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Federal Reserve Bank
of

Dallas

ROBERT D. McTEER, JR.
DALLAS, TEX AS

PR ES ID EN T

75265-5906

A N D C H IE F E X E C U T I V E O F F I C E R

September 2, 1997

Notice 97-75

TO:

The Chief Executive Officer of each
member bank and bank holding company
in the Eleventh Federal Reserve District

SUBJECT
Request for Public Comment on Proposed
Amendments to the Risk-Based Capital Guidelines
DETAILS
The Board of Governors, along with the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, is requesting
public comment on a proposal to amend its risk-based and Tier 1 leverage capital guidelines for
state member banks and bank holding companies. The proposed amendments address the treat­
ment of servicing assets on both mortgage assets and financial assets other than mortgages.
Under the proposed rule, the amount of mortgage servicing assets includable in
regulatory capital would be increased from 50 to 100 percent. In addition, all non-mortgage
servicing assets would be fully deducted from Tier 1 capital.
The Board must receive comments by October 3, 1997. Please address comments to
William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street
and Constitution Avenue, N.W., Washington, D.C. 20551. All comments should refer to Docket
No. R-0976.
ATTACHMENT
A copy of the interagency notice as it appears on pages 42005-16, Vol. 62, No. 149
of the Federal Register dated August 4, 1997, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

-2-

MORE INFORMATION
For more information, please contact Dorsey Davis at (214) 922-6051. For addi­
tional copies of this Bank’s notice, please contact the Public Affairs Department at (214)
922-5254.
Sincerely yours,

Monday
August 4, 1997

Part III
Department of the Treasury
Office of Comptroller of the Currency
12 CFR Parts 3 and 6

Federal Reserve System
12 CFR Parts 208 and 225

Federal Deposit Insurance
Corporation
12 CFR Part 325

Department of the Treasury
Office of Thrift Supervision
12 CFR Parts 565 and 567
Capital; Risk-Based Capital Guidelines;
Capital Adequacy Guidelines; Capital
Maintenance: Servicing Assets; Proposed
Rule

42005

*

42006

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3 and 6
[Docket No. 97-15]
RIN 1557-AB14

FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-0976]

FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 325
RIN 3064-AC07

DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 565 and 567
[Docket No. 97-67]
RIN 1550-AB11

Capital; Risk-Based Capital
Guidelines; Capital Adequacy
Guidelines; Capital Maintenance:
Servicing Assets
AGENCIES: Office of th e C o m ptroller of
th e C urrency, T reasury; B oard of
G overnors of the F ederal Reserve
System ; F ederal D eposit In su ra n ce
C orporation; an d Office of T hrift
S u perv ision, T reasury.
ACTION: Joint n o tice of p ro p o sed
rulem aking.
SUMMARY: T he Office of th e C om ptroller

of th e C urrency, (OCC), th e B oard of
G overnors of th e F ederal Reserve
S ystem (Board), th e F ed eral D eposit
In su ra n ce C orporatio n (FDIC), a n d the
Office of Thrift S up ervision , (OTS)
(collectively, th e A gencies) p ro p o se to
a m en d th e ir capital ad eq u acy stan d ard s
for banks, b a n k h o ld in g com panies, an d
savings associations (banking
organizations) to ad d ress th e treatm en t
of servicing assets o n b o th m ortgage
assets an d fin an cial assets o th er th a n
m ortgages (non-mortgages). T his
p ro p o se d ru le w as d ev elo p ed in
resp o n se to a rec en t F in an cial
A cco u n tin g S tan d ard s B oard (FASB)
accoun ting sta n d a rd th a t affects
servicing assets; th a t is, S tatem en t of
F in an c ial A cco u n tin g S tan d ard s No.
125, “A ccou nting for T ransfers an d
S ervicing of F in an c ial A ssets an d
E x tingu ishm ents of L iab ilities” (FAS
125), issu e d in June 1996, w h ic h
su p e rse d e d S tatem ent of F in an cial

B uilding (located on F Street), on
A cco untin g S tan d ard s No. 122,
b u sin e ss days b etw e en 7:00 a.m. an d
“A cco u n tin g for M ortgage Servicing
5:00 p.m . (Fax num ber: (202) 898-3838;
R ights” (FAS 122), issu ed in M ay 1995.
In tern et address: com m ents@ fdic.gov).
U n d e r th is p ro p o se d rule, m ortgage
C om m ents m ay b e in sp e cted an d
servicing assets in c lu d e d in regulatory
p h o to c o p ie d in th e FDIC P ublic
c apital w o u ld c o n tin u e to b e subject to
c ertain p ru d e n tia l lim itation s. H ow ever, Info rm atio n Center, Room 100, 801 17th
Street, NW., W ashington, DC, b etw een
th e lim ita tio n on th e am o u n t of
9:00 a.m. an d 4:30 p.m . on b usiness
m ortgage servicing assets (and
p u rc h a se d cre d it card relatio n sh ip s) th a t days.
O TS: S en d com m ents to Chief,
can be recog nized as a p e rc e n t of Tier
D issem in atio n B ranch, Records
1 capital w o u ld b e in creased from 50 to
M anagem ent an d Inform ation Policy,
100 percent. A lso, all non-m ortgage
servicing assets w o u ld be fully d ed u c te d Office of T h rift S up ervision , 1700 G
Street, NW., W ashington, D.C. 20552,
from T ier 1 capital. T he A gencies are
A tte n tio n D ocket No. 9 7-6 7. T hese
req uesting co m m en t on th e regulatory
sub m issio n s m ay be h an d -d e liv e re d to
capital lim itatio n s th a t are being
1700 G Street, N.W. b etw e en 9 a.m. an d
p ro p o se d for servicing assets a n d on
5 p.m . o n b u sin e ss days; th e y m ay be
w h e th e r an y in terest-o n ly strips
receivable sh o u ld be subject to th e sam e sent by facsim ile tran sm issio n to FAX
N u m b er (202) 90 6-7755; or b y e-m ail to
regulatory capital lim itatio n s as
public.info@ ots.treas.gov. T hose
servicing assets.
com m en ting by e-m ail sh o u ld in c lu d e
DATES: C om m ents m u st be receiv ed on
th e ir nam e a n d te lep h o n e n um ber.
or before O ctober 3, 1997.
C om m ents w ill be available for
ADDRESSES: In terested p arties are
in sp e c tio n at 1700 G Street, N.W., from
in v ite d to su b m it w ritte n com m ents to
9:00 a.m. u n til 4:00 p.m . o n b u sin e ss
a n y or all of th e A gencies. A ll com m ents days.
w ill be sh a re d am ong th e A gencies.
FOR FURTHER INFORMATION CONTACT:
OCC: W ritten com m ents sh o u ld be
s u b m itte d to Docket No. 9 7-15,
OCC: G ene Green, D eputy C hief
C o m m u nication s D ivision, N in th Floor,
A cc o u n tan t (202/874-5180); Roger
Office of th e C om p troller of th e
T ufts, S enior E conom ic A dviser, or T om
C urrency, 250 E Street, SW.,
Rollo, N ation al Bank E xam iner, C apital
W ashington, DC 20219. C om m ents w ill
P olicy D ivision (202/874-5070);
be available for in sp e ctio n a n d
M itchell Stengel, S enior F in an cial
p h o to c o p y in g at th a t address. In
E conom ist, Risk A naly sis D ivision (202/
ad d itio n , co m m ents m ay be sent by
874-5431); S aum ya Bhavsar, A ttorney
facsim ile tran sm issio n to FAX n u m b e r
or R onald S h im abu kuro, Senior
(202) 874 -52 74, or b y electronic m ail to
A ttorney (202/874-5090), Legislative
regs.com m ents@ occ.treas.gov.
a n d Regulatory A ctivities D ivision,
Board: C om m ents sh o u ld refer to
Office of th e C om ptroller of th e
Docket No. R -0976, an d m ay be m ailed
Currency.
to W illiam W. W iles, Secretary, B oard of
Board: A rleen Lustig, S upervisory
G overnors of th e F ederal Reserve
F in an c ial A n alyst (202/452-2987),
System , 20th Street a n d C o nstitution
A rth u r W. L indo, S uperv isory F in an cial
A venue, NW., W ashington, DC 20551.
A nalyst, (202/452-2695) or T hom as R.
C om m ents also m ay b e d eliv ered to the
Boem io, S en io r S u perv isory F in an cial
B o ard’s m ail room b etw e en 8:45 a.m.
A nalyst, (202/452-2982), D ivision of
a n d 5:15 p.m . w eekdays, an d to the
B anking S u p erv isio n a n d Regulation.
secu rity co n tro l ro om at all o th e r tim es.
For th e hearing im p aired only,
T he m ail room an d th e secu rity control
T elec o m m u n ic atio n D evice for th e D eaf
roo m are accessible from th e co urtyard
(TDD), D iane Jenkins (202) 4 52-354 4,
en tran ce o n 20th Street b etw een
B oard of G overnors of th e F ederal
C o n stitu tio n A v en u e an d C Street, NW.
R eserve System , 20th an d C Streets,
C om m ents receiv ed w ill be available for NW., W ashington, DC 20551.
FDIC: Fo r su p erv iso ry issues, S tep h e n
in sp e ctio n in Room M P -5 0 0 of th e
G. Pfeifer, E x am in atio n S pecialist, (202/
M artin B uilding b etw een 9:00 a.m. a n d
898-8904), A ccou nting Section,
5:00 p.m . w eekd ay s, except as p ro v id ed
D ivision of S upervision; for legal issues,
in 12 CFR 261.8 of the B o ard ’s Rules
Regarding A vailability of Inform ation.
M arc J. G oldstom , Counsel, (202/898—
FDIC: W ritten com m en ts shall be
8807), Legal D ivision.
O TS: John F. C onnolly, Senior
ad d re ssed to Robert E. F eldm an,
P rogram M anager for C apital Policy,
E xecutive Secretary, A ttention:
S u p erv isio n P olicy D ivision (202/906—
C om m ents/O E S, F ederal D eposit
6465), C hristine S m ith, C apital and
In su ran ce C orporation, 550 17th Street,
NW., W ashington, DC 20429. C om m ents A cco untin g P o licy A nalyst, (2 0 2 /9 0 6 5740), T im o th y J. Stier, C hief
m ay be h a n d d elivered to th e guard
A cco untant, (202/906-5699),
station at th e rear of th e 17th Street

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules
A cco untin g Policy D ivision, or V ern
M cK inley, A ttorney, R egulations an d
L egislation D ivision (202/906-6241),
Office of T hrift S u perv ision, 1700 G
Street, NW., W ashington, DC 20552.
SUPPLEMENTARY INFORMATION:

