[Federal Register Volume 64, Number 165 (Thursday, August 26, 1999)]
[Rules and Regulations]
[Pages 46560-46565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21993]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 541, 545, 560, 561
[No. 99-34]
RIN 1550-AB21
Letters of Credit, Suretyship and Guaranty
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS) is amending its
regulations to clarify that a Federal savings association may act as
guarantor under section 5(b)(2) of the Home Owners' Loan Act (the
``HOLA''). Additionally, OTS is modifying restrictions on suretyship
and guaranty agreements issued under this section. The rule also
clarifies that a Federal savings association holds authority to issue
letters of credit and makes related technical amendments. OTS is also
amending various lending related definitions to either clarify
definitions or remove unnecessary or outdated definitions.
EFFECTIVE DATE: October 1, 1999.
FOR FURTHER INFORMATION CONTACT: William J. Magrini, Senior Project
Manager, (202) 906-5744, Supervision Policy; Raynette Gutrick,
Attorney, (202) 906-6265, Regulations and Legislation Division or Karen
Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations and
Legislation Division, Chief Counsel's Office, Office of Thrift
Supervision, 1700 G Street NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
On September 18, 1998, OTS issued a Notice of Proposed Rulemaking
(``NPR'') clarifying a Federal savings association's authority to act
as guarantor under section 5(b)(2) of the HOLA (64 FR 49874). The
proposed rule included restrictions on suretyship and guaranty
agreements issued under this authority. OTS also proposed revisions
clarifying that Federal savings associations may issue letters of
credit. Finally, OTS sought comment on whether it should adopt a
regulation to address the escrow authority of Federal savings
associations.
This document finalizes the proposed changes, clarifies or removes
various related definitions that are outdated or unnecessary, and makes
other technical amendments.
II. Summary of Comments
The public comment period on the NPR closed on November 17, 1998.
Two Federal savings associations, two trade associations, a Federal
Home Loan Bank, and one individual filed comments on the NPR.
Four commenters addressed OTS's proposal clarifying the guaranty
authority for Federal savings associations and proposing restrictions
on suretyship and guaranty agreements under section 5(b)(2) of the
HOLA. Two commenters supported the proposed
[[Page 46561]]
changes and two commenters suggested clarifications.
Two commenters supported the clarification of the authority of
Federal savings associations to issue letters of credit. Three
commenters opposed the issuance of a regulation addressing the escrow
authority of Federal savings associations. OTS has addressed the
specific comments in the section-by-section discussion below.
III. Section-by-Section Discussion
A. Suretyship and Guaranty \1\
Section 5(b)(2) of the HOLA provides ``[t]o such extent as the
Director may authorize in writing, a Federal savings association * * *
may be surety as defined by the Director.* * *'' 2 OTS's
current regulation at 12 CFR 545.103 authorizes Federal savings
associations to act as surety under this section, subject to specified
conditions.
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\1\ Letters of credit and other independent undertakings are
discussed in Section III. B. below.
\2\ 12 U.S.C. 1464(b)(2).
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Neither section 5(b)(2) of the HOLA nor current 545.103 address a
Federal savings association's authority to issue a
guaranty.3 Nonetheless, OTS and its predecessor, the Federal
Home Loan Bank Board (``FHLBB''), have recognized that the authority of
a Federal savings association to act as guarantor is subsumed within
section 5(b)(2) of the HOLA.4 To clarify this point, OTS
proposed to specifically authorize Federal savings associations to act
as guarantors. OTS also proposed to move the portion of the regulation
authorizing surety and guaranty agreements under section 5(b)(2) of the
HOLA from part 545 to the lending and investment regulation at part
560.
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\3\ Under a suretyship agreement, the surety is bound with its
principal to pay or perform an obligation to a third party. Black's
Law Dictionary 1441-42 (6th ed. 1990). Under a guaranty agreement,
on the other hand, the guarantor agrees to satisfy the obligation of
the principal to another only if the principal fails to pay or
perform. Id. at 705.
\4\ See e.g., 48 FR 23032, 23043 (May 23, 1983) (stating that
section 5(b)(2) of the HOLA empowers the FHLBB to authorize by
regulation the issuance of suretyship devices by Federal savings
associations for the purpose of guarantying the obligations of
others); FHLBB Op. Assoc. Gen. Counsel (July 5, 1983) (permitting
the association to act as surety or guarantor under section 5(b)(2)
of the HOLA). See also 12 CFR 545.16(a)(3) (``surety'' means surety
under real and/or personal suretyship, and includes guarantor).
