

’ has all

the weaknesses inherent in one classified

substandard with the added characteristic that the

weaknesses make collection or liquidation in full,

on the basis of currently known facts, conditions,

and values, highly questionable and improbable.

Loss: An asset classified ‘‘loss’’ is considered

uncollectible, and of such little value that its

continuance on the books is not warranted. This

classification does not mean that the asset has

absolutely no recovery or salvage value, but rather

it is not practical or desirable to defer writing off

this basically worthless asset event though partial

recovery may be affected in the future.

2 The Federal Home Loan Bank Board, the

predecessor of the OTS, adopted the Uniform

Agreement in 1987.

copies of comments that the OCC has

received by contacting the OCC’s Public

Information Room at

regs.comments@occ.treas.gov.

• Docket: You may also request

available background documents and

project summaries using the methods

described above.

Board: You may submit comments,

identified by Docket Number OP–1227,

by any of the following methods:

• Agency Web Site: http://

www.federalreserve.gov. Follow the

instructions for submitting comments

on the http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• E-mail:

regs.comments@federalreserve.gov.

Include docket number in the subject

line of the message.

• FAX: 202–452–3819 or 202–452–

3102.

• Mail: Jennifer J. Johnson, Secretary,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, NW., Washington,

DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

except as necessary for technical

reasons. Accordingly, your comments

will not be edited to remove any

identifying or contact information

rd of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, NW., Washington,

DC 20551.

All public comments are available

from the Board’s Web site at http://

www.federalreserve.gov/generalinfo/

foia/ProposedRegs.cfm as submitted,

except as necessary for technical

reasons. Accordingly, your comments

will not be edited to remove any

identifying or contact information.

Public comments may also be viewed

electronically or in paper in Room MP–

500 of the Board’s Martin Building (20th

and C Streets, N.W.) between 9 a.m. and

5 p.m. on weekdays.

FDIC: You may submit comments by

any of the following methods:

• Agency Web Site: http://

www.fdic.gov/regulations/laws/federal/

propose.html. Follow instructions for

submitting comments on the Agency

Web site.

• E-mail: Comments@FDIC.gov.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429.

• Hand Delivery/Courier: Guard

station at the rear of the 550 17th Street

Building (located on F Street) on

business days between 7 a.m. and 5 p.m.

Instructions: All comments received

will be posted without change to

http://www.fdic.gov/regulations/laws/

federal/propose.html including any

personal information provided.

OTS: You may submit comments,

identified by No. 2005–14, by any of the

following methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• E-mail:

regs.comments@ots.treas.gov. Please

include No. 2005–14 in the subject line

of the message, and include your name

and telephone number in the message.

• Fax: (202) 906–6518.

• Mail: Regulation Comments, Chief

Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW.,

Washington, DC 20552, Attention: No.

2005–14.

• Hand Delivery/Courier: Guard’s

Desk, East Lobby Entrance, 1700 G

Street, NW., from 9 a.m. to 4 p.m

include No. 2005–14 in the subject line

of the message, and include your name

and telephone number in the message.

• Fax: (202) 906–6518.

• Mail: Regulation Comments, Chief

Counsel’s Office, Office of Thrift

Supervision, 1700 G Street, NW.,

Washington, DC 20552, Attention: No.

2005–14.

• Hand Delivery/Courier: Guard’s

Desk, East Lobby Entrance, 1700 G

Street, NW., from 9 a.m. to 4 p.m. on

business days, Attention: Regulation

Comments, Chief Counsel’s Office,

Attention: No. 2005–14.

Instructions: All submissions received

must include the agency name and

document number or Regulatory

Information Number (RIN) for this

notice. All comments received will be

posted without change to http://

www.ots.treas.gov/

pagehtml.cfm?catNumber=67&an=1,

including any personal information

provided.

Docket: For access to the docket to

read background documents or

comments received, go to http://

www.ots.treas.gov/

pagehtml.cfm?catNumber=67&an=1. In

addition, you may inspect comments at

the Public Reading Room, 1700 G Street,

NW., by appointment. To make an

appointment for access, call (202) 906–

5922, send an e-mail to

public.info@ots.treas.gov, or send a

facsimile transmission to (202) 906–

7755. (Prior notice identifying the

materials you will be requesting will

assist us in serving you.) We schedule

appointments on business days between

10 a.m. and 4 p.m. In most cases,

appointments will be available the next

business day following the date we

receive a request.

FOR FURTHER INFORMATION CONTACT:

OCC: Daniel Bailey, National Bank

Examiner, Credit Risk Division, (202)

874–5170, Office of the Comptroller of

the Currency, 250 E Street, SW.,

Washington, DC 20219.

Board: Robert Walker, Senior

Supervisory Financial Analyst, Credit

Risk, (202) 452–3429, Division of

Banking Supervision and Regulation,

Board of Governors of the Federal

Reserve System

est.

FOR FURTHER INFORMATION CONTACT:

OCC: Daniel Bailey, National Bank

Examiner, Credit Risk Division, (202)

874–5170, Office of the Comptroller of

the Currency, 250 E Street, SW.,

Washington, DC 20219.

Board: Robert Walker, Senior

Supervisory Financial Analyst, Credit

Risk, (202) 452–3429, Division of

Banking Supervision and Regulation,

Board of Governors of the Federal

Reserve System. For the hearing

impaired only, Telecommunication

Device for the Deaf (TDD), (202) 263–

4869, Board of Governors of the Federal

Reserve System, 20th and C Streets

NW., Washington, DC 20551.

FDIC: Kenyon Kilber, Senior

Examination Specialist, (202) 898–8935,

Division of Supervision and Consumer

Protection, Federal Deposit Insurance

Corporation, 550 17th Street. NW.,

Washington, DC 20429.

OTS: William J. Magrini, Senior

Project Manager, (202) 906–5744,

Supervision Policy, Office of Thrift

Supervision, 1700 G Street, NW.,

Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background Information

The Uniform Agreement on the

Classification of Assets and Appraisal of

Securities Held by Banks (current

classification system 1) was originally

issued in 1938. The current

classification system was revised in

1949, again in 1979,2 and most recently

in 2004. Separately in 1993, the

agencies adopted a common definition

of the special mention rating. The

current classification system is used by

both regulators and institutions to

measure the level of credit risk in

commercial loan portfolios, benchmark

credit risk across institutions, assess the

adequacy of an institution’s capital and

allowance for loan and lease losses

(ALLL), and evaluate an institution’s

ability to accurately identify and

evaluate the level of credit risk posed by

commercial exposures

tion system is used by

both regulators and institutions to

measure the level of credit risk in

commercial loan portfolios, benchmark

credit risk across institutions, assess the

adequacy of an institution’s capital and

allowance for loan and lease losses

(ALLL), and evaluate an institution’s

ability to accurately identify and

evaluate the level of credit risk posed by

commercial exposures.

