Lending Limits Pilot Program

AGENCY:

Office of the Comptroller of the Currency, Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Office of the Comptroller of the Currency (OCC) is proposing to extend for three years an OCC pilot program that authorizes new, special lending limits for 1-4 family residential real estate loans and small business loans. Under the program, eligible national banks with main offices located in states that have a lending limit available for residential real estate loans or small business loans that is higher than the current Federal limit, may apply to take part in the pilot and make use of the higher limits. The pilot program will expire on June 11, 2004, although national banks approved to participate in the program as of that date may continue to lend under the higher limits until September 10, 2004. While our preliminary analysis indicates that the pilot program has operated in a safe and sound manner, additional experience with the program is needed before we can make a determination to retain, modify, or rescind these special lending limits. Accordingly, the proposal would extend the pilot program for an additional three years. The proposal also seeks comment on expansion or modification of the scope of the current pilot program.

DATES:

Comments must be received by May 24, 2004.

ADDRESSES:

Please designate the OCC in your comment and include the docket number 04-11. Because paper mail in the Washington area and at OCC may be subject to delays, please submit your comments by e-mail or fax whenever possible. 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., Public Reference Room, Mail Stop 1-5, Washington, DC 20219.
• Hand Delivery/Courier: 250 E Street, SW., Attn: Public Reference Room, Mail Stop 1-5, Washington, DC 20219.

Instructions: As a general rule, the OCC will enter all comments received into the docket without change, including any business or personal information that you provide. The Freedom of Information Act (FOIA) protects certain information, such as trade secrets and commercial or financial information from disclosure. You may request, and the OCC may grant, confidential treatment for items of information in your comment that you identify as protected under FOIA.

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 Reference 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 copies of comments that the OCC has received by contacting the OCC's Public Reference Room at foia-pa@occ.treas.gov.
• Docket: You may also request available background documents using the methods described earlier.

FOR FURTHER INFORMATION CONTACT:

Tom O'Dea, National Bank Examiner, Credit Risk, (202-874-5170); Stuart Feldstein, Assistant Director, Legislative and Regulatory Activities Division, (202) 874-5090, Mitchell Plave, Counsel, Legislative and Regulatory Activities Division, (202) 874-5090, or Jonathan Fink, Senior Attorney, Bank Activities and Structure, (202) 874-5300.

SUPPLEMENTARY INFORMATION:

Background

Twelve U.S.C. 84 governs the percentage of capital and surplus that a bank may loan to any one borrower. Section 84 and the OCC's implementing regulations, 12 CFR part 32, permit a national bank to make loans in an amount up to 15 percent of its unimpaired capital and surplus to a single borrower. A national bank may extend credit up to an additional 10 percent of unimpaired capital and surplus to the same borrower if the amount of the loan that exceeds the 15 percent limit is secured by “readily marketable collateral.” Part 32 refers to these lending limits as the “combined general limit.” The statute and regulation also provide other exceptions to, and exemptions from, the combined general limit for various types of loans and extensions of credit.

Section 84 authorizes the OCC to establish lending limits “for particular classes or categories of loans” that are different from those expressly provided by the statute's terms. Effective September 10, 2001, the OCC published a final rule (2001 final rule) to amend part 32 to establish a pilot program with special lending limits for residential real estate loans and small business loans. 66 FR 31114 (June 11, 2001). The purpose of the program was to enable community banks to remain competitive in states that provide their state-chartered institutions with a higher lending limit for these types of loans, while maintaining national bank safety and soundness.

For purposes of the pilot program, a residential real estate loan is a loan secured by a perfected first-lien security interest in one-to-four family real estate in an amount that does not exceed 80 percent of the appraised value of the collateral at the time the loan is made. A small business loan is a loan secured by “nonfarm, nonresidential property” or a “commercial and industrial loan” as those terms are defined in the instructions for preparation of the Consolidated Report of Condition and Income (Call Report), Schedule RC-C, Part 1, 1.e and 4 (rev. 3-03).