Background
C apital T rea tm en t o f M ortgage S ervicing
R ig hts P re-FAS 122
P rior to th e issu an ce of FAS 122,
in tangible assets generally w ere
d e d u c te d from cap ital in determ inin g
th e am o u n t of T ier 1 cap ital u n d e r th e
A gencies’ regulatory capital r u le s .1
H ow ever, lim ite d am o u n ts of p u rch a sed
m ortgage servicing rights (PMSRs) an d
p u rc h a se d cre d it c a rd rela tio n sh ip s
(PCCRs) w ere allo w ed in T ier 1 c a p ita l.2
T he aggregate am o u n t of PMSRs an d
PCCRs th a t co u ld b e reco gnized for
regu lato ry cap ital p u rp o ses c o u ld n o t
exceed 50 p e rc e n t of T ier 1 capital, w ith
PCCRs subject to a fu rther su b lim it of 25
p erc en t of T ier 1 capital. In ad dition,
PM SRs an d PCCRs w ere each subject to
a 10 p e rc e n t “ h a irc u t” th a t p erm itte d
o nly th e lo w er of book v alu e or 90
p e rc e n t o f fair m ark et v alu e to be
in c lu d e d in T ier 1 capital. T his h airc u t
is req u ired for PMSRs u n d e r section 475
of th e F ederal D eposit In su ran ce
C orporation Im p ro v em en t A ct of 1991
(12 U.S.C. 1828 n o te ) (Decem ber 19,
1991)).
T he reg ulatory capital trea tm e n t of
servicing rights p rio r to th e issu an ce of
FAS 122 specified a trea tm e n t for
PMSRs b u t n o t for originated mortgage
servicing rights (OMSRs) or servicing
rights on loans o th er th a n mortgages
b ecau se generally ac cep ted ac coun ting
p rin c ip le s (GAAP), at th a t tim e, d id n o t
p e rm it in stitu tio n s to boo k OMSRs n o r
d id it generally allow in stitu tio n s to
bo ok servicing rights o n o th er assets.
F urtherm ore, GAAP b ased th e
acco u n tin g for servicing rights o n a
d istin c tio n b etw e en n o rm al servicing
fees a n d excess servicing fe e s.3
1For OTS purposes, Tier 1 capital is the same as
core capital.
2 Servicing rights are the contractual obligations
undertaken by an institution to provide servicing
for loans ow ned by others, typically for a fee.
PMSRs are mortgage servicing rights that have been
purchased from other parties. The purchaser is not
the originator of the mortgage. Originated mortgage
servicing rights, on the other hand, generally
represent the servicing rights acquired w hen an
institution originates mortgage loans and
subsequently sells the loans but retains the
servicing rights. Under the accounting standards
that were in effect prior to FAS 122, mortgage
servicing rights w ere characterized as intangible
assets.
3 A norm al servicing fee was defined as a
servicing fee that was representative of servicing
fees most com m only used in com parable servicing
agreements covering sim ilar types of loans. Excess
servicing fees arose only w hen a banking

A lth o u g h GAAP p erm itte d excess
servicing fees receivable (ESFRs) to be
reco gnized as assets, for regulatory
reporting pu rp o ses, ban ks generally
w ere allo w ed to book o nly ESFRs on
first lien, one-to four-fam ily resid e n tia l
mortgages. T he A gencies d id n o t allow
bank s to book ESFRs on any other loans
and, th u s, these ESFRs w ere also
effectively ex c lu d e d from cap ital for
regulatory reporting a n d regulatory
c apital p u r p o s e s .4
F A S 122 a n d th e Interim R u le
In M ay 1995, FASB issu ed FAS 122,
w h ic h e lim in ate d th e GAAP d istin ctio n
b etw een OMSRs an d PMSRs an d
req u ired th a t these assets, together
k n o w n as m ortgage servicing rights
(MSRs), be trea te d as a single asset for
financial statem en t purp o ses, regardless
of h o w th e servicing rights w ere
acquired. U n d er FAS 122, OMSRs a n d
PMSRs are trea te d th e sam e for
reporting, v aluation , a n d d isclosu re
p u rp o s e s .5 T h e GAAP accou nting
trea tm e n t of ESFRs w as n o t changed by
FAS 122.
T he A gencies a d o p te d th e FAS 122
sta n d ard for regulatory rep ortin g
p u rp o ses a n d th e n issu ed an interim
ru le on th e regulatory cap ital trea tm e n t
of MSRs (60 FR 39226, A ug ust 1, 1995),
w ith a req u e st for p u b lic com m ent. T he
in terim rule, w h ic h becam e effective
u p o n p u b licatio n , a m e n d e d th e
A g en cies’ capital adequacy sta n d ard s to
treat OMSRs in the sam e m a n n er as
PMSRs for regulatory capital purpo ses.
U n d er th e in terim rule, th e total of all
MSRs (i.e., PMSRs a n d OMSRs), w h e n
co m b in ed w ith PCCRs, th a t can be
in c lu d e d in regulatory ca p ita l ca n n o t
exceed 50 p erc en t of T ier 1 capital. In
ad d itio n , th e in terim ru le ex ten d e d the
10 p erc en t h a irc u t to all MSRs. T he
in terim ru le d id n o t am en d an y other
elem ents of th e A gencies’ capital r u le s .6
organization sold loans bu t retained the servicing
and received a servicing fee that was in excess of
a norm al servicing fee. Excess servicing fees
receivable were the present value of the excess
servicing fees and were reported on the in stitution’s
balance sheet. GAAP continued to differentiate
betw een norm al and excess servicing fees un til FAS
125 was im plem ented in January 1997.
4 Bank holding com panies and thrift institutions,
however, w ere allowed to report ESFRs for
regulatory reporting purposes and recognize all
ESFRs in capital in accordance w ith existing GAAP.
5 Among other things, FAS 122 im posed valuation
and im pairm ent criteria, based on the stratification
of MSRs by their p redom inant risk characteristics.
In addition, FAS 122 elim inated the intangible asset
reference that prior GAAP applied to MSRs and
stated that the characterization of MSRs as either
intangible or tangible was unnecessary because
sim ilar characterizations are not applied to most
other assets.
6 Thus, PCCRs continued to be subject to the 25
percent of Tier 1 capital sublimit.

42007

A m ajority of th e com m enters
o p p o se d th e in terim r u le ’s capital
lim itation s. S everal com m enters stated
th a t th e capital lim itation s ign ored the
in c re ase d m ark etab ility of MSRs, w h ile
others asserted th a t FAS 122’s v alu atio n
a n d im p airm e n t req u irem en ts for MSRs
w ere conservative, th ereb y p ro vid in g
safeguards against th e risks associated
w ith th ese assets. T h ey b eliev ed th at
FAS 122’s strin gen t v alu atio n an d
im p a irm e n t sta n d ard s (low er o f cost or
m arket [LOCOM] o n a stratum -bystratu m basis) p re c lu d e d th e n ee d for
arbitrary regulatory capital lim its. In
ad d itio n , w h ile acknow ledging th a t the
10 p e rc e n t h a irc u t is req u ired by statute
for PMSRs, com m en ters ad vocated a
legislative change to elim in ate it. If
cap ital lim ita tio n s on MSRs are
retain ed , m o st com m enters agreed th at
d isallo w ed MSRs, i.e., th ose that
exceeded 50 p e rc e n t of T ier 1 capital,
sh o u ld be d ed u c te d from T ier 1 capital
o n a basis th a t is n e t of any associated
d eferred tax liability.
F A S 125
In June 1996, FASB issu ed FAS 125,
w h ic h becam e effective for all transfers
a n d servicing of financial assets on or
after Jan uary 1, 1997. FAS 125 requires
th e reco rd in g of servicing o n all
financial assets th a t are serviced for
others, in c lu d in g loans o th er th a n
m ortgages.7
FAS 125 elim in ates th e d istin ctio n
b etw e en n o rm al servicing fees a n d
excess servicing fees an d reclassifies
th e se cash flow s into tw o n e w ty p es of
assets: (a) Servicing assets, w h ic h are
m e asu red b ased on co ntractually
specified servicing fees; a n d (b) interesto n ly (I/O) strip s receivable, w h ic h
reflect rights to futu re in terest incom e
from th e serviced assets in excess o f the
co n tractu ally specified servicing fees. In
ad d itio n , FAS 125 req u ires I/O strips
a n d o th er fin an cial assets th a t can be
co n tractu ally p re p a id or o therw ise
settled in su c h a w ay th a t th e h o ld e r
w o u ld n o t recover su b stan tially all of its
rec o rd e d in v e stm e n t (including loans,
other receivables, a n d reta in e d interests
in securitizations) to b e m e asu red at fair
v alu e like d eb t secu rities th a t are
classified as available-for-sale or trading
secu rities u n d e r FASB S tatem ent No.
115, “A cco unting for C ertain
In v estm ents in D ebt a n d Equity
S ecu rities” (FAS 115).
7 In a press release issued on December 18, 1996,
the Federal Financial Institutions Examination
Council (FFIEC) issued interim guidance for the
regulatory capital treatm ent of servicing assets
u nder the Agencies’ existing capital standards,
which, after the effective date of FAS 125, will
rem ain in effect until the Agencies issue a final rule
on servicing assets.

42008

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

U n d er FAS 125, organizations are
req u ired to recognize separate servicing
assets (or liabilities) for th e contractu al
obligation to service fin an cial assets
(e.g., m ortgage loans, credit card
receivables) th a t th e en tity h as eith er
so ld or se cu ritiz ed w ith servicing
retain ed . In ad d itio n , servicing assets (or
liabilities) th a t are p u rc h a se d (or
assum ed) as p a rt of a separate
tran sa ctio n m u st also be recognized.
H ow ever, no servicing asset (or liability)
n e e d be reco gnized w h e n an
organ izatio n securitizes assets, retain s
all of th e resu ltin g securities, an d
classifies th e securities as held-tom a tu rity in acco rd an ce w ith FAS 115.
U n d er FAS 125, th e existence of a
servicing asset (or liability) is b a s e d on
rev en u es a servicer w o u ld receive for
perform ing th e servicing. A servicing
asset is rec o rd e d for a con tract to service
financial assets u n d e r w h ic h the
estim a te d future reven ues from
co n tractu ally specified servicing fees,
late charges, an d o th er an cillary
rev e n u es (such as “ float”) are ex pected
to m o re th a n ad e q u ately co m p en sa te the
servicer for perform ing th e se rv ic in g .8
H ow ever, am o u n ts rep rese n tin g rights to
future in terest incom e from serviced
assets in excess of co n tractu ally
specified servicing fees are n o t treated
as servicing assets u n d e r FAS 125 since
th e rig h t to th is excess fu tu re in terest
inco m e does n o t d e p e n d on th e
servicing w o rk being satisfactorily
perfo rm ed a n d rem ain in g w ith the
servicer. Rather, th e se am o u n ts are
trea te d as fin an cial assets, effectively, 1/
O strip s receivable.
FAS 125 also a d o p ts th e v alu atio n
a p p ro a c h estab lish ed b y FAS 122 for
determ in in g th e im p a irm e n t of m ortgage
servicing assets (MSAs) an d ex ten d s th is
ap p ro a ch to all o th e r servicing assets,
i.e., servicing assets o n fin an cial assets
other th a n m ortgages.
Proposed Am endm ents to the Capital
Adequacy Standards
O verview
T he A gencies are p ro p o sin g to
increase the am o u n t of M SAs th a t can
be recogn ized for regulatory capital
p u rp o se s.9 H ow ever, u n d e r th is
8 FAS 125 defines contractually specified
servicing fees as all am ounts that, per contract, are
due to the servicer in exchange for servicing a
financial asset and w ould no longer be received by
a servicer if the beneficial owners of the serviced
assets or their trustees or agents were to shift the
servicing to another servicer.
9 For regulatory capital purposes, a mortgage
servicing asset is a servicing asset that results from
a contract to service mortgages (as defined in the
Reports of Condition and Income for commercial
banks and FDIC-supervised savings banks, Thrift
Financial Report (TFR) for savings associations, and