The current classification system

focuses primarily on borrower

weaknesses and the possibility of loss

without specifying how factors that

mitigate the loss, such as collateral and

guarantees, should be considered in the

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15683

Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

3 Borrower means any obligor or counterparty in

a credit exposure, both on and off the balance sheet.

rating assignment. This has led to

differing applications of the current

classification system by institutions and

the agencies.

Under the current classification

system, rating differences between an

institution and its supervisor commonly

arise when, despite a borrower’s well-

defined credit weaknesses, risk

mitigants such as collateral and the

facility’s structure reduce the

institution’s risk of incurring a loss. The

current classification system does not

adequately address how, when rating an

asset, to reconcile the risk of the

borrower’s default with the estimated

loss severity of the particular facility. As

a result, the system dictates that

transactions with significantly different

levels of expected loss receive the same

rating. This limits the effectiveness of

the current classification system in

measuring an institution’s credit risk

exposure

address how, when rating an

asset, to reconcile the risk of the

borrower’s default with the estimated

loss severity of the particular facility. As

a result, the system dictates that

transactions with significantly different

levels of expected loss receive the same

rating. This limits the effectiveness of

the current classification system in

measuring an institution’s credit risk

exposure.

To address these limitations, the

agencies are proposing a two-

dimensional rating framework

(proposed framework) that considers a

borrower’s capacity to meet its debt

obligations separately from the facility

characteristics that influence loss

severity. By differentiating between

these two factors, a more precise

measure of an institution’s level of

credit risk is achieved.

The proposal includes three borrower

rating categories, ‘‘marginal,’’ ‘‘weak’’

and ‘‘default.’’ Facility ratings would be

required only for those borrowers rated

default (i.e. borrowers with a facility

placed on nonaccrual or fully or

partially charged off). Typically, this is

a very small proportion of all

commercial exposures. For borrowers

not rated default, institutions would

have the option of assigning the facility

ratings as discussed in the proposed

framework.

The agencies believe that this

flexibility will allow institutions with

both one-dimensional and two-

dimensional internal risk rating systems

to adopt the proposed framework.

Under the current classification system,

institutions with two-dimensional

internal credit rating systems have

encountered problems translating their

internal ratings into the supervisory

categories.

The agencies also propose to adopt

common definitions for the ‘‘criticized’’

and ‘‘classified’’ asset quality

benchmarks.

In this proposed framework, the

agencies have sought to minimize

complexity and supervisory burden.

The agencies believe that the proposed

framework attains these goals and that

institutions of all sizes will be able to

apply the approach

the supervisory

categories.

The agencies also propose to adopt

common definitions for the ‘‘criticized’’

and ‘‘classified’’ asset quality

benchmarks.

In this proposed framework, the

agencies have sought to minimize

complexity and supervisory burden.

The agencies believe that the proposed

framework attains these goals and that

institutions of all sizes will be able to

apply the approach.

The proposed framework aligns the

determination of a facility’s accrual

status, partial charge-off and ALL

treatment with the rating assignment

process. The current framework does

not provide a link between these

important determinations and a

facility’s assignment to a supervisory

category. The proposed framework

leverages off many determinations and

estimates management must already

make to comply with generally accepted

accounting principles (GAAP). As a

result, financial institutions should

benefit from a more efficient assessment

process and improved clarity.

This proposed framework, if adopted,

would apply to all regulated financial

institutions and their operating

subsidiaries supervised by the agencies.

Institutions will be provided transition

time to become familiar with the

proposal and to implement the

framework for their commercial loan

portfolios. In addition, the agencies will

need to review the existing

classification guidance for specialized

lending activities, such as commercial

real estate lending, to reflect the

proposed rating framework. The text of

the proposed framework statement

follows below.

Uniform Agreement on the

Classification of Commercial Credit

Exposures

This agreement applies to the

assessment of all commercial credit

exposures both on and off an

institution’s balance sheet. An

institution’s management is encouraged

to differentiate borrowers and facilities

beyond the requirements of this

framework by developing its own risk

rating system

statement

follows below.

Uniform Agreement on the

Classification of Commercial Credit

Exposures

This agreement applies to the

assessment of all commercial credit

exposures both on and off an

institution’s balance sheet. An

institution’s management is encouraged

to differentiate borrowers and facilities

beyond the requirements of this

framework by developing its own risk

rating system. Institutions may

incorporate this framework into their

internal risk rating systems or,

alternatively, they may map their

internal rating system into the

supervisory framework. Note that this

framework does not apply to

commercial credit exposures in the form

of securities.

The framework is built upon two

distinct ratings:

• Borrower 3 rating—rates the

borrower’s capacity to meet financial

obligations.

• Facility rating—rates a facility’s

estimated loss severity.

When combined, these two ratings

determine whether the exposure will be

a ‘‘criticized’’ or ‘‘classified’’ asset, as

those asset quality benchmarks are

defined.

Borrower Ratings

Marginal

A ‘‘marginal’’ borrower exhibits

material negative financial trends due to

company-specific or systemic

conditions. If these potential

weaknesses are not mitigated, they

threaten the borrower’s capacity to meet

its debt obligations. Marginal borrowers

still demonstrate sufficient financial

flexibility to react to and positively

address the root cause of the adverse

financial trends without significant

deviations from their current business

strategy. Their potential weaknesses

deserve institution management’s close

attention and warrant enhanced

monitoring.

A marginal borrower exhibits

potential weaknesses, which may, if not

checked or corrected, negatively affect

the borrower’s financial capacity and

threaten its ability to fulfill its debt

obligations.

The existence of adverse economic or

market conditions that are likely to

affect the borrower’s future financial

capacity may support a ‘‘marginal’’

borrower rating

t enhanced

monitoring.

A marginal borrower exhibits

potential weaknesses, which may, if not

checked or corrected, negatively affect

the borrower’s financial capacity and

threaten its ability to fulfill its debt

obligations.