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Currently 545.103 imposes various conditions on the exercise of a
Federal savings association's authority under section 5(b)(2) of the
HOLA. Under these conditions, a Federal savings association may enter
into a surety agreement only if its performance under the agreement
would create an obligation authorized for investment and it takes and
maintains a perfected security interest in described collateral. In
addition, the current rule treats the obligation under the surety
agreement as a loan to the principal under the loans-to-one-borrower
limits and loans to insider restrictions.
OTS proposed several modifications to these existing conditions.
First, OTS proposed to revise the collateral requirements to reflect
changes to the Office of Comptroller of the Currency's (OCC) related
regulation on surety and guaranty agreements.5 Second, OTS
proposed to add a new provision requiring the association to limit its
obligations under the surety or guaranty agreement to a fixed amount
and a specified duration. The proposed rule also added definitions of
the terms suretyship and guaranty agreement.6
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\5\ 12 CFR 7.1017, as amended by 61 FR 4849 (February 9, 1996).
\6\ The agency proposed to delete certain provisions of existing
Sec. 545.103. For example, current Sec. 545.103(c) states that if a
Federal savings association is required to perform under the
suretyship agreement, it must treat the amount advanced as an
extension of credit, subject to investment limits and other
restrictions applicable to such an extension of credit. OTS has
deleted this paragraph because it duplicates Sec. 560.31(a).
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Four commenters addressed the proposed surety and guaranty
regulation. Two supported the proposed changes. Two other commenters
suggested clarifications and changes. These two commenters argued that
the text of the proposed rule assumes that all guaranties are repayable
and, thus, treats all guaranty agreements as if they were loans. The
commenters noted that many guaranty-type arrangements issued by savings
associations are not repayable. As examples of such arrangements, the
commenters cited letters of credit, recourse transactions, and various
other corporate undertakings in financial transactions. The commenters
urged OTS to adopt a rule recognizing the standard market practice of
non-repayable guaranties and similar arrangements, and clarifying that
these practices are not subject to the conditions contained in the
proposed rule.
OTS did not intend to deprive Federal thrifts of any existing
authority. Rather, like the existing rule, this provision is intended
to address only repayable guaranty and surety agreements issued under
section 5(b)(2) of the HOLA.7 Federal savings associations
hold other authority to issue other guaranties and guaranty-like
arrangements. For example, a Federal savings association may sell loans
with recourse,8 issue letters of credit and other
independent undertakings,9 and act as a surety for public
deposits.10 Further, a Federal savings association may
execute signature guaranties,11 may act as a surety with
respect to its lost or destroyed Government National Mortgage
Association (GNMA) certificate,12 and may offer performance
guaranties on low down payment mortgage loans that it originates or
purchases and insures with a private mortgage insurer.13 OTS
did not intend to limit these authorities or to subject these
authorities to the conditions contained in the proposed rule.
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\7\ See FHLBB Op. Gen. Counsel (March 5, 1985) (Section 545.103
``addresses the situation where the association for a fee backs the
obligation of another to a third party; the party contracting for
the association to pledge to pay its debt would be liable to the
association for repayment should the association have to make
payment to the third party under the surety agreement.'')
\8\ See 47 FR 4049, 4051 (January 28, 1982).
\9\ See today's final rule at Sec. 560.50.
\10\ 12 CFR 545.16.
\11\ See FHLBB Op. Gen. Counsel (August 11, 1981) (``The
authority to guarant[y] customer signatures is both implied in and
incidental to the express objects and powers of Federal associations
as set forth in the HOLA and the Federal charter.'').
\12\ See FHLBB Op. Gen. Counsel (March 5, 1985) (``This is a
form of offering the association's assets generally in support of
its obligations which appears to be incidental to its authority to
enter into the GNMA transaction and to give security.'').
\13\ See OTS Op. Chief Counsel (October 2, 1998) (This activity
``is subsumed within the residential real property lending authority
of Federal savings associations in section 5(c)(1)(B) of the [HOLA],
and is a power incident to this authority.'').
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OTS has revised its final rule to clarify this point. The final
rule clarifies that a Federal savings association may enter into a
repayable suretyship or guaranty agreement under section 5(b)(2) of the
HOLA, subject to the conditions listed in Sec. 560.60.