propo sal, servicing assets on financial
assets o th e r th a n m ortgages w o u ld
c o n tin u e to be d e d u c te d from T ier 1
capital. T he A gencies are also seeking
co m m en t on w h e th e r I/O strips
receivable th a t are n o t in th e form of a
secu rity (w h eth er h e ld by th e servicer or
p u rc h a se d from an o th er organization)
sh o u ld be su bject to th e capital
lim ita tio n s im p o sed on servicing assets.
In th is p ro p o sal, co n sisten t w ith the
in te rim capital g u id an ce a n n o u n c e d by
th e FFIEC in its D ecem ber 1996 press
release, th e A gencies h av e c h o sen to use
FAS 125 term ino log y w h e n referring to
servicing assets an d fin an cial assets in
th e b elief th a t th e a d o p tio n of th e sam e
term s for regulatory p u rp o ses w o u ld
re d u c e th e b u rd e n of hav ing to m a in ta in
tw o sets of d efin itio n s—on e for cap ital
p u rp o ses a n d a n o th er for financial
rep o rtin g p u r p o s e s .10
C apital L im ita tio n fo r M ortgage
Servicin g A sse ts
T his p ro p o sal w o u ld subject all M SAs
to a 100 p erc en t of T ier 1 capital
lim ita tio n a n d to a 10 p erc en t o f fair
valu e h a irc u t.11 T he 10 p erc en t h airc u t
a p p lie d to all M SAs im po ses som e
safeguards o n th e am o u n t of M SAs th at
can be in c lu d e d in T ier 1 capital
calcu latio n s an d , n o tw ith sta n d in g the
v a lu a tio n a n d im p a irm e n t sta n d ard s in
FAS 122 a n d FAS 125, p ro v id es a
greater level of su p erv iso ry com fort that
add resses co ncern s abou t th e risks (e.g.,
th e se assets are p o te n tia lly vo latile due
to in terest rate a n d p rep a y m en t risk)
in v o lv ed in h o ld in g th e se assets.12
T he A gencies p ro p o se to reta in a
capital lim ita tio n o n M SAs b ased on a
percentage of T ier 1 capital to m in im ize
b anking o rg an izatio n s’ relian ce on these
M SAs as p a rt o f th e o rg an izatio n s’
regulatory capital base. Excessive
co n cen tratio n s in th e se assets co uld
p o te n tia lly h ave an adverse im p act on
b a n k capital. T he A gencies, how ever,
Consolidated Financial Statem ents (FR Y-9C) for
bank holding companies).
10The Agencies’ regulatory reports (Reports of
Condition and Income for commercial banks and
FDIC-supervised savings banks, Thrift Financial
Report (TFR) for savings associations, and
Consolidated Financial Statements (FR Y-9C) for
bank holding companies) also reflect FAS 125
definitions for the reporting of servicing assets
beginning w ith the first quarter of 1997.
11PCCRs w ould also continue to be subject to the
10 percent of fair value haircut.
12 For purposes of determ ining the am ount of
servicing assets on financial assets (mortgage loans
and other financial assets) that w ould be deducted
(or disallowed) under this proposal, organizations
may choose to reduce their otherwise disallowed
servicing assets by the am ount of any associated
deferred tax liability. Any deferred tax liability used
in this m anner w ould not be available for the
organization to use in determ ining the am ount of
n et deferred tax assets that m ay be in cluded for
purposes of Tier 1 capital calculations.

pro p o se to increase th e capital
lim ita tio n so th a t th e am o u n t of MSAs,
w h e n co m b in ed w ith PCCRs, th a t can be
in c lu d e d in capital can equ al no m ore
th a n 100 p e rc e n t of T ier 1 capital. T he
A gencies believe th a t a hig h er lim it is
m ore reaso nable in light of th e m ore
specific ac co untin g g u id an ce in FAS
125 for th e v alu atio n a n d im p airm e n t of
servicing assets. M oreover, th e A gencies
believe th a t som e ban k in g organizations
w ill ex ceed th e c u rren t 50 p e rc e n t of
Tier 1 capital lim ita tio n d u e o n ly to
changes in th e ac co untin g for servicing
contracts b ro u g h t about by FAS 122 an d
FAS 125.
Capital T rea tm en t o f S ervicing A sse ts
on F in an cia l A sse ts O ther T han
M ortgages (Non-M ortgage S ervicing
A sse ts)
T he A gencies pro p o se to d e d u c t from
T ier 1 cap ital all non-m ortgage servicing
a s s e ts .13 A lth o u g h th e A gencies
recognize th a t th e m arkets for servicing
assets for som e typ es of fin an cial assets
other th a n mortgages are grow ing, these
m arkets are n o t as d ev elo p ed as the
m ortgage servicing m arket. T herefore,
th e A gencies p ro p o se to fully d ed u c t
non-m ortgage servicing assets from
capital b ecau se of co ncerns th a t th e
m arkets for th e se assets m ay n o t yet be
of sufficient d e p th to p ro v id e liq u id ity
for these assets. In ad d itio n , th e
A gencies are u n c e rta in w h e th e r th e fair
valu es of th e se servicing assets can be
d eterm in e d w ith a h ig h degree of
reliab ility a n d p redictability. Therefore,
at th is tim e, th e A gencies p ro p o se to
ex c lu d e th e se assets from T ier 1
c a p ita l.14
S u m m a r y o f P roposed C apital
A m endm ent
T he A gencies are p ropo sin g tw o
alternatives (alternative A an d
altern ativ e B), w h ic h are d escrib ed
below , to revise th e ir ca p ita l adequacy
sta n d ard s for servicing assets. T hese
alternatives p ro v id e different treatm ents
of I/O strips receivable. M oreover, th e
p ro p o sed alternatives do n o t reflect all
d ed u c tio n s (e.g., th e d isa llo w e d am o u n t
of d eferred tax assets an d n e t u n rea liz ed
losses on available-for-sale equity
13 Originated servicing rights on financial assets
other than mortgages w ere not booked as balance
sheet assets u nd er pre-FAS 125 GAAP. However,
for regulatory reporting purposes, banks prior to
1997 were perm itted to indirectly recognize ESFRs
on certain governm ent-guaranteed small business
loans, and thrifts and bank holding companies
booked ESFRs on financial assets other than
mortgages in accordance w ith GAAP. Under FAS
125, these ESFRs have been reclassified as either
servicing assets or I/O strips receivable, depending
on w hether the assets are part of the “ contractually
specified servicing fee,” as that term is defined in
FAS 125.
14 See footnote 12.

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules
secu rities w ith rea d ily d eterm in able fair
values) th a t are re q u ire d w h e n
organizations calculate th e ir T ier 1
capital ratios. T he regulatory capital
lim itatio n s u n d e r th is p ro p o sal can be
su m m arize d as follows:
(a) S ervicing assets a n d PCCRs th at
are in c lu d ab le in capital are each
subject to a 90 p erc en t of fair value
lim ita tio n (also k n o w n as a “ 10 p ercen t
h a irc u t” ) . 15
(b) M SAs an d PCCRs m u st be less
th a n or equal to 100% of T ier 1 c a p ita l16
(c) PCCRs m u st be less th a n or equal
to 25% of T ier 1 capital.
(d) N on-m ortgage servicing assets an d
all intan gib le assets (other th a n
qualifying PCCRs) m u st be d e d u c te d
from T ier 1 capital.
U n d er altern ativ e A, I/O strips
(w heth er or n o t in th e form of securities)
w o u ld n o t be subject to an y regulatory
capital lim it. U n d er altern ativ e B, I/O
strip s receivable n o t in security form
(w heth er h e ld b y th e servicer or
p u rc h a se d from a n o th er organization)
w o u ld be subject to th e sam e capital
lim ita tio n th a t is a p p lie d to the
co rresp o n d in g ty p e of servicing assets.
T h at is, if th e I/O strips receiv ab le are
rela te d to m ortgages, th e y w o u ld be
co m b in ed w ith M SAs an d th e co m b in ed
am o u n t w o u ld be subject to th e 100
perc en t of T ier 1 capital lim itation ; if
th e I/O strips are related to financial
assets other th a n mortgages, th e y w o u ld
be d ed u c te d from T ier 1 c a p ita l.17
F urth erm ore, th e I/O strips receivable
subject to th e T ier 1 cap ital lim ita tio n
w o u ld also be subject to th e 10 p ercen t
haircu t. In all o th er respects,
alternatives A an d B are identical. The
p ro p o se d ru les attac h ed to this
d o c u m e n t reflect altern ativ e A.
T he A gencies are req uesting pu blic
co m m en t on w h e th e r to a d o p t
altern ativ e A or B for regulatory cap ital
p u rposes. T he A gencies also are seeking
co m m en t o n w h e th e r to ex ten d the
cap ital lim ita tio n im p o sed on servicing
assets (mortgage an d non-m ortgage) to
15If some or all types of non-mortgage servicing
assets are includable in capital in the final rule,
they w ould m ost likely be subject to the 90 percent
of fair value limitation.
16A m ounts of MSAs and PCCRs in excess of the
am ounts allowable m ust be deducted from Tier 1
capital.
17 Under either alternative A or B, I/O strips that
take the form of mortgage-backed securities are
subject to the provisions of the Agencies’
Supervisory Policy Statem ent on Securities
Activities (57 FR 4029, February 3,1992). They are
not, however, subject to any Tier 1 capital
limitations. I/O strips receivable that arise in sales
and securitizations of assets, w hich use this
receivable as a credit enhancem ent, are considered
asset sales w ith recourse under the A gencies’ riskbased capital standards. Such I/O strips w ould be
treated like other recourse obligations under the
Agencies’ capital rules and w ould not be subject to
the capital lim itations for servicing assets.