The existence of adverse economic or

market conditions that are likely to

affect the borrower’s future financial

capacity may support a ‘‘marginal’’

borrower rating. An adverse trend in the

borrower’s operations or balance sheet,

which has not reached a point where

default is likely, may warrant a

‘‘marginal’’ borrower rating. The rating

should also be used for borrowers that

have made significant progress in

resolving their financial weaknesses but

still exhibit characteristics inconsistent

with a ‘‘pass’’ rating.

Weak

A ‘‘weak’’ borrower does not possess

the current sound worth and payment

capacity of a creditworthy borrower.

Borrowers rated weak exhibit well-

defined credit weaknesses that

jeopardize their continued performance.

The weaknesses are of a severity that the

distinct possibility of the borrower

defaulting exists.

Borrowers included in this category

are those with weaknesses that are

beyond the requirements of routine

lender oversight. These weaknesses

affect the ability of the borrower to

fulfill its obligations. Weak borrowers

exhibit adverse trends in their

operations or balance sheets of a

severity that makes it questionable that

they will be able to fulfill their

obligations, thus making default likely.

Illustrative adverse conditions that may

warrant a borrower rating of ‘‘weak’’

include an insufficient level of cash

flow compared to debt service needs; a

highly leveraged balance sheet; a loss of

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at

they will be able to fulfill their

obligations, thus making default likely.

Illustrative adverse conditions that may

warrant a borrower rating of ‘‘weak’’

include an insufficient level of cash

flow compared to debt service needs; a

highly leveraged balance sheet; a loss of

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15684

Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

4 The materiality of credit exposures is measured

relative to the institution’s overall exposure to the

borrower. Charge-offs and write-downs on material

credit exposures include credit-related write-downs

on securities of distressed borrowers for other than

temporary impairment, as well as material write-

downs on exposures to distressed borrowers that

are sold or transferred to held-for-sale, the trading

account, or other reporting categories.

5 An asset should be reported as being in

nonaccrual status if (1) it is being maintained on a

cash basis because of deterioration in the financial

condition of the borrower, (2) payment in full of

principal and interest is not expected, or (3)

principal or interest has been in default for a period

of 90 days or more unless the asset is both well

secured and in the process of collection.

access to the capital markets; adverse

industry and/or economic conditions

that the borrower is poorly positioned to

withstand; or a substantial deterioration

in the borrower’s operating margins. A

‘‘weak’’ rating is inappropriate for any

borrower that meets the conditions

described in the definition of a

‘‘default’’ rating.

Default

A borrower is rated ‘‘default’’ when

one or more of the institution’s

material 4 credit exposures to the

borrower satisfies one of the following

conditions:

(1) the supervisory reporting

definition of non-accrual,5 or

he borrower’s operating margins. A

‘‘weak’’ rating is inappropriate for any

borrower that meets the conditions

described in the definition of a

‘‘default’’ rating.

Default

A borrower is rated ‘‘default’’ when

one or more of the institution’s

material 4 credit exposures to the

borrower satisfies one of the following

conditions:

(1) the supervisory reporting

definition of non-accrual,5 or

(2) the institution has made a full or

partial charge-off or write-down for

credit-related reasons or determined

that an exposure is impaired for credit-

related reasons.

Borrowers rated ‘‘default’’ may be

upgraded if they have met their

contractual debt service requirements

for six consecutive months and their

financial condition supports

management’s assessment that they will

recover their recorded book value(s) in

full.

Facility Ratings

Facilities to borrowers with a rating of

default must be further differentiated

based upon their estimated loss severity.

The framework contains additional

applications of facility ratings; however,

institutions may choose not to utilize

them. An institution can estimate how

severe losses may be for either

individual loans or pooled loans

(provided the pooled transactions have

similar risk characteristics), mirroring

the institution’s allowance for loan and

lease losses (ALLL) methodologies.

Institutions may use their ALLL

impairment analysis as a basis for their

loss severity estimates.

The four facility ratings are:

Loss severity

category

Loss severity estimate

Remote Risk of

Loss.

0%.

Low ...................

<=5% of recorded invest-

ment 6.

Moderate ..........

>5% and <=30% of re-

corded investment.

High ..................

>30% of recorded invest-

ment.

6 Recorded investment means the exposure

amount reported on the financial institution’s

balance sheet per the Call Report or Thrift Fi-

nancial Report instructions

ategory

Loss severity estimate

Remote Risk of

Loss.

0%.

Low ...................

<=5% of recorded invest-

ment 6.

Moderate ..........

>5% and <=30% of re-

corded investment.

High ..................

>30% of recorded invest-

ment.

6 Recorded investment means the exposure

amount reported on the financial institution’s

balance sheet per the Call Report or Thrift Fi-

nancial Report instructions.

Remote Risk of Loss

Management has the option to expand

the use of the ‘‘remote risk of loss’’

facility rating to borrowers rated

‘‘marginal’’ and ‘‘weak.’’ Facilities or

portions of facilities that represent a

remote risk of loss include those

secured by cash, marketable securities,

commodities, or livestock. In the event

of the borrower’s contractual default,

management must be capable of

liquidating the collateral and applying

the funds against the facility’s balance.

The balance reflected in this category

should be adequately margined to

reflect fluctuations in the collateral’s

market price.

Loans for the purpose of financing

production expenses associated with

agricultural crops may be rated ‘‘remote

risk of loss’’ if management can

demonstrate that the loan will be self-

liquidating at the end of the production

cycle. That is, based upon current

estimates of yields and market prices for

the crops securing the loan, the

borrower should be expected to yield

sufficient cash from the sale to repay the

loan in full.

Facilities guaranteed by the U.S.

government or a government-sponsored

entity (GSE) that have a high investment

grade external rating might be included

in this category. If the guaranty is

conditional, the ‘‘remote risk of loss’’

rating should be used only when the

institution can satisfy the conditions

and qualify for payment under the terms

of the guaranty

e to repay the

loan in full.

Facilities guaranteed by the U.S.

government or a government-sponsored

entity (GSE) that have a high investment

grade external rating might be included

in this category. If the guaranty is

conditional, the ‘‘remote risk of loss’’

rating should be used only when the

institution can satisfy the conditions

and qualify for payment under the terms

of the guaranty.