As noted in the NPR, OTS modeled its rule on the OCC's rule on
surety and guaranty agreements at 12 CFR 7.1017. The OCC's regulation
states that:
A national bank may lend its credit, bind itself as a surety to
indemnify another, or otherwise become a guarantor, if: (a) The bank
has a substantial interest in the performance of the transaction
involved * * *; or (b) The transaction is for the benefit of a
customer and the bank obtains from the customer a segregated deposit
that is sufficient in amount to cover the bank's total potential
liability.
One commenter observed that the proposed rule incorporated paragraph
(b), but did not incorporate paragraph (a) of the OCC's rule. Thus, the
commenter noted that OCC does not require a national bank to
collateralize the transaction or meet collateral requirements listed in
paragraph (b), if the bank holds a substantial interest. The commenter,
therefore, asserted that OTS has imposed more rigorous
[[Page 46562]]
requirements than OCC, causing the thrift charter to be less attractive
than the national bank charter.
OCC appears to have included the ``substantial interest'' provision
to clarify the authority of national banks in light of judicial
precedent limiting their ability to issue guaranties for others based
on a lack of express authority to national banks to guarantee the acts
of third parties.14 Despite this limitation, national banks
may provide guaranties that are ``entered into for the furtherance of
their own rights or as an incident to the transaction of business.''
15 Interpretative Ruling 7.1017 was ``intended to provide a
general statement of this incidental powers exception to the general
prohibition against national banks' entering guarantees.''
16 Because the HOLA expressly authorizes thrifts to enter
into suretyship and guaranty agreements,17 it is unnecessary
to include a similar clarification in OTS's authorizing rule.
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\14\ See OCC Unpublished Interpretative Letter (June 4, 1993)
citing Dunn v. McCoy, 113 F.2d 587, 588 (3d Cir. 1940); Kimen v.
Atlas Exch. Nat'l Bank, 92 F.2d 615, 617 (7th Cir. 1937), cert.
denied, 303 U.S. 650 (1938); Border Nat'l Bank v. American Nat'l
Bank, 282 F. 73, 77 (5th Cir.), cert. denied and appeal dismissed,
260 U.S. 701 (1922); Bowen v. Needles Nat'l Bank, 94 F. 925, 927
(9th Cir. 1899), cert. denied, 176 U.S. 682 (1900).
\15\ OCC Interpretative Letter 376 (October 22, 1986), citing
Dunn, 113 F.2d at 589.
\16\ OCC Unpublished Interpretative Letter (June 4, 1993).
\17\ See 12 U.S.C. 1464(b)(2) and infra notes 2-4 and
accompanying text.
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Moreover, OTS believes that a new paragraph incorporating
incidental powers concepts would duplicate other existing OTS
regulations. Like national banks, federal savings associations hold
powers incident to their express powers, as set forth in the
HOLA.18 OTS regulations at 12 CFR 544.1 and 552.3 already
state that a Federal savings association may ``exercise all the
express, implied, and incidental powers conferred'' by the HOLA. In
light of this general recognition of incidental powers under the HOLA,
OTS has not restated the widely recognized incidental powers concepts
in this authorizing rule.
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\18\ See OTS Op. Acting Chief Counsel (March 25, 1994) at 7-8
and (October 17, 1994) at 4-5.
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In the proposed rule, OTS asked whether the OTS rule should
specifically authorize other types of suretyship, guaranty, or similar
arrangements beyond those covered in the proposed rule. One commenter
recommended that OTS adopt a rule based on the OCC's former rule at 12
CFR 7.7015 (1996), which permitted a national bank to engage in check
guaranty plans under which it will honor checks drawn on it up to a
certain amount. OCC determined that this arrangement is essentially a
credit agreement and, therefore, a permissible activity.
OTS believes that the HOLA expressly authorizes these check
guaranty plans. A check guaranty plan is an arrangement where an
institution holds out to the public that it will honor checks drawn
upon it up to a certain amount by a depositor who displays a check
guaranty card. A check guaranty plan is, in essence, an agreement by a
Federal savings association to pay deposits out of an account or extend
credit up to a predetermined amount to a depositor when insufficient
funds are available to honor a check drawn on a depositor's
account.19 In the latter case, such a commitment to lend is
within the express powers of Federal savings associations under section
5(c)(1)(A) of the HOLA, which permits a Federal savings association to
make ``loans specifically related to transaction accounts.''