in c lu d e certain o th er n o n -secu rity
fin an cial in stru m en ts, su c h as loans,
other receivables, or o th er reta in e d
in terests in secu ritizations, th a t can be
co n tractu ally p re p a id or otherw ise
settled in su c h a w ay th a t th e h o ld e r
w o u ld n o t recover su b stan tially all of its
rec o rd e d investm ent.
Som e reasons in su p p o rt of am ending
th e capital ad eq u acy sta n d ard s to reflect
alternative A, w h ic h w o u ld n o t subject
I/O strip s receivable to a T ier 1 cap ital
lim itatio n , are:
(1) I/O strip s receivable n o t in
secu rity form are sim ilar in econom ic
su bstance to I/O strip securities. T hese
I/O strips receivable sh o u ld be treated
in a m a n n e r c o n siste n t w ith th e m a n n er
in w h ic h th e A gencies treat I/O strip
secu rities a n d n o t be subject to capital
lim ita tio n s.18 M oreover, b ecau se th e re is
in su fficien t data on th e se n e w financial
assets, th e A gencies sh o u ld not, at this
tim e, im p o se capital lim its on these n ew
fin an cial assets. Rather, th e A gencies
sh o u ld let the m ark et d ev elop before
assessing w h e th e r any regulatory
lim itatio n s are w arranted.
(2) C ertain I/O strips receivable on
cre d it card receivables w o u ld likely be
subject to a risk-based capital charge
u n d e r th e reco u rse ru les estab lish ed by
th e A gencies b ecause th e se I/O strips
receivable, w h ic h generally act as cred it
e n h a n ce m e n ts for th e cre d it card assetbacked securities sold, w o u ld fu nction
as recourse. T h us, th e risk-based capital
ru les for “ assets so ld w ith rec o u rse”
w o u ld a p p ly to th e se I/O strips
receivable.
(3) U n d er FAS 125, th e cash flows
u n d erly in g th e I/O strip s receivable n o t
in secu rity form actually possess
characteristics th a t are m o re sim ilar to
I/O strip securities th a n to ESFRs
b ecau se th e h o ld e r of a n o n -secu rity 1/
O strip receivable retain s th e rights to
th e I/O strip cash flow s even i f the
u n d erly in g servicing (and th e related
servicing asset) is shifted aw ay from the
servicer (if, for exam ple, th e servicer
fails to p erfo rm in acco rdance w ith th e
servicing contract). T h us, I/O strips
receivable n o t in security form sh o u ld
b e treated sim ilarly to I/O strip
securities, w h ic h are n o t subject to
regu lato ry capital lim itations.
(4) T h e am o u n t of I/O strips
receivable recog nized by banking
organizations m ay be lim ited. For
exam ple, th e d isc ip lin e im p o sed b y the

42009

w ell-d e v elo p ed m ortgage m arkets m ay
m in im iz e th e am o u n ts re ta in e d b y the
servicers above th e co n tractu ally
specified servicing fee am ount.
Som e reasons in su p p o rt of am en d in g
th e capital ad eq uacy sta n d ard s to reflect
altern ativ e B, w h ic h lim its th e am o u n t
of I/O strips receivable n o t in security
form th a t can be in c lu d e d in T ier 1
capital, are:
(1) I/O strip s receivable n o t in
security form are n o t ra te d an d are n o t
registered. Rather, th e y are relativ ely
n ew fin an cial assets, w h ic h are
recog nized o n th e b alan c e sheet in
resp o n se to th e rec en tly issu ed FAS 125,
an d for w h ic h an active, liq u id m arket
does n o t c u rren tly exist. In contrast, 1/
O strips receivable th a t are registered
secu rities h av e an id en tifiab le m ark et
a n d are rea d ily salable. S ince th e m arket
for these n ew ly -created I/O strips
receivable is n o t c u rren tly w elldev eloped, accurate, d ep e n d ab le
in fo rm atio n on th e fair v alu e of such
assets m ay n o t be read ily available or
m ay be difficult to ascertain.
(2) I/O strip s receivable n o t in
secu rity form arising from servicing
activities sh o u ld receive a no less
restrictive capital trea tm e n t th a n the
trea tm e n t afforded to th e servicing asset
itself b ecau se servicing assets a n d th e 1/
O strips receivable b o th arise from th e
sam e activity a n d are subject to sim ilar
p rep a y m en t risk.
(3) If I/O strip s receivable reta in e d by
th e servicer are n o t subject to th e sam e
cap ital lim ita tio n as th e ir related
servicing assets, ban kin g organizations
m ay be in c lin e d to avoid capital
lim itatio n s b y negotiating contracts th a t
m in im iz e co n tra ctu ally specified
servicing fees, th ereb y enabling th e m to
classify m o re of th e cash flow s as I/O
strip s receivable. T his w o u ld u n d ersta te
th e servicing assets and, th u s, m in im ize
th e effectiveness of an y cap ital
lim itation.
(4) T he econom ic sub stan ce of
servicing tran sa ctio n s rem ains
u n ch an g ed . U n d er FAS 125, the cash
flow s of th e se tran sa ctio n s h av e sim p ly
been reclassified into n e w assets su c h as
I/O strips receivable. T he risks
associated w ith th e servicing assets an d
th e I/O strips receivable have not
changed.
Tangible Equity

T he d efin itio n of tangible equity
fo u n d in each A gency’s reg u latio n for
P ro m p t Corrective A ctio n w o u ld be
18 I/O strips from mortgage-backed securities that
revised to conform to th e changes m ad e
are currently h eld by banks and thrifts are subject
in th e p ro p o se d rule, i.e., th e term
to the “high-risk test” in the Agencies” Supervisory
Policy Statem ent on Securities Activities (57 FR
“ mortgage servicing rig h ts” w o u ld be
4029, February 3, 1992). That policy statem ent has,
re n a m e d “m ortgage servicing assets” to
in the past, lim ited a depository in stitution’s ability
reflect th e FAS 125 co n c ep tu al changes
to hold I/Os because they typically are “high-risk”
for m easu rin g servicing. No other
mortgage securities.

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Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

changes to th e d efin itio n of tangible
eq u ity are p ro p o se d at th is tim e .19
Request for Public Comment
T he A gencies in v ite com m ents on all
aspects of th ese p ro p o sed changes. In
p articu lar, th e A gencies seek com m ents
from in tereste d p arties on th e follow ing:
1. H ow read ily d eterm in ab le are fair
valu es of m ortgage servicing assets an d
non-m ortgage servicing assets (e.g.,
cre d it card servicing assets)? Please
describe th e existing m etho dolog ies an d
m ark et m e ch a n ism s u se d by yo ur
organizatio n for d eterm in in g fair values
for servicing assets.
2. G iven th e su p erv iso ry concerns
regarding th e reliab ility of th e v alu atio n
of servicing assets a n d th e po te n tia l
v o la tility in th e fair valu e of these
assets, sh o u ld lim its be re ta in e d o n the
am o u n t of servicing assets th a t is
recogn ized for regulatory cap ital
pu rpo ses?
a. W hat aggregate lim it, if any, sh o u ld
a p p ly to th e m a x im u m am o u n t of
m ortgage servicing assets a n d PCCRs
th a t m ay be recogn ized for regulatory
capital p urp oses?
b. To w h a t extent sh o u ld servicing
assets o n non-m ortgage fin an cial assets
be in c lu d e d in regulatory capital?
c. S h o u ld non-m ortgage servicing
assets a n d I/O strip s receivable (if
trea te d sim ilarly to non-m ortgage
servicing assets) be subject to th e sam e
25 p e rc e n t su b lim it a n d h a irc u t as
PCCRs?
3. W hat ty pes of assets sh o u ld be
subject to regulatory capital lim itatio n s
u n d e r th is rule?
a. S h o u ld I/O strips receivable n o t in
secu rity form b e subject to th e sam e
c apital lim itatio n s as servicing assets?
b. If alternative B is a d o p ted , sh o u ld
th e d efin itio n of I/O strip s receivable
th a t are subject to capital lim itatio n s be
e x p a n d e d to in c lu d e all fin an cial assets
n o t in secu rity form th a t ca n be
co n tractu ally p re p a id or o therw ise
settled in su c h a w ay th a t th e h o ld e r
w o u ld n o t recover su b stan tially all of its
rec o rd e d in v e stm e n t as d escrib ed u n d e r
FAS 125? T hese assets w o u ld in c lu d e
loans, other receivables, an d o ther
re ta in e d in terests in secu ritizatio n s th at
m e et th is con ditio n. Please p ro vide
su p p o rtin g in fo rm atio n o n th e n a tu re of
these n o n -secu rity fin an cial assets w ith
significant p re p a y m e n t risk.
4. For w h at ty p es of financial assets
(other th a n loans se cu red b y first liens
o n 1- to 4-fam ily resid e n tia l properties)
does y o u r organ ization c u rren tly book
19 The OTS is proposing to make an additional
technical clarification to its definition of tangible
equity in 12 CFR 565.2(f) that w ould conform the
OTS rule to this proposal and elim inate th e double
deduction of disallowed mortgage servicing assets.

servicing assets a n d /o r I/O strips
receivable? H ow w ill th is change in the
fu tu re for y o u r organization?
5. In light of FAS 125 an d this
pro p o sal, w h a t sh o u ld be th e cap ital
trea tm e n t for am o u n ts p rev io u sly
desig n ated as ESFRs for finan cial
rep o rtin g p u rp o ses (if y our organization
still m a in ta in s th is b rea k d o w n for
in co m e tax or o th er p u rpo ses) h e ld by
b anking organizations?
6. W h at effect, if any, sh o u ld efforts
to hedg e th e M SA portfolio h av e on the
M SA regu latory capital lim itations?
7. S h o u ld servicing assets th a t are
d isa llo w e d for regulatory capital
p u rp o ses b e d e d u c te d o n a b asis th a t is
n e t of any associated deferred tax
liability?
Regulatory Flexibility Act A nalysis
OCC R egulatory F lexib ility A c t
P u rsu a n t to section 605(b) of th e
Regulatory F lexib ility Act, th e
C om ptroller of th e C urren cy certifies
th a t th is p ro p o se d ru le w o u ld n o t have
a significant econom ic im p act on a
su b stan tial n u m b e r of sm all en tities in
accord w ith th e sp irit a n d p u rp o ses of
the Regulatory F lexib ility A ct (5 U.S.C.
601 et seq.). A ccordingly, a regulatory
flexibility analy sis is n o t req uired . The
a d o p tio n of th is p ro p o sal w o u ld red uce
th e regu lato ry b u rd e n of sm all
b u sin e sse s by aligning th e term ino lo gy
in th e cap ital ad eq u acy sta n d ard s m ore
closely to n ew ly -issu ed generally
ac ce p te d acco u n tin g p rin c ip le s an d by
relax ing th e capital lim ita tio n on
m ortgage servicing assets. T he econom ic
im p a c t of th is p ro p o se d ru le o n banks,
regardless of size, is ex p ected to be
m inim al.
B oard R eg u la to ry F le xib ility A c t
P u rsu a n t to sectio n 605(b) of th e
R egulatory F lexib ility Act, th e B oard
does n o t b eliev e th a t th is p ro p o se d ru le
w o u ld h av e a significant econom ic
im p act on a su b stan tial n u m b e r of sm all
en tities in accord w ith th e sp irit an d
p u rp o ses of th e R egulatory F lexibility
A ct (5 U.S.C. 601 et seq.). A ccordingly,
a regu lato ry flexibility analysis is n o t
requ ired . T he effect of th is p rop osal
w o u ld be to red u c e th e regulatory
b u rd e n of b an k s a n d b an k ho ld in g
co m panies by aligning th e term inology
in th e cap ital ad eq u acy g uid e lin e s m ore
closely to n ew ly -issu ed generally
ac ce p te d acco u n tin g p rin c ip le s a n d by
relaxing th e capital lim ita tio n on
m ortgage servicing assets. In ad d itio n,
b ecau se th e risk-based an d leverage
cap ital g u id elin es generally do n o t
ap p ly to b an k h o ld in g co m p an ies w ith
co n so lid a ted assets of less th a n $150