Asset-based lending facilities may be

rated ‘‘remote risk of loss’’ only if

certain criteria are met, as described

below (see ‘‘Treatment of Asset-Based

Lending Activities.’’)

Low Loss Severity

The ‘‘low loss severity’’ rating applies

to exposures to borrowers rated default.

Loss severity is estimated to be 5

percent or less of the institution’s

recorded investment. Asset-based

lending facilities to Weak borrowers

may be rated ‘‘low loss severity’’ only if

certain criteria are met, as described

below (see ‘‘Treatment of Asset-Based

Lending Activities.’’)

Moderate Loss Severity

The ‘‘moderate loss severity’’ rating

only applies to exposures to borrowers

rated default. Loss severity is estimated

to be greater than 5 percent and at most

30 percent of the institution’s recorded

investment. Recovery in full is not

likely.

High Loss Severity

The ‘‘high loss severity’’ rating only

applies to exposures to borrowers rated

default. Loss severity is estimated to be

greater than 30 percent of the

institution’s recorded investment.

Recovery in full is not likely.

Loss

Assets rated ‘‘loss’’ are considered

uncollectible and of such little value

that their continuance on the

institution’s balance sheet is not

warranted. This rating does not mean

that the asset has absolutely no recovery

or salvage value (it may indeed have

some fractional future value), but rather

that it is not practical or desirable to

defer writing off this basically worthless

asset.

Portions of facilities rated ‘‘low loss

severity’’ and ‘‘moderate loss severity’’

must be rated loss when they satisfy this

definition

s not

warranted. This rating does not mean

that the asset has absolutely no recovery

or salvage value (it may indeed have

some fractional future value), but rather

that it is not practical or desirable to

defer writing off this basically worthless

asset.

Portions of facilities rated ‘‘low loss

severity’’ and ‘‘moderate loss severity’’

must be rated loss when they satisfy this

definition. Entire facilities or portions

thereof rated ‘‘high loss severity’’ must

be rated loss if they satisfy the

definition. Balances rated loss are

charged off and netted from the facility’s

balance and the institution’s loss

severity estimate must be updated to

reflect the uncertainty in collecting the

remaining recorded investment.

A loss rating for an exposure does not

imply that the institution has no

prospects to recover the amount charged

off. However, institutions should not

maintain an asset or a portion thereof on

their balance sheet if realizing its value

would require long-term litigation or

other lengthy recovery efforts. A facility

should be partially rated ‘‘loss’’ if there

is a remote prospect of collecting a

portion of the facility’s balance. When

the collectibility of the loan becomes

highly questionable, it should be

charged off or written down to a balance

equal to a conservative estimate of its

net realizable value under a realistic

workout strategy. When access to the

collateral is impeded, regardless of the

collateral’s value, the institution’s

management should carefully consider

whether the facility should remain a

bankable asset. Furthermore,

institutions need to recognize losses in

the period in which the asset is

identified as uncollectible.

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al is impeded, regardless of the

collateral’s value, the institution’s

management should carefully consider

whether the facility should remain a

bankable asset. Furthermore,

institutions need to recognize losses in

the period in which the asset is

identified as uncollectible.

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Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

Treatment of Asset-Based Lending

Facilities

Institutions with asset-based lending

(ABL) activities can utilize the following

facility ratings for qualifying exposures;

however, this treatment is not required.

Some ABL facilities, including some

debtor-in-possession (DIP) loans, may be

included in the ‘‘remote risk of loss’’

category if they are well-secured by

highly liquid collateral and the

institution exercises strong controls over

the collateral and the facility. ABL

facilities secured by accounts receivable

or other collateral that readily generates

sufficient cash to repay the loan may be

included in this category. In addition,

the institution must have dominion over

the cash generated from the conversion

of collateral, prudent advance rates,

strong monitoring controls, such as

frequent borrowing base audits, and the

expertise to liquidate sufficient

collateral to repay the loan. Facilities

that do not possess these characteristics

are excluded from the category.

ABL facilities and the lending

institution must meet certain

characteristics for the exposure to be

rated ‘‘remote risk of loss.’’

• Convertibility

—Institution is able to liquidate the

collateral within 90 days of the

borrower’s contractual default.

—Collateral is readily convertible to

cash.

• Coverage

—Loan is substantially over-

collateralized such that full

recovery of the exposure is

expected.

—Collateral has been valued within

60 days.

• Control

—Collateral is under the institution’s

control

sk of loss.’’

• Convertibility

—Institution is able to liquidate the

collateral within 90 days of the

borrower’s contractual default.

—Collateral is readily convertible to

cash.

• Coverage

—Loan is substantially over-

collateralized such that full

recovery of the exposure is

expected.

—Collateral has been valued within

60 days.

• Control

—Collateral is under the institution’s

control.

—Active lender management and

credit administration can mitigate

all loss through disbursement

practices and collateral controls.

For ABL facilities whose borrower is

rated weak, management may assign the

‘‘low loss severity’’ rating if the

conditions set forth below are satisfied:

• Convertibility

—Institution is able to liquidate

collateral within 180 days of the

borrower’s contractual default.

—Substantial amount of the collateral

is self-liquidating or marketable.

• Coverage

—Loss severity is estimated to be 5

percent or less.

—Collateral has been valued within

60 days.

• Control

—Collateral is under the institution’s

control.

—Active lender management and

credit administration can minimize

loss through disbursement practices

and collateral controls.

The institution’s ABL controls and

capabilities are the same as those

described in the ‘‘remote risk of loss’’

description above. This category simply

lengthens the period it would likely take

the institution to liquidate the collateral

from 90 days to 180 days and increases

the loss severity estimate from full

recovery of the exposure to 5 percent or

less.

Commercial Credit Risk Benchmarks:

Criticized Assets = All loans to

borrowers rated marginal, excluding

those facilities, or portions thereof, rated

‘‘remote risk of loss’’

plus

ABL transactions to borrowers rated

weak, if they satisfy the ‘‘low loss

severity’’ definition

90 days to 180 days and increases

the loss severity estimate from full

recovery of the exposure to 5 percent or

less.

Commercial Credit Risk Benchmarks:

Criticized Assets = All loans to

borrowers rated marginal, excluding

those facilities, or portions thereof, rated

‘‘remote risk of loss’’

plus

ABL transactions to borrowers rated

weak, if they satisfy the ‘‘low loss

severity’’ definition.