20 OTS regulation at 12 CFR 560.30, which implements this
section of the HOLA, specifically states that transaction account loans
include overdrafts.21 Thus, the HOLA and OTS regulations
already authorize a Federal savings association to offer a plan that
provides a line of credit on the customer's checking account. Since a
Federal savings association may make overdraft loans, it is not
necessary to expressly authorize check guaranty plans in the revised
suretyship and guaranty provisions.22
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\19\ OCC reached a similar conclusion that check guaranty plans
are essentially a loan commitment. See 12 CFR 7.7015 (1996).
\20\ 12 U.S.C. 1464(c)(1)(A). Moreover, section 12 of the HOLA
expressly authorizes a Federal savings association to advertise,
subject to OTS regulations.
\21\ While loans on transactional accounts under section
5(c)(1)(A) of the HOLA are not subject to percentage of assets
limitation, OTS implementing regulation indicates that
``[overdrafts] on commercial deposit or transaction accounts shall
be considered to be commercial loans for the purposes of determining
the association's percentage of assets limitations.'' 12 CFR 560.30,
footnote 20.
\22\ OTS notes that OCC removed the interpretive ruling on check
guaranty plans from its regulations in 1996 because the ruling was
unnecessary or repetitive. 61 FR 4849, 4860 (February 9, 1996).
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Today's final rule also includes several changes to the proposed
rule. First, OTS has moved the conditions on the exercise of this
surety and guaranty authority from its proposed location at
Sec. 560.115 to the authorizing provision at Sec. 560.60.23
Second, OTS has made minor clarifying revisions to the text of the
rule. For example, OTS has revised the provision addressing real estate
collateral at Sec. 560.60(c)(1)(i) to require an evaluation or
appraisal of real estate consistent with OTS appraisal regulation at 12
CFR 564.3. OTS has also replaced the phrase ``prior mortgage'' in
Sec. 560.60(c)(1)(i) with the phrase ``any existing senior mortgages''
to clarify this provision.
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\23\ OTS originally placed these conditions in subpart B of part
560 to ensure that similar guaranty and surety agreements by state-
chartered savings associations would be subject to cited conditions.
A state-chartered savings association may not engage as principal in
any type of activity that is not permissible for a Federal savings
association, unless the FDIC has made certain determinations
regarding the risk of the transactions. See 12 U.S.C. 1831e(a)
(1989). Accordingly, this purpose will be preserved by placing the
restrictions in the authorizing provision at Sec. 560.60.
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B. Letters of Credit and Other Independent Undertakings
Proposed 560.50 would clarify that Federal savings associations are
authorized to issue letters of credit, and may issue such other
independent undertakings as are approved by OTS, subject to
restrictions in existing 560.120.24 Three commenters
addressed proposed 560.50. Two of these commenters supported OTS's
proposal. The third commenter submitted information regarding
international practices relating to standby letters of credit. Today's
final rule adopts proposed 560.50 without change.
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\24\ The broad scope of the term ``independent undertakings''
and its recent evolution require close supervision and review when
such undertakings fall outside the more traditional activities
generally known as letters of credit. OTS approval may take the form
of legal opinions, general guidance, or case-by-case approvals,
depending on how the undertakings are presented to the agency. See
63 FR 49874, 49875-76 (September 18, 1998).
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Today's final rule also makes several technical and clarifying
revisions to 560.120, a related rule on Letters of Credit and Other
Undertakings to Pay Against Documents. First, OTS has redrafted
paragraph (a) to be more concise. Second, OTS is revising footnote 1 to
indicate that the U.N. General Assembly adopted in 1995 and the United
States signed in 1997, the United Nations Convention on Independent
Guarantees and Standby Letters of Credit. Third, OTS is revising
560.120(b)(2)(ii) to clarify that the precautions on allowing credit
assessments when an independent undertaking is renewed apply only to
automatic renewals. Discretionary renewals implicitly allow the savings
association to make any necessary credit assessment before renewing.
Fourth, OTS is updating a telephone number in footnote 1.
OTS did not address these changes in the NPR. Because these changes
are technical, rather than substantive, OTS has concluded that notice
and public comment on these changes is
[[Page 46563]]
unnecessary and contrary to the public interest.25
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\25\ See 5 U.S.C. 553(b)(B).