The pilot program authorizes eligible national banks to apply for approval to make residential real estate loans and small business loans to a single borrower in addition to amounts that they may already lend to a single borrower under the existing combined general limit and special limits in 12 CFR 32.3(a) and (b). A bank is eligible for the pilot program only if it is well capitalized, as defined in 12 CFR 6.4(b)(1), and has a rating of 1 or 2 under the Uniform Financial Institutions Rating System (UFIRS), with at least a rating of 2 for asset quality and for management. These criteria ensure that only banks with sufficient capital and good managerial oversight are permitted to use the increased limits.

Under the pilot program, an eligible national bank may make residential loans in an additional amount up to the lesser of 10 percent of its capital and surplus, or the percent of its capital and surplus in excess of 15 percent that a state bank is permitted to lend under the state lending limit that is available for residential real estate loans or unsecured loans in the state where the main office of the national bank is located. Similarly, an eligible national bank may make small business loans in an additional amount up to the lesser of 10 percent of capital and surplus or the percent of its capital and surplus in excess of 15 percent that a state bank is permitted to lend under the state lending limit that is available for small business loans or unsecured loans in the state where the main office of the national bank is located. In each case, the bank may not lend more than $10 million to a single borrower under the new authority.

The OCC adopted a number of safeguards that apply to banks using the authority under the pilot program. For example, the amount that a bank may lend under the pilot program's special limits is subject to an individual borrower cap and an aggregate borrower cap. Under the individual borrower cap, the total outstanding amount of a bank's loans to one borrower under 12 CFR 32.3(a) and (b), together with loans made under the program, may not exceed 25 percent of the bank's capital and surplus. The aggregate cap provides that the total outstanding amount of any loan or parts of loans made by a bank to all of its borrowers under the special limits of the pilot program may not exceed 100 percent of the bank's capital and surplus.

A bank must apply and obtain the OCC's approval before it may use the special lending limits. The application includes a certification that the bank is well capitalized and has the requisite ratings, citation to state law on lending limits, a copy of a written resolution by a majority of the bank's board of directors approving the use of the new lending authority, and a description of how the board will exercise its continuing responsibility to oversee the use of this lending authority.

Description of the Proposal

The pilot program is scheduled to expire on June 11, 2004, although national banks approved to participate in the program as of June 11, 2004 can continue to lend under the extended limits until September 10, 2004. The OCC stated in the preamble to the 2001 final rule that prior to the conclusion of the pilot program it would evaluate its experiences and determine whether, and under what circumstances, to extend the program.

As of the end of February 2004, 169 national banks headquartered in 23 states had received approval to participate in the program. The OCC compared the performance of 129 banks that participated in the program to that of comparable state-chartered banks and national banks that did not participate in the program focusing on: (1) Loan portfolio composition; (2) asset quality; (3) liquidity and capital; and (4) differences in interest expense, non-interest expense and profitability indicators between participating banks and their peers. Based on this review, the OCC could not attribute any statistical differences directly to participation in the program. In the OCC's view, banks in the program have not had the additional lending authority for a sufficient period of time for the OCC to assess fully the effects of their participation in the program. In particular, the limited number of banks in the program, and the relatively small number of quarters of data available for review, make reaching a definitive conclusion about the program premature.

For these reasons, this proposal would amend 12 CFR part 32 to continue the pilot program in its current form until June 11, 2007. Banks that receive OCC approval to participate in the program before June 11, 2007, would be authorized to lend under the expanded limits until September 10, 2007, provided that a bank continues to be an “eligible bank” as defined in 12 CFR 32.2(i). Banks already approved under the pilot program need not do anything further to continue their approval.

The OCC invites comment on all aspects of this proposal, including whether to continue the pilot program as proposed and, if it is continued, whether to modify it for the next three-year period. Commenters recommending modifications that would expand the types of loans covered by, or otherwise liberalize the program are encouraged to identify appropriate safeguards to ensure that the changes they propose are consistent with safety and soundness.

Commenters urging the expansion of the pilot program also are asked to describe situations or circumstances in which a higher state lending limit has competitively disadvantaged a national bank in that lending market. For example, in what circumstances has the current scope of the pilot program prevented the bank from making loans?