m illion, th is p ro p o sal w ill n o t affect
su ch com panies.
FDIC R egu la tory F lexib ility A c t
P u rsu a n t to sectio n 605(b) of th e
R egulatory F lexibility A ct (Pub. L. 9 6 354, 5 U.S.C. 601 et seq.), it is certified
th a t th is p ro p o se d ru le w o u ld n o t have
a significant econ om ic im p act o n a
su b stan tial n u m b e r of sm all entities.
A ccordingly, a reg ulatory flexibility
analysis is n o t req uired . T he
a m e n d m e n t concerns capital
req u irem en ts for servicing assets h eld
by d ep o sito ry in stitu tio n s of an y size.
T he effect o f th e p ro p o sal w o u ld be to
red u c e reg ulato ry b u rd e n o n dep ository
in stitu tio n s (in clu d in g sm all businesses)
by aligning th e term inology u se d in the
ca p ita l adequacy g u id e lin e s m ore
closely to n ew ly -issu ed generally
accep ted acco u n tin g p rin cip les a n d by
relaxing th e capital lim ita tio n on
m ortgage servicing assets. T he econom ic
im p a c t of th is p ro p o sed ru le o n banks,
regardless of size, is ex p ected to be
m inim al.
O T S R eg u la to ry F lexib ility A c t A n a ly sis
P u rsu a n t to section 605(b) of the
R egulatory F lexibility Act, th e OTS
certifies th a t th is p ro p o sed ru le w o u ld
n o t h av e a significant eco nom ic im p act
on a su b stan tial n u m b e r of sm all
entities. T he am e n d m e n t co ncerns
capital req u irem en ts for servicing assets
w h ic h m ay be en tered in to by
dep o sito ry in stitu tio n s of an y size. T he
effect of th e p ro p o sal w o u ld be to
red u c e regulatory b u rd e n o n deposito ry
in stitu tio n s by aligning th e term inology
u se d in th e cap ital ad eq u acy stan d ard s
m ore closely to n ew ly -issu ed generally
ac ce p te d acco u n tin g p rin cip les a n d by
relaxing th e ca p ita l lim ita tio n on
m ortgage servicing assets.
Paperw ork R eduction Act
T he A gencies h av e d e te rm in e d th a t
th is p ro p o sal w o u ld n o t in crease the
regulatory p ap e rw o rk o f b ank ing
o rganizations p u rs u a n t to th e p ro v isions
of th e P ap erw o rk R ed u ctio n A ct (44
U.S.C. 3501 et seq.).
OCC and OTS Executive Order 12866
Statement
T he C om ptroller of th e C urren cy a n d
th e D irector of th e OTS h av e d eterm in e d
th a t th is p ro p o sal is n o t a significant
regulatory ac tio n u n d e r E xecutive O rder
12866. A ccordingly, a regu lato ry im p act
analy sis is n o t required.
OCC and OTS Unfunded M andates Act
Statement
S ection 202 of the U n fu n d e d
M an dates Reform A ct of 1995, Pub. L.
10 4 -4 (U n fu n d ed M an dates Act)

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules
req u ires th a t a n agency p rep a re a
bu dgetary im p act statem en t before
prom ulgating a ru le th a t in c lu d e s a
F ederal m a n d ate th a t m ay re su lt in
ex p e n d itu re b y State, local an d tribal
govern m en ts, in th e aggregate, or b y th e
p riv ate sector, of $100 m illio n or m ore
in any on e year. If a b u d g etary im p act
statem en t is req uired , sectio n 205 of th e
U n fu n d e d M andates A ct also requires
a n agency to id e n tify a n d co n sid er a
reason ab le n u m b e r of regulatory
alternatives before p ro m ulgating a rule.
As d isc u sse d in th e pream b le, this
p ro p o sed a m e n d m e n t to th e capital
ad eq u acy sta n d ard s w o u ld relax the
capital lim ita tio n on m ortgage servicing
assets a n d PCCRs. F u rth er, th e p ro p o sed
am e n d m e n t m oves to w ard greater
co n sisten cy w ith FAS 125 in a n effort to
red u c e th e b u rd e n of com p ly in g w ith
tw o different standards. T hus, no
a d d itio n a l cost o f $100 m illio n or m ore,
to State, local, or trib a l g ov ern m en ts or
to th e p riv ate sector w ill re su lt from th is
pro p o sed rule. A ccordingly, th e OCC
an d th e OTS hav e n o t p re p a re d a
bu d g etary im p a c t statem en t n or
specifically ad d re ssed any regulatory
alternatives.
List o f Subjects
12 CFR Part 3
A d m in istrativ e practice an d
p ro ce d u re , C apital, N atio n al banks,
R eporting a n d reco rd k eep in g
req u irem en ts, Risk.
12 CFR P art 6
N ational b anks, P ro m p t corrective
action.
12 CFR Part 208
A ccounting, A griculture, Banks,
banking, C onfid en tial b u sin e ss
info rm ation, Crim e, C urrency, F ederal
Reserve System , Mortgages, R eporting
an d reco rdk eeping req uirem ents,
Securities.
12 CFR Part 225
A d m in istrativ e p ractice a n d
p ro ce d u re , Banks, banking, F ederal
Reserve System , H old ing com panies,
R eporting a n d record keeping
req u irem en ts, S ecurities.
12 CFR Part 325
A d m in istrativ e p ractice a n d
pro ced u re, Banks, banking, C apital
adequacy, R eporting a n d recordkeepin g
req u irem en ts, Savings associations,
State n o n -m em b er banks.
12 CFR Part 565
A d m in istrativ e p ractice an d
p ro ce d u re , C apital, Savings
associations.

12 CFR Part 567
C apital, R eporting an d reco rdkeeping
req u irem en ts, Savings associations.
A uthority and Issuance
Office o f the Comptroller o f the
Currency
12 CFR Chapter I

F or th e reasons set forth in th e joint
pream ble, p arts 3 a n d 6 of c h a p te r I of
title 12 o f th e Code of F ederal
R egulations are p ro p o se d to b e a m e n d e d
as follows:
PART 3— MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES
1. T he au th o rity citatio n for p a rt 3
c o n tin u es to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818,
1828(n), 1828 note, 1831nnote, 1835, 3907,
and 3909.
§3.3

[Amended]

2. S ection 3.3 is a m e n d e d by
rem oving th e w o rds “m ortgage servicing
rig h ts” in th e first sen ten ce an d ad d in g
“m ortgage servicing assets” in th e ir
place.
3. S ectio n 3.100 is a m e n d e d by
revising p arag rap h (c)(2) a n d by
rem ov ing th e w o rd s “m ortgage servicing
rig h ts” in p aragraph s (e)(7) an d (g)(2)
an d ad d in g “ m ortgage servicing assets”
in th e ir place, to read as follows:
§3.100

Capital and surplus.

*

*
*
*
*
(c) * * *
(2) M ortgage servicing assets;
*
*
*
*
*
4. In a p p e n d ix A to p a rt 3, paragraph
(c)(14) of section 1 is rev ise d to rea d as
follows:
A ppendix A to Part 3— Risk-Based
Capital G uidelines
Section 1. Purpose, Applicability o f
Guidelines, and Definitions.
*
*
*
*
*
(c) * * *
(14) In ta n g ib le assets in c lu d e
m ortgage servicing assets, p u rc h a se d
cre d it card rela tio n sh ip s (servicing
rights), goodw ill, favorable leaseholds,
a n d core d ep o sit value.
*
*
*
*
*
5. In a p p e n d ix A to p a rt 3, in section
2, paragrap hs (c) in tro d u c to ry text,
(c)(1), (c)(2), a n d th e h e a d in g of
p arag rap h (c)(3)(i) are rev ise d to rea d as
follows:
*
*
*
*
*
S ection 2. C om po nents of Capital.
*
*
*
*
*
(c) Deductions From Capital. The following
items are deducted from the appropriate
portion of a national bank’s capital base
when calculating its risk-based capital ratio.

42011

(1) Deductions from Tier 1 capital. The
following items are deducted from Tier 1
capital before the Tier 2 portion of the
calculation is made:
(1) All goodwill subject to the transition
rules contained in section 4(a)(l)(ii) of this
appendix A;
(ii) Non-mortgage servicing assets;
(iii) Other intangible assets, except as
provided in section 2(c)(2) of this appendix
A; and
(iv) Deferred tax assets, except as provided
in section 2(c)(3) of this appendix A, that are
dependent upon future taxable income,
which exceed the lesser of either:
(A) The amount of deferred tax assets that
the bank could reasonably expect to realize
within one year of the quarter-end Call
Report, based on its estimate of future taxable
income for that year; or
(B) 10% of Tier 1 capital, net of goodwill
and all intangible assets other than mortgage
servicing assets and purchased credit card
relationships, and before any disallowed
deferred tax assets are deducted.
(2) Qualifying intangible assets. Subject to
the following conditions, mortgage servicing
assets and purchased credit card
relationships need not be deducted from Tier
1 capital:
(i) The total of all intangible assets
included in Tier 1 capital is limited to 100
percent of Tier 1 capital, of which no more
than 25 percent of Tier 1 capital can consist
of purchased credit card relationships.
Calculation of these limitations must be
based on Tier 1 capital net of goodwill and
other disallowed intangible assets.
(ii) Banks must value each intangible asset
included in Tier 1 capital at least quarterly
at the lesser of:
(A) 90 percent of the fair value of each
asset, determined in accordance with
paragraph (c)(2)(iii) of this section; or
(B) 100 percent of the remaining
unamortized book value.
(iii) The quarterly determination of the
current fair value of the intangible asset must
include adjustments for any significant
changes in original valuation assumptions,
including changes in prepayment estimates.
(3) Deferred tax assets—(i) Net unrealized
gains and losses on available-for-sale
securities. * * *
*
*
*
*
*
PART 6— PROMPT CORRECTIVE
ACTION
1. T h e au th o rity citatio n for p a rt 6
co n tin u es to rea d as follows:
Authority: 12 U.S.C. 93a, 1831o.

2. S ectio n 6.2(g) is rev ise d to rea d as
follow s:
§6.2

*

Definitions

*
*
*
*
(g) T angible e q u ity m ean s th e am o u n t
of T ier 1 cap ital elem en ts in th e OCC’s
Risk-B ased C apital G u idelines (12 CFR
p art 3, a p p e n d ix A) p lu s th e am o u n t of
o u tstan d in g cum u lativ e p erp e tu al
preferred stock (in clud ing rela te d
surplu s) m in u s all intang ib le assets

42012

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

except m ortgage servicing assets to the
extent p erm itte d in T ier 1 capital u n d e r
12 CFR p a rt 3, a p p e n d ix A, section
2(c)(2).
*
*
*
*
*
Dated: July 17,1997.
Eugene A. Ludwig,

Comptroller o f the Currency.
Federal Reserve System
12 CFR CHAPTER II

F or th e reaso ns set fo rth in th e join t
pream ble, th e B oard of G overnors of th e
F ederal Reserve S ystem p ro p o ses to
am e n d p arts 208 a n d 225 of c h a p te r II
of title 12 of th e Code of F ederal
R egulations as follows:
PART 208— MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
1. T he a u th o rity citation for p art 208
c o n tin u es to read as follows:
Authority: 12 U.S.C. 36, 248(a), 248(c),
321-338a, 371d, 461, 481^86 , 601, 611,
1814, 1823(j), 1828(o), 18310, 1831p-l, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C.
78b, 781(b), 781(g), 78l(i), 78o-4(c)(5), 78o-5,
78q, 78q— and 78w; 31 U.S.C. 5318; 42
1,
U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

2. S ectio n 208.41, as p ro p o se d to be
re n u m b e re d from § 208.31 a n d revised
at 62 FR 15291, is fu rth er a m en d e d by
revising p arag rap h (f) to rea d as follows:
§ 208.41
subpart.