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C. Escrow Accounts
In the NPR, OTS requested comment on the escrow authority of
Federal savings associations. OTS has long recognized that the
authority of Federal savings associations to make loans includes the
authority to establish an escrow account in connection with a
loan.26 However, OTS questioned whether it should clarify
the scope of Federal savings associations' authority to handle escrow
accounts that are not related to loans. OTS did not propose any new
regulatory text on escrow accounts. Rather, it requested comment on
this issue. OTS specifically asked commenters to address whether OTS
should place any restriction on the exercise of the escrow authority.
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\26\ See 61 FR 50951, 50961 (September 30, 1996).
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Three commenters opposed the adoption of any regulation addressing
the escrow authority of Federal savings associations. These commenters
argued that current guidance in the escrow area is
sufficient.27 Commenters also feared that additional
restrictions on the exercise of escrow authority, particularly for
escrow accounts related to loans, could lead to confusion with other
regulations.28
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\27\ See 61 FR 50951, 50961 (September 30, 1996)(the authority
to hold escrow accounts related to loans); OTS Regulatory Handbook:
Trust Activities, Sec. 140 (1992) and Op. Chief Counsel (October 17,
1995) (the authority to engage in fiduciary activities involving
non-discretionary activities such as escrow or safekeeping services
or acting as a custodian or paying agent); and OTS Op. Chief Counsel
(August 19, 1998) (the authority to hold an escrow account for funds
representing down-payments on vacations for a Federal savings
association customer, a vacation organizer).
\28\ See e.g., the Real Estate Settlement Procedures Act at 12
U.S.C. 2601 et seq. and the implementing regulations at 24 CFR 3500
et seq.
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In light of these comments, OTS will not adopt a regulation on
escrow authority in this rulemaking. OTS will continue to answer any
questions that arise in this area on a case-by-case basis.
IV. Related Definitions
In connection with today's final rule, OTS has removed or revised
certain lending-related definitions in parts 541 and 561 and elsewhere.
These revisions fulfill, in part, promises made in the final lending
and investment regulation in 1996. In that rulemaking, OTS recognized
that its regulations include similar, but not identical, terms in
various regulatory provisions. OTS indicated that it would review its
definitions and would minimize or eliminate the potential for confusion
in a later rulemaking.29
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\29\ See e.g., 61 FR 50951, 50953, 50959 (September 30, 1996).
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OTS did not address the possibility of these changes in the NPR.
Nonetheless, OTS has concluded that additional notice and public
comment on these changes is unnecessary and contrary to the public
interest.30 OTS has not made any substantive revisions in
this final rule. Rather, OTS has simply removed some unused terms, and
made other minor technical or clarifying changes to other definitions.
OTS has made the following revisions:
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\30\ See 5 U.S.C. 553(b)(B).
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A. Guaranteed Loan, Guaranteed Obligation, and Insured Loan
The current OTS rules at Parts 541 and 561 include one definition
of ``guaranteed obligation'' (561.21), two definitions of ``guaranteed
loan'' (541.13 and 561.20), and two definitions of ``insured loan''
(541.17 and 561.25). The FHLBB originally adopted these definitions
between 1949 and 1968 to implement various lending and investments
authorities then applicable to Federal savings
associations.31 Neither OTS nor the FHLBB substantively
revised these definitions after 1971. OTS merely adopted these
definitions without change when it transferred and re-codified FHLBB
regulations in 1989.32
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\31\ See 14 FR 3981 (July 16, 1949); 23 FR 9891 (December 23,
1958); 33 FR 16555 (November 14, 1968).
\32\ 54 FR 49411 (November 30, 1989).
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The current definitions of the cited terms conflict. For example,
541.13 defines ``guaranteed loan'' as a loan guaranteed under the
Servicemen's Readjustment Act of 1944 or chapter 37 of title 38, United
States Code, as amended. Section 561.20, on the other hand, defines
``guaranteed loan'' as a loan guaranteed under ``(a) The Servicemen's
Readjustment Act of 1944 or chapter 37 of title 38, United States Code;
(b) The New Communities Act of 1968; (c) Section 221 or section 224 of
the Foreign Assistance Act of 1961, as in effect prior to December 30,
1969; or (d) section 221 or section 222 of the Foreign Assistance Act
of 1961, as in effect on December 30, 1969, and thereafter.'' The two
definitions of insured loans are similarly inconsistent.33
These inconsistencies have arisen over time as the statutes and
regulations affecting savings associations have been reorganized and
recodified.