Classified Assets = All loans to

borrowers rated default, excluding those

facilities, or portions thereof, rated

‘‘remote risk of loss’’

plus

All loans to borrowers rated weak,

excluding those facilities, or portions

thereof, rated ‘‘remote risk of loss’’ and

ABL transactions rated ‘‘low loss

severity.’’

When calculating a financial

institution’s criticized and classified

assets, the institution’s recorded

investment plus any undrawn

commitment that is reported on the

institution’s Call Report or Thrift

Financial Report is included in the total,

excluding any balances rated ‘‘remote

risk of loss.’’ In the cases of lines of

credit with borrowing bases or any other

contractual restrictions that prevent the

borrower from drawing on the entire

committed amount, only the amount

outstanding and available under the

facility is included—not the full amount

of the commitment. However, the lower

amount should be used only if it is

management’s intent and practice to

exert the institution’s contractual rights

to limit its exposure.

Framework Principles

The borrower ratings should be

utilized for both improving and

deteriorating borrowers. Management

should refresh ratings with adequate

frequency to avoid significant jumps

across their internal rating scale.

When a facility is unconditionally

guaranteed, the guarantor’s rating can be

substituted for that of the borrower to

determine whether a facility should be

criticized or classified

The borrower ratings should be

utilized for both improving and

deteriorating borrowers. Management

should refresh ratings with adequate

frequency to avoid significant jumps

across their internal rating scale.

When a facility is unconditionally

guaranteed, the guarantor’s rating can be

substituted for that of the borrower to

determine whether a facility should be

criticized or classified. If the guarantor

does not perform its obligations under

the guarantee, the guarantor is rated

default and the facility is included in

the institution’s classified assets.

Loss severity estimates must relate to

the institution’s recorded investment,

net of prior charge-offs, borrower

payments, application of collateral

proceeds, or any other funds attributable

to the facility.

Each loss severity estimate for

borrowers rated default must reflect the

institution’s estimate of the asset’s net

realizable value or its estimate of

projected future cash flows and the

uncertainty of their timing and amount.

For this purpose, financial institutions

may use their impairment analysis for

determining the adequacy of their

ALLL. Facilities may be analyzed

individually or in a pool with similar

facilities.

The ‘‘default’’ borrower rating in no

way implies that the borrower has

triggered an event of default as specified

in the loan agreement(s). The rating

indicates only that management has

placed one or more of the borrower’s

facilities on non-accrual or recognized a

full or partial charge-off. Legal

determinations and collection strategies

are the responsibility of management. If

a borrower is rated default, it does not

imply that the lender must take any

particular action to collect from the

borrower.

When management recognizes a

partial charge-off, the loss severity

estimate and facility rating should be

updated. For example, after a facility is

partly charged off, its loss severity may

improve and warrant a better rating

re the responsibility of management. If

a borrower is rated default, it does not

imply that the lender must take any

particular action to collect from the

borrower.

When management recognizes a

partial charge-off, the loss severity

estimate and facility rating should be

updated. For example, after a facility is

partly charged off, its loss severity may

improve and warrant a better rating.

Estimating loss severity for many

exposures to defaulted borrowers is

difficult. If borrowers have filed for

bankruptcy protection, there is normally

significant uncertainty regarding their

intent and ability to reorganize, to sell

assets, to sell divisions, or, if it comes

to that, to liquidate the firm. In addition,

there is considerable uncertainty

regarding the timing and amount of cash

flows that these various strategies will

produce for creditors. As a result, the

loss severity estimates for facilities to

borrowers rated default should be

conservative and based upon the most

probable outcome given current

circumstances and the institution’s loss

experience on similar assets. The

financial institution should be able to

credibly support recovery rates on

facilities in excess of the underlying

collateral’s net realizable value.

Supervisors will focus on estimates

where institution management has

estimated recovery rates in excess of a

loan’s collateral value. Market prices for

a borrower’s similar exposures are one

indication of a claim’s intrinsic value.

However, distressed debt prices may not

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lue.

Supervisors will focus on estimates

where institution management has

estimated recovery rates in excess of a

loan’s collateral value. Market prices for

a borrower’s similar exposures are one

indication of a claim’s intrinsic value.

However, distressed debt prices may not

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Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

be a realistic indication of value if

trading volume is low compared to the

magnitude of the institution’s exposure.

Split facility ratings should be used

only when part of the facility meets the

criteria for the ‘‘remote risk of loss’’

category. When a portion of a facility is

rated ‘‘remote risk of loss,’’

management’s loss severity estimate

should only reflect the risk associated

with the remaining portion of the

facility.

To eliminate the need for split facility

ratings and further simplify the

framework, institutions have the option

to disregard the ‘‘remote risk of loss’’

category for loans partially secured by

collateral that qualify for the treatment.

In that case, the institution would

reflect the loss characteristics of the

loan in its entirety when estimating the

loan’s loss severity and slot the loan in

one of the three remaining facility

ratings.

Because individually rating every

borrower would be labor-intensive and

costly, institutions may use an

alternative rating approach for

borrowers with an aggregate exposure

below a specified threshold. Examiners

will evaluate the appropriateness of the

alternative rating approach and

aggregate exposure threshold by

considering factors such as the size of

the institution, the risk profile of the

subject exposures, and management’s

portfolio management capabilities.

The following chart summarizes the

structure of the proposed framework:

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;

6720–01–P

Chart 1—Framework Overview

Appendix A

of the

alternative rating approach and

aggregate exposure threshold by

considering factors such as the size of

the institution, the risk profile of the

subject exposures, and management’s

portfolio management capabilities.

The following chart summarizes the

structure of the proposed framework:

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;

6720–01–P

Chart 1—Framework Overview

Appendix A. Application of Framework

The following examples highlight how

certain loan facilities should be rated under

the ‘‘Uniform Agreement on the Assessment

of Commercial Credit Risk.’’

Example 1. Marginal Borrower Rating

Credit Facility: $100 line of credit for

working capital, $50 outstanding

Source of Repayment:

Primary: Cash flow from conversion of

assets

Secondary: Security interest in all

corporate assets

Collateral: Accounts receivable with a net

book value of $70 from large hospitals,

nursing care facilities, and other health care

providers. Receivables turn slowly, 120–150

days, but with a low level of uncollectible

accounts. No customer concentrations exceed

5 percent of sales. Modest inventory levels

consist of products to fill specific orders.