Definitions for purposes of this

*

*
*
*
*
(f) Tangible e q u ity m ean s th e am o u n t
of core capital elem ents as defin ed in
th e B oard ’s C apital A dequ acy
G u id elin es for State M em ber Banks:
Risk-Based M easure (A p p en d ix A to this
part), p lu s the am o u n t of o u tstan d in g
cum u lativ e p e rp e tu a l preferred stock
(includ in g related su rplus), m in u s all
in tan g ib le assets ex cep t mortgage
servicing assets to th e ex tent th a t the
B oard d eterm in es th a t m ortgage
servicing assets m ay b e in c lu d e d in
calcu lating th e b a n k ’s T ier 1 capital.
*
*
*
*
*
3. In A p p e n d ix A to p a rt 208, sections
II.B .l.b.i. th ro u g h II.B.l.b.v. are revised
to rea d as follows:
A ppendix a to Part 208— Capital
A dequacy G uidelines for State Member
Banks: Risk-Based Measure

The only types of identifiable intangible
assets that may be included in, that is, not
deducted from, a bank's capital are readily
marketable mortgage servicing assets and
purchased credit card relationships. The total
amount of these assets included in capital, in
the aggregate, can not exceed 100 percent of
Tier 1 capital. Purchased credit card
relationships are subject to a separate
sublimit of 25 percent of Tier 1 capital.14
ii. For purposes of calculating these
limitations on mortgage servicing assets and
purchased credit card relationships, Tier 1
capital is defined as the sum of core capital
elements, net of goodwill, and net of all
identifiable intangible assets other than
mortgage servicing assets and purchased
credit card relationships, regardless of the
date acquired, but prior to the deduction of
deferred tax assets.
iii. Banks must review the book value of all
intangible assets at least quarterly and make
adjustments to these values as necessary. The
fair value of mortgage servicing assets and
purchased credit card relationships also must
be determined at least quarterly. This
determination shall include adjustments for
any significant changes in original valuation
assumptions, including changes in
prepayment estimates or account attrition
rates.
iv. Examiners will review both the book
value and the fair value assigned to these
assets, together with supporting
documentation, during the examination
process. In addition, the Federal Reserve may
require, on a case-by-case basis, an
independent valuation of a bank’s intangible
assets.
v. The amount of mortgage servicing assets
and purchased credit card relationships that
a bank may include in capital shall be the
lesser of 90 percent of their fair value, as
determined in accordance with this section,
or 100 percent of their book value, as
adjusted for capital purposes in accordance
with the instructions in the commercial bank
Consolidated Reports of Condition and
Income (Call Reports). If both the application
of the limits on mortgage servicing assets and
purchased credit card relationships and the
adjustment of the balance sheet amount for
these assets would result in an amount being
deducted from capital, the bank would
deduct only the greater of the two amounts
from its core capital elements in determining
Tier 1 capital.
*
*
*
*
*
4. In A p p e n d ix A to p art 208, sectio n
II.B.4. is rev ise d to read as follows:
*
*
*
*
*
J J

*

*

*

14
Am ounts of mortgage servicing assets and
purchased credit card relationships in excess of
these lim itations, as well as identifiable intangible
*
*
*
*
*
assets, including core deposit intangibles, favorable
J J
* * *
leaseholds and non-mortgage servicing assets, are to
g
* * *
be deducted from a bank’s core capital elem ents in
1. Goodwill and other intangible assets *** determ ining Tier 1 capital. However, identifiable
intangible assets (other than mortgage servicing
b. Other intangible assets, i. All servicing
assets and purchased credit card relationships)
assets, including servicing assets on assets
acquired on or before February 19, 1992, generally
other than mortgages (i.e., non-mortgage
w ill not be deducted from capital for supervisory
servicing assets) are included in this
purposes, although they w ill continue to be
deducted for applications purposes.
Appendix A as identifiable intangible assets.

g * * *

4. Deferred tax assets. The amount of
deferred tax assets that is dependent upon
future taxable income, net of the valuation
allowance for deferred tax assets, that may be
included in, that is, not deducted from, a
bank’s capital may not exceed the lesser of
(i) the amount of these deferred tax assets
that the bank is expected to realize within
one year of the calendar quarter-end date,
based on its projections of future taxable
income for that year,20 or (ii) 10 percent of
Tier 1 capital. The reported amount of
deferred tax assets, net of any valuation
allowance for deferred tax assets, in excess of
the lesser of these two amounts is to be
deducted from a bank’s core capital elements
in determining Tier 1 capital. For purposes
of calculating the 10 percent limitation, Tier
1 capital is defined as the sum of core capital
elements, net of goodwill, and net of all other
identifiable intangible assets other than
mortgage servicing assets and purchased
credit card relationships, before any
disallowed deferred tax assets are deducted.
There generally is no limit in Tier 1 capital
on the amount of deferred tax assets that can
be realized from taxes paid in prior carry­
back years or from future reversals of existing
taxable temporary differences, but, for banks
that have a parent, this may not exceed the
amount the bank could reasonably expect its
parent to refund.
*
*
*
*
*
5. In A p p e n d ix B to p a rt 208, section
Il.b. is rev ise d to rea d as follows:
A ppendix B to Part 208— Capital
A dequacy G uidelines for State Member
Banks: Tier 1 Leverage Measure
*
*
*
*
*
II. * * *
b. A bank’s Tier 1 leverage ratio is
calculated by dividing its Tier 1 capital (the
numerator of the ratio) by its average total
consolidated assets (the denominator of the
ratio). The ratio will also be calculated using
period-end assets whenever necessary, on a
case-by-case basis. For the purpose of this
leverage ratio, the definition of Tier 1 capital
as set forth in the risk-based capital
guidelines contained in Appendix A of this
part will be used.2 As a general matter,
20 To determ ine the am ount of expected deferredtax assets realizable in the next 12 m onths, an
institution should assum e that all existing
tem porary differences fully reverse as of the report
date. Projected future taxable incom e should not
include net operating-loss carry-forwards to be used
during that year or the am ount of existing
tem porary differences a bank expects to reverse
w ithin the year. Such projections should include
the estim ated effect of tax-planning strategies that
the organization expects to im plem ent to realize net
operating losses or tax-credit carry-forwards that
w ould otherwise expire during the year. Institutions
do not have to prepare a new 12-m onth projection
each quarter. Rather, on interim report dates,
institutions m ay use the future-taxable-income
projections for their current fiscal year, adjusted for
any significant changes that have occurred or are
expected to occur.
2
Tier 1 capital for state member banks includes
com m on equity, m inority interest in the equity
accounts of consolidated subsidiaries, and
qualifying noncum ulative perpetual preferred stock.
In addition, as a general matter, Tier 1 capital

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules
average total consolidated assets are defined
as the quarterly average total assets (defined
net of the allowance for loan and lease losses)
reported on the bank’s Reports of Condition
and Income (Call Reports), less goodwill;
amounts of mortgage servicing assets and
purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of
Tier 1 capital; amounts of purchased credit
card relationships in excess of 25 percent of
Tier 1 capital; all other identifiable intangible
assets; any investments in subsidiaries or
associated companies that the Federal
Reserve determines should be deducted from
Tier 1 capital; and deferred tax assets that are
dependent upon future taxable income, net of
their valuation allowance, in excess of the
limitation set forth in section II.B.4 of
Appendix A of this part.3
*
*
*
*
*
PART 225— BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
1. T he a u th o rity citatio n for p a rt 225
co n tin u es to rea d as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818,
1831i, 1831p— 1843(c)(8), 1844(b), 1972(1),
1,
3106, 3108, 3310, 3331-3351, 3907, and
3909.

2. In A p p e n d ix A to p a rt 225, sections
II.B .l.b.i. th ro u g h II.B.l.b.v. are revised
to rea d as follows:
Appendix A to Part 225—Capital Adequacy
Guidelines for Bank Holding Companies:
Risk-Based Measure

*

*
JJ

*

*
*

*
*

*

*

*
*

1. Goodwill and other intangible assets
b. Other intangible assets, i. All servicing
assets, including servicing assets on assets
other than mortgages (i.e., non-mortgage
servicing assets) are included in this
Appendix A as identifiable intangible assets.
The only types of identifiable intangible
assets that may be included in, that is, not
deducted from, an organization’s capital are
readily marketable mortgage servicing assets
and purchased credit card relationships. The
total amount of these assets included in
capital, in the aggregate, can not exceed 100
percent of Tier 1 capital. Purchased credit
card relationships are subject to a separate
sublimit of 25 percent of Tier 1 capital.1
5
excludes goodwill: am ounts of mortgage servicing
assets and purchased credit card relationships that,
in the aggregate, exceed 100 percent of Tier 1
capital; purchased credit card relationships that
exceed 25 percent of Tier 1 capital; other
identifiable intangible assets; and deferred tax
assets that are dependent upon future taxable
income, net of their valuation allowance, in excess
of certain lim itations. The Federal Reserve may
exclude certain investm ents in subsidiaries or
associated com panies as appropriate.
3
Deductions from T ier 1 capital and other
adjustm ents are discussed m ore fully in section II.B.
in A ppendix A of this part.
15
Am ounts of mortgage servicing assets and
purchased credit card relationships in excess of
these lim itations, as well as servicing assets on
loans other than mortgages and all other identifiable

ii. For purposes of calculating these
limitations on mortgage servicing assets and
purchased credit card relationships, Tier 1
capital is defined as the sum of core capital
elements, net of goodwill, and net of all
identifiable intangible assets and similar
assets other than mortgage servicing assets
and purchased credit card relationships,
regardless of the date acquired, but prior to
the deduction of deferred tax assets.
iii. Bank holding companies must review
the book value of all intangible assets at least
quarterly and make adjustments to these
values as necessary. The fair value of
mortgage servicing assets and purchased
credit card relationships also must be
determined at least quarterly. This
determination shall include adjustments for
any significant changes in original valuation
assumptions, including changes in
prepayment estimates or account attrition
rates.
iv. Examiners will review both the book
value and the fair value assigned to these
assets, together with supporting
documentation, during the inspection
process. In addition, the Federal Reserve may
require, on a case-by-case basis, an
independent valuation of an organization’s
intangible assets or similar assets.
v. The amount of mortgage servicing assets
and purchased credit card relationships that
a bank holding company may include in
capital shall be the lesser of 90 percent of
their fair value, as determined in accordance
with this section, or 100 percent of their book
value, as adjusted for capital purposes in
accordance with the instructions to the
Consolidated Financial Statements for Bank
Holding Companies (FR Y-9C Report). If both
the application of the limits on mortgage
servicing assets and purchased credit card
relationships and the adjustment of the
balance sheet amount for these intangibles
would result in an amount being deducted
from capital, the bank holding company
would deduct only the greater of the two
amounts from its core capital elements in
determining Tier 1 capital.
*

*

*

*

*

3. In A p p e n d ix A to p a rt 225, section
II.B.4. is revised to rea d as follows:
*

*
JJ

*
*

*

*

*

*

B. * * *
4. Deferred tax assets. The amount of
deferred tax assets that is dependent upon
future taxable income, net of the valuation
allowance for deferred tax assets, that may be
included in, that is, not deducted from, a
banking organization’s capital may not
exceed the lesser of (i) the amount of these
deferred tax assets that the banking
organization is expected to realize within one
year of the calendar quarter-end date, based
intangible assets, including core deposit intangibles
and favorable leaseholds, are to be deducted from
an organization’s core capital elem ents in
determ ining Tier 1 capital. However, identifiable
intangible assets (other than mortgage servicing
assets and purchased credit card relationships)
acquired on or before February 19,1992, generally
w ill not be deducted from capital for supervisory
purposes, although they w ill continue to be
deducted for applications purposes.