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\33\ Compare 12 CFR 541.17 with 12 CFR 561.25.
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OTS regulations use the three cited terms only in the lending and
investment chart at 560.30. This chart expressly cross-references the
explicit statutory citation for each type of guaranteed loan,
guaranteed obligation, or insured loan. These cross-references
completely and accurately define the scope of the lending and
investment authority of Federal savings associations. Accordingly, OTS
has concluded that these definitions are unnecessary and potentially
confusing, and has deleted these provisions.
B. Open-End Consumer Credit and Closed-End Consumer Credit
The current rules at 561.36 and 561.10 define open-end consumer
credit and closed-end consumer credit by a cross-reference to
Regulation Z (12 CFR 226.2). OTS regulations use these two phrases only
in 560.3 (definition of consumer loan). Accordingly, OTS has deleted
the definitions of open-end and closed-end consumer credit, and has
revised 560.3 to include appropriate cross-references to Regulation Z.
OTS has also made a minor technical change to the definition of
consumer loan at 560.3. The existing consumer loan definition excludes
``credit extended in connection with credit cards and bona fide
overdraft loans.'' OTS excluded these loans to reflect the fact that
credit card loans and overdraft loans are not subject to the 35 percent
of asset limitation applicable to consumer loans under section 5 of the
HOLA.34 OTS notes, however, that other types of loans may
meet the technical definition of consumer loan at 560.3, but may also
be made without limitation under other sections of the HOLA. Examples
include educational loans and home improvement loans.35 OTS
has revised the rule to indicate that the term consumer loan does not
include credit extended in connection with credit card loans, bona fide
overdraft loans, and other loans that the savings association has
designated as made under investment or lending authority other than
section 5(c)(2)(D) of the HOLA.36
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\34\ See 61 FR 50951, 50959 (September 30, 1996). A Federal
thrift's aggregate investments in consumer loans, corporate debt
securities, and commercial paper are subject to a 35 percent of
assets limitation.
\35\ 12 U.S.C. 1464(c)(1)(J) and (c)(1)(U).
\36\ See 12 CFR 560.31.
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C. Residential Real Estate and Related Definitions
OTS has also made minor revisions to the definition of residential
real estate and related definitions. Two changes consolidate defined
terms. For example, 541.3 defines the phrase ``combination of home and
business property'' as a home used in part for business. OTS
[[Page 46564]]
regulations use this phrase twice--once in the definition of
residential real estate at 541.23 and once in the definition of home
loan at 560.3. The final rule deletes 541.3 and modifies 541.23 and
560.3 accordingly.
Similarly, 541.4 defines the phrase ``combination of residential
real estate and business property involving only minor or incidental
business use'' as residential real estate for which no more than twenty
percent of the total appraised value of the real estate is attributable
to the business use. OTS regulations use this phrase only in the
definition of residential real estate at 541.23. OTS has deleted 541.4
and has revised 541.23 to include the phrase.
In addition, 541.23 currently defines residential real estate, in
part, as ``homes (including condominiums and cooperatives).'' OTS has
clarified the parenthetical phrase to include ``a dwelling unit in a
multi-family residential property such as a condominium or a
cooperative.'' 37
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\37\ OTS has made a related change to the definition of home
loan at 12 CFR 560.3.
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D. Miscellaneous Definitions
Section 561.23 defines the term ``home mortgage.'' OTS regulations
use this term only within the phrase ``home mortgage loan'' in part
563e--Community Reinvestment. OTS has separately defined ``home
mortgage loan'' for part 563e by a cross-reference to the Federal
Reserve Board's Regulation C--Home Mortgage Disclosure.38
Since OTS rules do not use the term ``home mortgage'' elsewhere, OTS
has deleted this definition as superfluous.
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\38\ See 12 CFR 563e.12(l), which cross-references 12 CFR 203.2.
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OTS regulations define the phrase ``normal lending territory'' at
561.32, but do not use this term anywhere. This definition appears to
be a remnant of provisions found in former section 5(c) of the HOLA,
which generally restricted real estate lending by a Federal savings
association to property located in the state in which the association's
home office was located, or within 100 miles of the home
office.39 OTS has deleted this term as unnecessary.
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\39\ 12 U.S.C. 1464(c)(1976).
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The rules define ``cooperative housing development'' at 541.6. This
term, however, is also not used in OTS regulations. OTS has, therefore,
deleted this definition.