Situation: The borrower is a distributor of

health care products. Consolidation of health

care providers in the firm’s market area has

had a negative effect on its revenues,

profitability, and cash flow. The borrower’s

balance sheet exhibits moderate leverage and

liquidity. The firm is currently operating at

break-even. The firm has developed a new

relationship with a hospital chain that

operates in adjacent markets to the firm’s

traditional trade area. The new client is

expected to increase sales by 10 percent in

the coming fiscal year. If this expectation

materializes, the borrower should return to

profitability. Line utilization has increased

over the last fiscal year; however, the

remaining availability should provide

sufficient liquidity during this slow period

that

operates in adjacent markets to the firm’s

traditional trade area. The new client is

expected to increase sales by 10 percent in

the coming fiscal year. If this expectation

materializes, the borrower should return to

profitability. Line utilization has increased

over the last fiscal year; however, the

remaining availability should provide

sufficient liquidity during this slow period.

Borrower Rating: The borrower has shown

material negative financial trends; however,

it appears that there is sufficient financial

flexibility to positively address the cause of

the concerns without significant deviation

from its original business plan. Accordingly,

the borrower is rated marginal.

The loan is included in criticized assets.

Example 2. Weak Borrower Rating

Credit Facility: $100 line of credit for

working capital purposes, $100 outstanding.

Borrowing base equal to 70 percent of eligible

accounts receivable.

Sources of Repayment:

Primary: Cash flow from conversion of

assets

Secondary: Security interest in all

unencumbered corporate assets

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EN28MR05.018</GPH>

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Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

Situation: The borrower is a regional truck

transportation firm. A sustained increase in

fuel prices over the last six months led to

operating losses. The borrower has been

unable to increase prices to offset the higher

fuel prices.

The borrower’s interest payments have

been running 15 to 30 days late over the last

several months. Net cash flow from

operations is breakeven, but sufficient to

meet lease payments on its truck fleet. The

borrower leases all of its trucks from the

manufacturer’s leasing company. The line

was recently fully drawn to pay registration

fees and insurance premiums for the fleet.

The borrower is moderately leveraged and

has minimal levels of liquid assets

s late over the last

several months. Net cash flow from

operations is breakeven, but sufficient to

meet lease payments on its truck fleet. The

borrower leases all of its trucks from the

manufacturer’s leasing company. The line

was recently fully drawn to pay registration

fees and insurance premiums for the fleet.

The borrower is moderately leveraged and

has minimal levels of liquid assets. Borrower

continues to maintain its customer base and

generate new business, but pricing pressures

are forcing it to run unprofitably.

The most recent borrowing base certificate

indicates the borrower is in compliance with

the advance rate.

Borrower and

Facility rating: The borrower’s unprofitable

operations and lack of liquidity constitute

well-defined credit weaknesses. As a result,

the borrower is rated weak.

The loan is included in classified assets.

Example 3. Remote Risk of Loss Facility

Rating

Credit Facilities: $100 line of credit to fund

seasonal fluctuations in cash flow

$100 mortgage for the acquisition of

farmland

Sources of Repayment:

Primary: Cash flow from operations

Secondary: Security interest in collateral

Collateral: The line of credit is secured by

livestock and crops with a market value of

$110. The mortgage is secured by a lien on

acreage valued at $75. A U.S. government

agency guarantee was obtained on the

mortgage loan. The guarantee covers 75% of

any principal deficiency the institution

suffers on the mortgage.

Situation: Borrower’s financial information

reflects the negative effect of low commodity

prices and a reduction in the value of the

livestock. The borrower does not have

adequate sources of liquidity to remain

operating. Both loans have been placed on

nonaccrual since they are delinquent in

excess of 90 days. Institution management

has completed a recent inspection of the

livestock and crops securing their loan. The

borrower has placed its operations up for

sale, including all of the collateral securing

both loans

he

livestock. The borrower does not have

adequate sources of liquidity to remain

operating. Both loans have been placed on

nonaccrual since they are delinquent in

excess of 90 days. Institution management

has completed a recent inspection of the

livestock and crops securing their loan. The

borrower has placed its operations up for

sale, including all of the collateral securing

both loans. The farmland is under contract

with a purchase price of $75. Management

expects to realize after selling expenses $100

from the sale of livestock and crops and $70

from the sale of the farmland. As a result,

management expects to collect approximately

$20 (75% of $30) under the government

guarantee. Management estimates that the

mortgage has impairment of $10 based on the

fair value of the collateral and the guarantee.

Borrower and Facility rating: The borrower

is rated default because the loans are on

nonaccrual.

Because the line of credit is adequately

collateralized by marketable collateral, the

facility is rated ‘‘remote risk of loss.’’ The

portion of the mortgage supported by the sale

of the property and proceeds from the

government guarantee, $90, is also

considered ‘‘remote risk of loss.’’ The

remaining $10 balance is rated loss due to the

collateral shortfall and the unlikely prospects

of collecting additional amounts.

The line of credit and the portion of the

mortgage supported by the government

guarantee are included in pass assets.

Example 4. Rating Assignments for Multiple

Loans to a Single Borrower

Credit Facilities: $100 mortgage for

permanent financing of an office building

located at One Main Street.

$100 mortgage for permanent financing of

an office building located at One Central

Avenue.

Sources of Repayment:

Primary: Rental income

Secondary:Sale of real estate

Collateral: Each loan is secured by a

perfected first mortgage on the financed

property. The values of the Main Street and

Central Avenue properties are $85 and $110,

respectively

office building

located at One Main Street.

$100 mortgage for permanent financing of

an office building located at One Central

Avenue.

Sources of Repayment:

Primary: Rental income

Secondary:Sale of real estate

Collateral: Each loan is secured by a

perfected first mortgage on the financed

property. The values of the Main Street and

Central Avenue properties are $85 and $110,

respectively.

Situation: The borrower is a real estate

holding company for the two commercial

office buildings. The Main Street building is

not performing well and is generating

insufficient cash flow to maintain the

building, renovate vacant space for new

tenants, and service the debt. The borrower

is more than 90 days delinquent on the

building’s mortgage. Because the building’s

rents have declined and its vacancy rate has

increased, the fair market value of the

troubled property has declined to $85 from

$120 at the time of loan origination. Market

conditions do not favor better performance of

the Main Street property in the short run. As

a result, management has placed the loan on

nonaccrual.