42013

on its projections of future taxable income for
that year,23 or (ii) 10 percent of Tier 1 capital.
The reported amount of deferred tax assets,
net of any valuation allowance for deferred
tax assets, in excess of the lesser of these two
amounts is to be deducted from a banking
organization’s core capital elements in
determining Tier 1 capital. For purposes of
calculating the 10 percent limitation, Tier 1
capital is defined as the sum of core capital
elements, net of goodwill, and net of all
identifiable intangible assets other than
mortgage servicing assets and purchased
credit card relationships, before any
disallowed deferred tax assets are deducted.
There generally is no limit in Tier 1 capital
on the amount of deferred tax assets that can
be realized from taxes paid in prior carryback
years or from future reversals of existing
taxable temporary differences.
*

*

*

*

*

4.

In A p p e n d ix D to p art 225, section
n.b. is rev ise d to re a d as follows:
A ppendix D to Part 225—Capital
A dequacy G uidelines for Bank Holding
Companies; Tier 1 Leverage M easure
*
*
*
*
*
JJ

*

*

*

b. A banking organization’s Tier 1 leverage
ratio is calculated by dividing its Tier 1
capital (the numerator of the ratio) by its
average total consolidated assets (the
denominator of the ratio). The ratio will also
be calculated using period-end assets
whenever necessary, on a case-by-case basis.
For the purpose of this leverage ratio, the
definition of Tier 1 capital as set forth in the
risk-based capital guidelines contained in
Appendix A of this part will be used.3 As a
general matter, average total consolidated
23 To determ ine the am ount of expected deferred
tax assets realizable in the next 12 m onths, an
institution should assum e that all existing
tem porary differences fully reverse as of the report
date. Projected future taxable income should not
include net operating loss carryforwards to be used
during that year or the am ount of existing
tem porary differences a bank holding com pany
expects to reverse w ithin the year. Such projections
should include the estim ated effect of tax planning
strategies that the organization expects to
im plem ent to realize net operating losses or tax
credit carryforwards that w ould otherwise expire
during the year. Institutions do not have to prepare
a new 12 m onth projection each quarter. Rather, on
interim report dates, institutions m ay use the future
taxable incom e projections for their current fiscal
year, adjusted for any significant changes that have
occurred or are expected to occur.
3 Tier 1 capital for banking organizations includes
common equity, m inority interest in the equity
accounts of consolidated subsidiaries, qualifying
noncum ulative perpetual preferred stock, and
qualifying cum ulative perpetual preferred stock.
(Cumulative perpetual preferred stock is lim ited to
25 percent of Tier 1 capital.) In addition, as a
general matter, Tier 1 capital excludes goodwill;
am ounts of mortgage servicing assets and purchased
credit card relationships that, in the aggregate,
exceed 100 percent of Tier 1 capital; purchased
credit card relationships that exceed 25 percent of
T ier 1 capital; all other identifiable intangible assets
(including non-mortgage servicing assets); and
deferred tax assets that are dependent upon future
taxable income, net of their valuation allowance, in
excess of certain limitations. The Federal Reserve
m ay exclude certain investm ents in subsidiaries or
associated com panies as appropriate.

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

42014

assets are defin ed as th e q uarterly
average total assets (defined n e t of the
allo w an ce for lo an a n d lease losses)
re p o rte d o n th e o rg an izatio n ’s
C o n so lid ated F in an c ial S tatem en ts (FR
Y -9C Report), less goodw ill; am o u n ts of
m ortgage servicing assets a n d p u rc h a se d
cre d it card rela tio n sh ip s th at, in th e
aggregate, are in excess of 100 p e rc e n t
of T ier 1 capital; am o u n ts of p u rc h a se d
cre d it card rela tio n sh ip s in excess of 25
p e rc e n t of T ier 1 capital; all o th er
id en tifiab le in tang ible assets (including
non-m ortgage servicing assets); any
in v e stm e n ts in sub sid iaries or
associated co m p an ies th a t th e F ed eral
R eserve d eterm in es sh o u ld b e d ed u c te d
from T ier 1 capital; a n d d eferred tax
assets th a t are d e p e n d e n t u p o n fu tu re
taxab le incom e, n et of th e ir v alu atio n
allow ance, in excess of th e lim ita tio n set
fo rth in section II.B.4 of A p p e n d ix A of
th is part.4
*
*
*
*
*
By order of the Board of Governors of the
Federal Reserve System, July 28,1997.
William W. Wiles,

Secretary o f the Board.
Federal D eposit Insurance Corporation
12 CFR Capter III
F or th e reaso ns set fo rth in th e join t
pream ble, p art 325 of ch a p te r III of title
12 of th e Code of F ed eral R egulations is
p ro p o sed to be a m en d e d as follows:
PART 325—CAPITAL MAINTENANCE
1. T he au th o rity citation for p art 325
co n tin u es to rea d as follows:
Authority: 12 U.S.C. 1815(a), 1815(b),
1816,1818(a), 1818(b), 1818(c), 1818(t),
1819(Tenth), 1828(c), 1828(d), 1828(i),
1828(n), 1828(o), 18310, 1835, 3907, 3909,
4808; Pub. L. 102-233, 105 Stat. 1761, 1789,
1790 (12 U.S.C. 1831n note); Pub. L. 102242, 105 Stat. 2236, 2355, 2386 (12 U.S.C.
1828 note).
2. In § 325.2, p ara g ra p h (n) is rev ised
to rea d as follows:
§325.2

*

*

Definitions.

*

*

*

(n) M ortgage servicing assets m ean s
th o se b alan ce sheet assets (net of any
related v alu atio n allow ances) th at
re p re se n t th e rights to p erform th e
servicing fu n ctio n for m ortgage loans
th a t h av e b ee n se cu ritiz ed or are o w n ed
by others. M ortgage servicing assets
m u st be am ortized in p ro p o rtio n to, an d
over th e p e rio d of, estim a te d n et
servicing incom e. For p u rp o ses of
determ in in g regulatory capital u n d e r
th is p art, m ortgage servicing assets w ill
be recog nized only to th e ex ten t th a t the
4 Deductions from Tier 1 capital and other
adjustm ents are discussed m ore fully in section II.B.
in A ppendix A of this part.

rights m e et th e co n d itio n s, lim itation s,
an d restriction s d escrib ed in § 325.5 (f).
*
*
*
*
*
§325.2

[Amended]

3. In § 325.2, p aragraph s (s), (t), an d
(v) are a m en d e d by rem o vin g th e w ords
“m ortgage servicing rig h ts” an d ad ding
in th e ir p la ce th e w o rd s “m ortgage
servicing assets” each tim e th e y appear.
4. In § 325.5, p arag rap h (f) is revised
to rea d as follows:
§325.5

*

Miscellaneous.

*
*
*
*
(f) T rea tm en t o f m ortgage servicing
a ssets a n d cred it ca rd rela tio n sh ip s. For
p u rp o ses of determ in in g T ier 1 cap ital
u n d e r th is part, mortgage servicing
assets a n d p u rc h a se d credit card
rela tio n sh ip s w ill be d e d u c te d from
assets a n d from equ ity capital to th e
extent th a t th e m ortgage servicing assets
a n d p u rc h a se d cre d it card rela tio n sh ip s
do n o t m e et th e co n d itio n s, lim itations,
an d restrictio n s d escrib ed in this
section.
(1) V aluation. T he fair v alu e of
m ortgage servicing assets an d p u rc h a se d
cre d it ca rd re la tio n sh ip s shall be
estim a te d at least quarterly. T he
qu arterly fair v alu e estim ate sh all
in c lu d e ad ju stm en ts for an y significant
changes in th e original v alu atio n
assu m p tio n s, in c lu d in g changes in
p rep a y m en t estim ates or attritio n rates.
T he FDIC in its disc re tio n m ay req uire
in d e p e n d e n t fair v alue estim ates on a
case-by-case basis w h ere it is deem ed
ap p ro p riate for safety a n d so u n d n e ss
pu rpo ses.
(2) Fair v a lu e lim ita tio n . F or pu rp o ses
of calculatin g T ier 1 capital u n d e r th is
p a rt (but n o t for financial statem ent
p u rpo ses), th e b alance sh eet assets for
m ortgage servicing assets a n d p u rc h a se d
cre d it card rela tio n sh ip s w ill each be
re d u c e d to an am o u n t equal to th e lesser
of:
(i) 90 p erc en t of th e fair value of these
assets, d eterm in e d in accordan ce w ith
p ara g ra p h (f)(1) of th is section; or
(ii) 100 p erc en t of the rem ain in g
u n am o rtize d boo k valu e of th e se assets
(net of an y rela te d v alu atio n
allow ances), d eterm in e d in accordance
w ith th e in stru c tio n s for th e p rep a ra tio n
of th e C o n so lidated R eports of Incom e
an d C o n d itio n (Call Reports).
(3) T ier 1 ca p ita l lim ita tio n . T he
m a x im u m allow able am o u n t of
m ortgage servicing assets a n d p u rc h a se d
cre d it card rela tio n sh ip s, in the
aggregate, w ill be lim ite d to th e lesser
of:
(i) 100 p e rc e n t of th e am o u n t of Tier
1 cap ital th a t exists before th e d ed u c tio n
of an y d isallo w ed m ortgage servicing
assets, an y d isa llo w e d p u rc h a se d cred it
card rela tio n sh ip s, a n d an y d isallow ed
d eferred tax assets; or