OTS rules at 561.11 define ``closing date'' as ``any annual or
semiannual closing date.'' Three OTS regulations use this term. The
cited definition is clearly inapplicable in two of these regulations.
See 12 CFR 563b.7(g)(5) (the closing date of a public offering) and 12
CFR 567.4(a)(4) (the closing date for a response to a notice of intent
to issue a capital directive). The remaining regulation at 563b.3(f)(5)
uses closing date within the phrase ``annual closing date.'' OTS,
therefore, has removed this term as superfluous.
V. Executive Order 12866
The Director of OTS has determined that this final rule does not
constitute a ``significant regulatory action'' for the purpose of
Executive Order 12866.
VI. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS
certifies that this final rule will not have a significant economic
impact on a substantial number of small entities. Today's final rule
will not impose any additional burdens or requirements on small
entities. Rather, the final rule simply clarifies the authority of
Federal savings associations to act as guarantor and to issue letters
of credit. This final rule also streamlines lending related definitions
or removes unnecessary or outdated definitions. While the final rule
also restricts the circumstances under which savings associations may
enter into surety and guaranty agreements, the restrictions are the
minimum necessary for safe and sound operations and should not impose a
significant burden on small savings associations.
VII. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. OTS has determined that the
final rule will not result in expenditures by state, local, or tribal
governments or by the private sector of $100 million or more.
Accordingly, this rulemaking is not subject to section 202 of the
Unfunded Mandates Act.
List of Subjects
12 CFR Part 541
Savings associations.
12 CFR Part 545
Accounting, Consumer protection, Credit, Electronic funds
transfers, Investments, Reporting and recordkeeping requirements,
Savings associations.
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 561
Savings associations.
Accordingly, the Office of Thrift Supervision amends chapter V,
title 12, Code of Federal Regulations as set forth below:
PART 541--DEFINITIONS
1. The authority citation for part 541 continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464.
Secs. 541.3, 541.4, 541.6, 541.13, 541.17 [Removed]
2. Sections 541.3, 541.4, 541.6, 541.13, and 541.17 are removed.
3. Section 541.23 is revised to read as follows:
Sec. 541.23 Residential real estate.
The terms residential real estate or residential real property
mean:
(a) Homes (including a dwelling unit in a multi-family residential
property such as a condominium or a cooperative);
(b) Combinations of homes and business property (i.e., a home used
in part for business);
(c) Other real estate used for primarily residential purposes other
than a home (but which may include homes);
(d) Combinations of such real estate and business property
involving only minor business use (i.e., where no more than 20 percent
of the total appraised value of the real estate is attributable to the
business use);
(e) Farm residences and combinations of farm residences and
commercial farm real estate;
(f) Property to be improved by the construction of such structures;
or
(g) Leasehold interests in the above real estate.
PART 545--[AMENDED]
PART 560--LENDING AND INVESTMENT
4. The authority citation for part 560 continues to read as
follows:
[[Page 46565]]
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,
1828, 3803, 3806; 42 U.S.C. 4106.
Sec. 545.103 [Redesignated as Sec. 560.60]
5. Section 545.103 is redesignated as Sec. 560.60 and revised to
read as follows:
Sec. 560.60 Suretyship and guaranty.
Pursuant to section 5(b)(2) of the HOLA, a Federal savings
association may enter into a repayable suretyship or guaranty
agreement, subject to the conditions in this section.
(a) What is a suretyship or guaranty agreement? Under a suretyship,
a Federal savings association is bound with its principal to pay or
perform an obligation to a third person. Under a guaranty agreement, a
Federal savings association agrees to satisfy the obligation of the
principal only if the principal fails to pay or perform.
(b) What requirements apply to suretyship and guaranty agreements
under this section? A Federal savings association may enter into a
suretyship or guaranty agreement under this section, subject to each of
the following requirements:
(1) The Federal savings association must limit its obligations
under the agreement to a fixed dollar amount and a specified duration.
(2) The Federal savings association's performance under the
agreement must create an authorized loan or other investment.
(3) The Federal savings association must treat its obligation under
the agreement as a loan to the principal for purposes of Secs. 560.93
and 563.43 of this chapter.
(4) The Federal savings association must take and maintain a
perfected security interest in collateral sufficient to cover its total
obligation under the agreement.