The Central Avenue property is performing

adequately, but is not generating sufficient

excess cash flow to meet the debt service

requirements of the first loan. The property

is currently estimated to be worth $110.

Since the loan’s primary source of repayment

remains adequate to service the debt, the

credit remains on accrual basis.

According to institution management’s

estimates, foreclosing on the troubled Main

Street building and selling it would realize

$75, net of brokerage fees and other selling

expenses. However, the institution is

exploring other workout strategies exclusive

of foreclosure. These strategies may mitigate

the amount of loss to the institution. To be

conservative, the institution bases its loss

severity estimate on the foreclosure scenario

tes, foreclosing on the troubled Main

Street building and selling it would realize

$75, net of brokerage fees and other selling

expenses. However, the institution is

exploring other workout strategies exclusive

of foreclosure. These strategies may mitigate

the amount of loss to the institution. To be

conservative, the institution bases its loss

severity estimate on the foreclosure scenario.

If the Central Avenue building continues to

generate sufficient cash flow to service the

loan and maintains its fair market value, the

institution does not expect to incur any loss

on the second loan. Therefore, management

assigns a 5 percent loss severity estimate to

the facility, which is equal to its impairment

estimate for a pool of similar facilities and

borrowers.

Borrower and Facility Ratings: The

borrower is rated default because the one

mortgage is on non-accrual.

The mortgage on the Main Street property

is rated ‘‘moderate loss severity’’ (>5% and

<=30%) because management’s estimate is a

25 percent loss severity. The mortgage on the

Central Avenue property is rated ‘‘low loss

severity’’ (<=5%) because management’s

estimate is a 5 percent loss severity.

Both facilities are included in classified

assets.

Example 5. Loss Recognition

Credit Facility: $100 term loan

Source of Repayment:

Primary: Cash flow from business

Secondary: Security interest in collateral

Collateral: The institution has a blanket

lien on all business assets with an estimated

value of $60.

Situation: The borrower is seriously

delinquent on its loan payments and has

filed for bankruptcy protection. Because the

borrower’s business prospects are poor,

liquidation of collateral is the only means by

which the institution will receive repayment.

Management estimates net realizable value

ranges between $50 and $60. As a result,

management charges off $40 and places the

loan on nonaccrual

on: The borrower is seriously

delinquent on its loan payments and has

filed for bankruptcy protection. Because the

borrower’s business prospects are poor,

liquidation of collateral is the only means by

which the institution will receive repayment.

Management estimates net realizable value

ranges between $50 and $60. As a result,

management charges off $40 and places the

loan on nonaccrual. Management also assigns

a 10 percent loss severity estimate to the

remaining balance, which is equal to its

impairment estimate for a pool of similar

facilities and borrowers.

Borrower and Facility Rating: Since the

borrower’s facility was placed on nonaccrual

and partially charged off, the borrower is

rated default.

After recognizing a loss in the amount of

$40, the facility’s remaining balance is rated

‘‘moderate loss severity’’ (>5% and <30%)

because management’s analysis indicates

impairment of 10 percent of the loan balance.

The loan is included in classified assets.

Example 6. Asset-Backed Loan

Credit Facility: $100 revolving credit

facility, $50 outstanding with $20 available

under the borrowing base

Sources of Repayment:

Primary: Conversion of accounts receivable

Secondary: Liquidation of collateral

Collateral: Accounts receivable from

companies with investment grade external

ratings.

Situation: The borrower manufactures

patio furniture. Because the prices of

aluminum and other raw materials have

increased, the borrower’s profit margin has

compressed significantly. As a result, the

borrower’s financial condition exhibits well-

defined credit weaknesses.

Despite the borrower’s financial weakness,

the financial institution is well-positioned to

recover its loan balance and interest. The

institution controls all cash receipts of the

company through a lock-box and applies

excess funds daily against the loan balance.

The institution also controls the borrower’s

cash disbursements

’s financial condition exhibits well-

defined credit weaknesses.

Despite the borrower’s financial weakness,

the financial institution is well-positioned to

recover its loan balance and interest. The

institution controls all cash receipts of the

company through a lock-box and applies

excess funds daily against the loan balance.

The institution also controls the borrower’s

cash disbursements. The facility has a

borrowing base that allows the borrower to

draw 70 percent of eligible receivables.

Eligibility is based on restrictive

requirements designed to exclude low-

quality or disputed receivables. Management

monitors adherence to the requirements by

conducting periodic on-site audits of the

borrower’s accounts receivable. Management

estimates that the facility is not impaired

because the collateral is liquid and has ample

coverage, the account receivables

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Federal Register / Vol. 70, No. 58 / Monday, March 28, 2005 / Notices

counterparties are highly creditworthy, and

the institution’s management not only has

tight controls on the loan but also has a

favorable track record of managing similar

loans. In the event of the borrower’s

contractual default, the institution’s

management believes that it would recover

sufficient cash to repay the loan within 60

days.

Borrower and Facility Rating: The borrower

is rated weak due to its well-defined credit

weaknesses.

The facility is rated ‘‘remote risk of loss’’

because of institutional management’s

expertise; the facility’s strong controls and

high quality; and the collateral’s liquidity

and ample coverage.

The facility is included in pass assets.

Example 7

ient cash to repay the loan within 60

days.

Borrower and Facility Rating: The borrower

is rated weak due to its well-defined credit

weaknesses.

The facility is rated ‘‘remote risk of loss’’

because of institutional management’s

expertise; the facility’s strong controls and

high quality; and the collateral’s liquidity

and ample coverage.

The facility is included in pass assets.

Example 7. Debtor-in-Possession

Credit Facility: $100 debtor-in-possession

(DIP) facility, $70 outstanding with $10

available

$100 term loan

Sources of Repayment:

Primary: Cash flow from operations

Secondary: Liquidation of collateral

Collateral: The DIP facility is secured by

receivables from several investment grade

companies and underwritten with a

conservative advance rate to protect against

dilution risk.

The term loan is secured by equipment.

Situation: The borrower has filed for

Chapter 11 bankruptcy protection because

the recall of one of the company’s products

has precipitated a substantial decline in

sales. The product liability litigation resulted

in substantial legal expenses and settlements.