(ii) T he am o u n t of m ortgage servicing
assets a n d p u rc h a se d credit card
rela tio n sh ip s, d eterm in e d in accordance
w ith p ara g ra p h (f)(2) of th is section.
(4) Tier 1 ca p ita l su b lim it. In ad d itio n
to th e aggregate lim ita tio n on mortgage
servicing assets an d p u rc h a se d credit
card rela tio n sh ip s set forth in p aragrap h
(f)(3) of th is section, a su b lim it w ill
a p p ly to p u rc h a se d cre d it card
relatio n sh ip s. T he m ax im u m allow able
am o u n t of p u rc h a se d credit card
rela tio n sh ip s, in th e aggregate, w ill be
lim ite d to th e lesser of:
(i) T w enty-five p e rc e n t of th e am o u n t
of T ier 1 cap ital th a t exists before the
d ed u c tio n of an y d isa llo w e d m ortgage
servicing assets, an y d isallow ed
p u rc h a se d cre d it card rela tio n sh ip s, an d
an y disallo w ed d eferred tax assets; or
(ii) T he am o u n t of p u rc h a se d credit
card rela tio n sh ip s, d eterm in e d in
accordan ce w ith paragrap h (f)(2) of this
section.
*
*
*
*
*
§325.5

[Amended]

5. In § 325.5, paragrap hs (g)(2)(i)(B)
a n d (g)(5) are a m e n d e d b y rem oving the
w o rd s “ m ortgage servicing rig h ts” an d
ad d in g in th e ir p lace the w ords
“m ortgage servicing assets” each tim e
th e y appear.
A ppendix A to Part 325 [Amended]
6. In a p p e n d ix A to p art 325, the
w o rds “m ortgage servicing rig h ts” are
rem o v ed an d th e w o rd s “m ortgage
servicing assets” are a d d e d each tim e
th e y ap p e ar in sectio n I.A .I., section
I.B .(l) a n d footnote 8 to section I.B.(l),
section B.C., an d Table I—D efinition of
Q ualifying C apital a n d footnote 2 to
Table I.
A ppendix B to Part 325 [Amended]
7. In a p p e n d ix B to p art 325, section
IV.A. an d footnote 1 to section IV. A. are
a m en d e d b y rem oving th e w ord s
“ m ortgage servicing rig h ts” a n d ad ding
in th e ir p la ce th e w o rd s “m ortgage
servicing assets” each tim e th e y appear.
By order of the Board of Directors.
Dated at Washington, D.C., this 22nd day
of July, 1997.
Federal Deposit Insurance Corporation.
Robert E. Feldman,

Executive Secretary.
Office o f Thrift Supervision
12 CFR CHAPTER V

For th e reason s o u tlin e d in th e join t
pream ble, th e Office of T hrift
S u p erv isio n h ereb y p ro poses to am en d
12 CFR, C hapter V, as set forth below:
PART 565— PROMPT CORRECTIVE
ACTION
1.
T he au th o rity citation for p art 565
co n tin u es to rea d as follows:

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules
Authority: 12 U.S.C. 1831o.

2.
S ection 565.2 is a m e n d e d by
revising parag rap h (f) to rea d as follows:
§565.2

*

Definitions.

*

*

*

*

(f) T angible e q u ity m ean s th e am o u n t
of a savings asso cia tio n ’s core capital as
co m p u te d in § 567.5(a) of th is ch ap ter
p lu s th e am o u n t of its ou tstan d in g
cu m u lativ e p erp e tu al preferred stock
(in clu d in g rela te d su rplus), m in u s
in tangible assets as d efin ed in
§ 567.1(m) of th is ch a p te r th a t h av e n o t
b ee n p rev io u sly d e d u c te d in calculating
core capital.
*
*
*
*
*
PART 567—CAPITAL
1. T he a u th o rity citatio n for p art 567
c o n tin u es to rea d as follow:
Authority: 12 U.S.C. 1462, 1462a, 1463,
1464, 1467a, 1828 (note).

2. S ection 567.1 is a m e n d e d by
revising p arag rap h (m) to rea d as
follows:
§567.1

*

Definitions

*

*

*

*

(m) In ta n g ib le assets. T he term
in tang ible assets m ean s assets
c o n sid ered to b e intan gib le assets u n d e r
generally ac ce p te d acco un tin g
prin cip les. T hese assets in c lu d e, b u t are
n o t lim ited to, goodw ill, favorable
leaseholds, core d ep o sit p rem iu m s, and
p u rc h a se d cre d it card relatio n sh ip s.
Servicing assets are n o t in tang ible assets
u n d e r th is definition.
*
*
*
*
*
3. S ection 567.5 is a m e n d e d by
revising p ara g ra p h (a)(2)(ii) to read as
follows:
§ 567.5

Components of capital.

(a) * * *
(2) *

*

*

(ii) S ervicing assets th a t are n o t
in c lu d a b le in tangible a n d core cap ital
p u rs u a n t to § 567.12 of th is p art are
d e d u c te d from assets a n d capital in
co m p u tin g core capital.
*
*
*
*
*
4. S ection 567.6 is a m e n d e d by
revising p arag rap hs (a)(l)(iv)(L) an d
(a)(l)(iv)(M) to rea d as follows:
§567.6 Risk-based capital credit riskweight categories.

(a) * * *
*

*

*

(iv) * * *

(L) M ortgage servicing assets a n d
in tang ible assets in c lu d ab le in core
cap ital p u rsu a n t to § 567.12 of th is part;
(M) Interest-only strip s receivable;
*
*
*
*
*
5. S ectio n 567.9 is a m e n d e d by
revising p arag rap h (c)(1) to rea d as
follows:
§567.9

*

*

Tangible capital requirement.

*

*

*

(c) * * *
(1) Intangible assets, as d efin ed in
§ 567.l(m ) of th is part, a n d servicing
assets n o t in c lu d ab le in core an d
tangible capital p u rs u a n t to § 567.12 of
this part.
*
*
*
*
*
6. S ection 567.12 is a m e n d e d by
revising th e section h ea d in g an d
paragraph s (a) th ro u g h (c), p arag rap h (d)
in tro d u c to ry text, a n d p aragraph s (e)
an d (f) to rea d as follow s:
§ 567.12
assets.

Intangible assets and servicing

(a) Scope. T his section prescribes the
m a x im u m am o u n t of in tang ib le assets
an d servicing assets th a t savings
associations m ay in c lu d e in calculating
tangible a n d core capital.
(b) C o m p u ta tio n o f core a n d tangible
capital. (1) P u rc h ase d c re d it card
rela tio n sh ip s m ay be in c lu d e d (that is,
n o t d ed u cted ) in co m p u tin g core cap ital
in accord ance w ith th e restrictio n s in
th is section, b u t m u st be d e d u c te d in
co m p u tin g tangible capital.
(2) M ortgage servicing assets m ay be
in c lu d e d in co m p u tin g core an d
tangible capital, in accord an ce w ith th e
restrictio n s in th is section.
(3) N on m ortgage-related servicing
assets are d e d u c te d in co m p u tin g core
an d tangible capital.
(4) Intangible assets, as d efin ed in
§ 567.l(m ) of th is part, o th er th a n
p u rc h a se d cre d it card rela tio n sh ip s
d escrib ed in p ara g ra p h (a)(1) of th is
sectio n a n d core d ep o sit intangibles
d escrib ed in p ara g ra p h (g)(3) of th is
section, are d ed u c te d in co m p utin g
tangible an d core capital.
(c) M a rket va lu a tio n s. T he OTS
reserves th e a u th o rity to requ ire an y
savings associatio n to p erform an
in d e p e n d e n t m ark et v a lu atio n of assets
subject to th is sectio n o n a case-by-case
basis or th ro u g h th e issu an ce of p o licy
guidance. A n in d e p e n d e n t m arket
v alu ation , if req u ired , sh a ll be
co n d u c te d in accord ance w ith any
p o licy g u id a n ce issu ed by th e OTS. A

42015

req u ired v alu atio n shall in c lu d e
ad ju stm en ts for an y significant changes
in original v alu atio n assu m ption s,
in c lu d in g changes in p rep a y m en t
estim ates or attritio n rates. The
valu atio n sh all determ in e th e c u rren t
fair v alu e of assets subject to th is
section. T his in d e p e n d e n t m ark et
valu atio n m ay be co n d u c te d by an
in d e p e n d e n t v alu atio n exp ert evaluating
th e reason ab leness of th e in tern al
calcu latio n s a n d a ssu m p tio n s u se d by
the association in co n d u c tin g its
in tern al analysis. T he associatio n shall
calcu late a n estim a te d fair v alu e for
assets subject to th is sectio n at least
qu arterly regardless of w h e th e r an
in d e p e n d e n t v alu atio n ex pert is
re q u ire d to p erform an in d e p e n d e n t
m arket valuation.
(d) V alue lim ita tio n . For p u rp o ses of
calcu lating core capital u n d e r th is p art
(but n o t for finan cial statem en t
p u rpo ses), p u rc h a se d cre d it card
rela tio n sh ip s a n d m ortgage servicing
assets m u st be v alu ed at th e lesser of:
*
*
*
*
*
(e) Core ca p ita l lim ita tio n — (1)
Aggregate lim it. T he m ax im u m
aggregate am o u n t of m ortgage servicing
assets a n d p u rc h a se d c re d it card
rela tio n sh ip s th a t m ay be in c lu d e d in
core capital sh a ll be lim ite d to th e lesser
of:
(1) 100 p erc en t of th e am o u n t of core
capital c o m p u ted before th e d e d u c tio n
of an y d isa llo w e d m ortgage servicing
assets a n d p u rc h a se d cre d it card
relatio n sh ip s; or
(ii) T he am o u n t of m ortgage servicing
assets a n d p u rc h a se d cre d it card
rela tio n sh ip s d eterm in e d in accordance
w ith parag rap h (d) of th is section.
(2) R ed u c tio n b y d eferred ta x liability.
A ssociations m ay elect to red u c e the
am o u n t of th e ir d isa llo w e d (i.e., not
in c lu d ab le in capital) m ortgage
servicing assets exceeding th e 100
p erc en t lim it b y th e am o u n t of any
asso ciated d eferred tax liability.
(3) S u b lim it fo r p u rc h a se d cred it card
rela tio n sh ips. In ad d itio n to the
aggregate lim ita tio n in parag rap h (e)(1)
of th is section, a su b lim it sh all a p p ly to
p u rc h a se d cre d it card relatio n sh ip s. The
m a x im u m allow able am o u n t of su c h
assets sh all be lim ited to th e lesser of:
(i)
25 p e rc e n t of th e am o u n t of core
capital c o m p u ted before th e d ed u c tio n
of a n y d isa llo w e d m ortgage servicing
assets an d p u rc h a se d cred it card
relatio n sh ip s; or

42016

Federal Register / Vol. 62, No. 149 / Monday, August 4, 1997 / Proposed Rules

(ii) T he am o u n t of p u rc h a se d cred it
card rela tio n sh ip s d e te rm in e d in
accordan ce w ith parag rap h (d) of th is
section.
(f)
T angible ca p ita l lim ita tio n . T he
m a x im u m am o u n t of m ortgage servicing
assets th a t m ay be in c lu d e d in tangible

capital sh all be th e sam e am o u n t
in c lu d ab le in core capital in acco rdance
w ith th e lim itation s set by parag rap h
(e)(1) o f th is section.
*
*
*
*
*
Dated: July 7, 1997.

By the Office of Thrift Supervision.
Nicolas P. Retsinas,

Director.
[FR Doc. 97-20391 Filed 8-1-97; 8:45 am]
BILLING CODES: 4810 -33 -P , 6210 -01 -P , 6714 -01 -P ,
6720-01- P