(c) What collateral is sufficient? (1) The Federal savings
association must take and maintain a perfected security interest in
real estate or marketable securities equal to at least 110 percent of
its obligation under the agreement, except as provided in paragraph
(c)(2) of this section.
(i) If the collateral is real estate, the Federal savings
association must establish the value by a signed appraisal or
evaluation in accordance with part 564 of this chapter. In determining
the value of the collateral, the Federal savings association must
factor in the value of any existing senior mortgages, liens or other
encumbrances on the property, except those held by the principal to the
suretyship or guaranty agreement.
(ii) If the collateral is marketable securities, the Federal
savings association must be authorized to invest in that security taken
as collateral. The Federal savings association must ensure that the
value of the security is 110 percent of the obligation at all times
during the term of agreement.
(2) The Federal savings association may take and maintain a
perfected security interest in collateral which is at all times equal
to at least 100 percent of its obligation, if the collateral is:
(i) Cash;
(ii) Obligations of the United States or its agencies;
(iii) Obligations fully guarantied by the United States or its
agencies as to principal and interest; or
(iv) Notes, drafts, or bills of exchange or bankers' acceptances
that are eligible for rediscount or purchase by a Federal Reserve Bank.
6. Section 560.3 is amended by revising the definitions of
``Consumer loans'' and ``Home loans'' to read as follows:
Sec. 560.3 Definitions.
* * * * *
Consumer loans include loans for personal, family, or household
purposes and loans reasonably incident thereto, and may be made as
either open-end or closed-end consumer credit (as defined at 12 CFR
226.2(a) (10) and (20)). Consumer loans do not include credit extended
in connection with credit card loans, bona fide overdraft loans, and
other loans that the savings association has designated as made under
investment or lending authority other than section 5(c)(2)(D) of the
HOLA.
* * * * *
Home loans include any loans made on the security of a home
(including a dwelling unit in a multi-family residential property such
as a condominium or a cooperative), combinations of homes and business
property (i.e., a home used in part for business), farm residences, and
combinations of farm residences and commercial farm real estate.
* * * * *
7. Section 560.50 is added to subpart A to read as follows:
Sec. 560.50 Letters of credit and other independent undertakings--
authority.
A Federal savings association may issue letters of credit and may
issue such other independent undertakings as are approved by OTS,
subject to the restrictions in Sec. 560.120.
8. Section 560.120 is amended by revising the first two sentences
of paragraph (a) and paragraph (b)(2)(ii) to read as follows:
Sec. 560.120 Letters of credit and other independent undertakings to
pay against documents.
(a) General authority. A savings association may issue and commit
to issue letters of credit within the scope of applicable laws or rules
of practice recognized by law. It may also issue other independent
undertakings within the scope of such laws or rules of practice
recognized by law, that have been approved by OTS (approved
undertaking).1 * * *
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\1\ Samples of laws or rules of practice applicable to letters
of credit and other independent undertakings include, but are not
limited to: the applicable version of Article 5 of the Uniform
Commercial Code (UCC) (1962, as amended 1990) or revised Article 5
of the UCC (as amended 1995) (available from West Publishing Co., 1/
800/328-4880); the Uniform Customs and Practice for Documentary
Credits (International Chamber of Commerce (ICC) Publication No.
500) (available from ICC Publishing, Inc., 212/206-1150; the United
Nations Convention on Independent Guarantees and Standby Letters of
Credit (adopted by the U.N. General Assembly in 1995 and signed by
the U.S. in 1997) (available from the U.N. Commission on
International Trade Law, 212/963-5353); and the Uniform Rules for
Bank-to-Bank Reimbursements Under Documentary Credits (ICC
Publication No. 525) (available from ICC Publishing, Inc., 212/206-
1150).
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(b) * * *
(2) * * *
(ii) In the event that the undertaking provides for automatic
renewal, the terms for renewal should allow the savings association to
make any necessary credit assessment prior to renewal;
* * * * *
PART 561--DEFINITIONS
9. The authority citation for part 561 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a.
Secs. 561.10, 561.11, 561.20, 561.21, 561.23, 561.25, 561.32,
561.36 [Removed]
10. Sections 561.10, 561.11, 561.20, 561.21, 561.23, 561.25,
561.32, and 561.36 are removed.
Dated: August 19, 1999.
By the Office of Thrift Supervision.
Richard M. Riccobono,
Deputy Director.
[FR Doc. 99-21993 Filed 8-25-99; 8:45 am]
BILLING CODE 6720-01-P