Because collecting the term loan in full is

very unlikely, the financial institution’s

management placed the term loan on

nonaccrual prior to the borrower’s

bankruptcy filing. Management estimates the

institution will collect 70 percent to 80

percent on their secured claim under the

borrower’s bankruptcy reorganization plan.

Based on this estimate, management charges

off $20 and estimates impairment of $10 for

the remaining balance. The DIP facility

repaid the pre-petition asset-based line of

credit. Management has expertise in asset-

based lending and strong controls over the

activity.

Borrower and Facility Rating: The borrower

is rated default since one of its facilities was

placed on nonaccrual

ation plan.

Based on this estimate, management charges

off $20 and estimates impairment of $10 for

the remaining balance. The DIP facility

repaid the pre-petition asset-based line of

credit. Management has expertise in asset-

based lending and strong controls over the

activity.

Borrower and Facility Rating: The borrower

is rated default since one of its facilities was

placed on nonaccrual.

The DIP facility is rated ‘‘remote risk of

loss’’ not only because it is secured by high-

quality receivables with ample coverage, but

also because the financial institution’s

management has performed frequent

borrowing-base audits and has strong

controls over cash disbursements and

collections. The term loan is rated ‘‘moderate

loss severity’’ (>5% and <=30%) because

management’s impairment estimate for the

remaining loan balance falls within this

range.

The DIP facility is included in pass assets.

The term loan is included in classified

assets.

Request for Comment

The agencies request comments on all

aspects of the proposed policy statement. In

addition, the agencies also are asking for

comment on a number of issues affecting the

policy and will consider the answers before

developing the final policy statement. In

particular, your comments are needed on the

following issues:

1. The agencies intend to implement this

framework for all sizes of institutions. Could

your institution implement the approach?

2. If not, please provide the reasons.

3. What types of implementation expenses

would financial institutions likely incur? The

agencies welcome financial data supporting

the estimated cost of implementing the

framework.

4. Which provisions of this proposal, if

any, are likely to generate significant training

and systems programming costs?

5. Are the examples clear and the resultant

ratings reasonable?

6. Would additional parts of the framework

benefit from illustrative examples?

7

institutions likely incur? The

agencies welcome financial data supporting

the estimated cost of implementing the

framework.

4. Which provisions of this proposal, if

any, are likely to generate significant training

and systems programming costs?

5. Are the examples clear and the resultant

ratings reasonable?

6. Would additional parts of the framework

benefit from illustrative examples?

7. Is the proposed treatment of guarantors

reasonable?

Please provide any other information that

the agencies should consider in determining

the final policy statement, including the

optimal implementation date for the

proposed changes.

Dated: March 17, 2005.

Julie L. Williams,

Acting Comptroller of the Currency.

Board of Governors of the Federal Reserve

System, March 21, 2005.

Jennifer J. Johnson,

Secretary of the Board.

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, this 18th day of

March, 2005.

Robert E. Feldman,

Executive Secretary.

Dated: March 18, 2005.

By the Office of Thrift Supervision.

James E. Gilleran,

Director.

[FR Doc. 05–5982 Filed 3–25–05; 8:45 am]

BILLING CODE 4810–33–C; 6210–01–C; 6714–01–C;

6720–01–C

DEPARTMENT OF VETERANS

AFFAIRS

[OMB Control No. 2900–0060]

Proposed Information Collection

Activity: Proposed Collection;

Comment Request

AGENCY: Veterans Benefits

Administration, Department of Veterans

Affairs.

ACTION: Notice.

SUMMARY: The Veterans Benefits

Administration (VBA), Department of

Veterans Affairs (VA), is announcing an

opportunity for public comment on the

proposed collection of certain

information by the agency. Under the

Paperwork Reduction Act (PRA) of

1995, Federal agencies are required to

publish notice in the Federal Register

concerning each proposed collection of

information, including each proposed

extension of a currently approved

collection, and allow 60 days for public

comment in response to the notice

for public comment on the

proposed collection of certain

information by the agency. Under the

Paperwork Reduction Act (PRA) of

1995, Federal agencies are required to

publish notice in the Federal Register

concerning each proposed collection of

information, including each proposed

extension of a currently approved

collection, and allow 60 days for public

comment in response to the notice. This

notice solicits comments on information

needed to process beneficiaries claims

for payment of insurance proceeds.

DATES: Written comments and

recommendations on the proposed

collection of information should be

received on or before May 27, 2005.

ADDRESSES: Submit written comments

on the collection of information to

Nancy J. Kessinger, Veterans Benefits

Administration (20M35), Department of

Veterans Affairs, 810 Vermont Avenue,

NW., Washington, DC 20420 or e-mail:

irmnkess@vba.va.gov. Please refer to

‘‘OMB Control No. 2900–0060’’ in any

correspondence.

FOR FURTHER INFORMATION CONTACT:

Nancy J. Kessinger at (202) 273–7079 or

FAX (202) 275–5947.

SUPPLEMENTARY INFORMATION: Under the

PRA of 1995 (Pub. L. 104–13; 44 U.S.C.

3501–3521), Federal agencies must

obtain approval from the Office of

Management and Budget (OMB) for each

collection of information they conduct

or sponsor. This request for comment is

being made pursuant to Section

3506(c)(2)(A) of the PRA.

With respect to the following

collection of information, VBA invites

comments on: (1) Whether the proposed

collection of information is necessary

for the proper performance of VBA’s

functions, including whether the

information will have practical utility;

llection of information they conduct

or sponsor. This request for comment is

being made pursuant to Section

3506(c)(2)(A) of the PRA.

With respect to the following

collection of information, VBA invites

comments on: (1) Whether the proposed

collection of information is necessary

for the proper performance of VBA’s

functions, including whether the

information will have practical utility;

(2) the accuracy of VBA’s estimate of the

burden of the proposed collection of

information; (3) ways to enhance the

quality, utility, and clarity of the

information to be collected; and (4)

ways to minimize the burden of the

collection of information on

respondents, including through the use

of automated collection techniques or

the use of other forms of information

technology.

Titles:

a. Claim for One Sum Payment

(Government Life Insurance), VA Form

29–4125.

b. Claim for Monthly Payments

(National Service Life Insurance), VA

Form 29–4125a.

c. Claim for Monthly Payments

(United States Government Life

Insurance, (USGLI)), VA Form 29–

4125k.

OMB Control Number: 2900–0060.

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