The part 32 lending limits apply to all loans and extensions of credit made by national banks and their “domestic operating subsidiaries.” The OCC is aware that some national banks control entities authorized by statute (“statutory subsidiaries”) other than operating subsidiaries or financial subsidiaries (e.g., agricultural credit corporations) that make loans that are currently excluded from the part 32 lending limits. The OCC invites comment on the current treatment of such “statutory subsidiaries,” including whether the current treatment provides a means to achieve additional flexibility in agricultural lending, and whether, and if so how, loans by such entities should be included in the scope of the part 32 lending limits.

Solicitation of Comments on Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec. 722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies to use plain language in all proposed and final rules published. We invite your comments on how to make this proposal easier to understand. For example:

• Have we organized the material to suit your needs? If not, how could this material be better organized?
• Are the requirements in the proposed regulation clearly stated? If not, how could the regulation be more clearly stated?
• Does the proposed regulation contain language or jargon that is not clear? If so, which language requires clarification?
• Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes to the format would make the regulation easier to understand?
• What else could we do to make the regulation easier to understand?

Solicitation of Comments on Impact on Community Banks

The OCC adopted the pilot program following a review of our regulations that focused specifically on ways to change the regulations to respond to community bank needs. 66 FR 31114, 31115 (June 11, 2001). The purpose of the review was to explore ways in which our regulations could be modified, consistent with safety and soundness, to reflect the fact that community banks operate with more limited resources, and often different risk profiles, than larger institutions. Our goal was to identify alternative regulatory approaches to minimize the burden on community banks and promote their competitiveness.

The OCC seeks comments on how community banks assess the program and on the impact of the proposal on community banks' current resources and available personnel with requisite expertise. The OCC also seeks comments on whether the goals of the proposal could be achieved, for community banks, through an alternative approach.

Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (RFA) requires Federal agencies either to certify that a proposed rule would not, if adopted in final form, have a significant impact on a substantial number of small entities or to prepare an initial regulatory flexibility analysis (IRFA) of the proposal and publish the analysis for comment. See 5 U.S.C. 603, 605. On the basis of the information currently available, the OCC is of the opinion that this proposal, if adopted in final form, is unlikely to have a significant impact on a substantial number of small entities, within the meaning of those terms as used in the RFA. Commenters are invited to provide the OCC with any information they may have about the likely quantitative effects of the proposal.

Executive Order 12866

The OCC has determined that this proposal is not a significant regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995 Determinations

Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532 (Unfunded Mandates Act), requires that an agency prepare a budgetary impact statement before promulgating any rule likely to result in a Federal mandate that may result in the 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 the agency to identify and consider a reasonable number of regulatory alternatives before promulgating the rule. The OCC has determined that this proposal will not result in expenditures by state, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. Accordingly, the OCC has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered.

Paperwork Reduction Act

The Office of Management and Budget (OMB) has reviewed and approved the collection of information requirements contained in the pilot program under control number 1557-0221, in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). However, because OCC is proposing to extend the pilot program, we invite comment on:

(1) Whether the proposed collection of information contained in this notice of proposed rulemaking is necessary for the proper performance of the OCC's functions, including whether the information has practical utility;

(2) The accuracy of the OCC's estimate of the burden of the proposed information collection;

(3) Ways to enhance the quality, utility, and clarity of the information to be collected;

(4) Ways to minimize the burden of the information collection on the respondents, including the use of automated collection techniques or other forms of information technology; and

(5) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

List of Subjects in 12 CFR Part 32

• National banks
• Reporting and recordkeeping requirements

Authority and Issuance

For the reasons set forth in the preamble, part 32 of chapter I of title 12 of the Code of Federal Regulations is proposed to be amended as follows:

PART 32—LENDING LIMITS

1. The authority citation for part 32 continues to read as follows:

Authority: 12 U.S.C. 1 et seq., 84, and 93a.

2. In § 32.7, paragraphs (c) and (e) are revised to read as follows: