[Federal Register Volume 60, Number 172 (Wednesday, September 6, 1995)]
[Proposed Rules]
[Pages 46246-46251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21983]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 60, No. 172 / Wednesday, September 6, 1995 /
Proposed Rules
[[Page 46246]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 23
[95-21]
RIN 1557-AB45
Leasing
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC) is
proposing to revise its regulation governing the personal property
lease financing transactions of national banks. This proposal is
another component of the OCC's Regulation Review Program to update and
streamline OCC regulations and to reduce unnecessary regulatory costs
and other burdens. The proposal revises the regulation to improve its
clarity. In addition, the OCC has identified several areas where
substantive changes may be appropriate based upon comments received in
this rulemaking.
DATES: Comments must be received by November 6, 1995.
ADDRESSES: Comments should be directed to: Communications Division, 250
E Street, SW., Washington, DC 20219, Attention: Docket No. 95-21.
Comments will be available for public inspection and photocopying at
the same location.
FOR FURTHER INFORMATION CONTACT: Morris Morgan, Credit and Management
Policy, Chief National Bank Examiner's Office 202/874-5170; Jacqueline
Lussier, Senior Attorney, Legislative and Regulatory Activities 202/
874-5090, Aline J. Henderson, Senior Attorney, Bank Activities and
Structure, Chief Counsel's Office 202/874-5300.
SUPPLEMENTARY INFORMATION:
Introduction
The OCC is proposing to revise 12 CFR part 23, which governs
personal property lease financing transactions by national banks. This
proposal is another component of the OCC's Regulation Review Program.
The principal goal of the Program is to review all of the OCC's rules
with a view toward eliminating provisions that do not contribute
significantly to maintaining the safety and soundness of national banks
or to accomplishing the OCC's other statutory responsibilities. Another
important goal is to clarify regulations so that they more effectively
convey the standards the OCC seeks to apply.
The OCC first adopted part 23 in mid-1991.1 The OCC's
experience to date suggests that a complete, substantive rewrite of the
regulation is not warranted at this time, but that revisions to improve
its clarity would be useful. Accordingly, the proposal revises the
regulation by shortening and streamlining its text; reorganizing many
of its provisions and adding paragraph headings; and conforming its
style to that of the OCC's other rules. In addition, the OCC has
identified several areas, described in the Discussion section below,
where substantive changes may be appropriate based upon the comments
received in response to this proposal.
\1\ 56 FR 28314 (June 20, 1991). The final regulation replaced
the OCC's interpretive ruling on lease financing transactions, which
had been codified at 12 CFR 7.3400. Much of the substance of this
interpretive ruling was retained, however, in the portions of part
23 that apply to Section 24(Seventh) Leases.
---------------------------------------------------------------------------
Background
National banks may engage in leasing activities pursuant to two
independent sources of authority. First, under 12 U.S.C. 24(Seventh),
national banks may engage in personal property lease financing
transactions (Section 24(Seventh) Leases) when the lease is the
functional equivalent of a loan.2 The OCC has interpreted the
functional equivalency standard to mean that Section 24(Seventh) Leases
must be ``net, full-payout leases.'' Under the current regulation, the
net lease requirement means that the lessor national bank may not
provide certain enumerated services such as repairs, maintenance, or
insurance in connection with the leased property. The full-payout
requirement means that the bank must expect to recover the full
acquisition and financing costs of the leasing transaction from sources
that include the estimated, unguaranteed residual value of the leased
property, but that the bank may rely on estimated residual value only
to a limited extent. There is no aggregate limit on a national bank's
investment in Section 24(Seventh) Leases.
\2\ See M & M Leasing Corp. v. Seattle First National Bank, 563
F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978)
(upholding national banks' authority under 12 U.S.C. 24(Seventh) to
engage in personal property lease financing transactions if the
lease is the functional equivalent of a loan).
In 1987, Congress gave national banks a second, explicit source of
authority to engage in the personal property lease financing. The
Competitive Equality Banking Act (CEBA) 3 amended 12 U.S.C. 24 by
adding a new paragraph Tenth, which allows national banks to invest in
tangible personal property, including vehicles, manufactured homes,
machinery, equipment, and furniture, for lease financing transactions
on a net lease basis. Investment in personal property to be leased
under the authority of 12 U.S.C. 24(Tenth) (CEBA Leases) may not exceed
10 percent of a national bank's assets. Although a national bank must
expect to recover its full acquisition and financing costs in a CEBA
leasing transaction from the same sources as the regulation specifies
for a Section 24(Seventh) leasing transaction, CEBA Leases are not
subject to a maximum estimated residual value limit.
\3\ Pub. L. 100-86, Sec. 108, 101 Stat. 552, 579 (August 10,
1987). See also S. Rep. No. 100-19, 100th Cong., 1st Sess. 43 (1987)
(CEBA expanded national banks' leasing authority in order to enable
them to respond to customer demand for a broader range of lease
financing transactions and to compete with thrift and other nonbank
lessors).
---------------------------------------------------------------------------
Both Section 24(Seventh) Leases and CEBA Leases are governed by
standards set forth in part 23. The current version of part 23 contains
three subparts: subpart A applies to all lease financing transactions;
subpart B contains additional requirements applicable only to CEBA
Leases; and subpart C contains additional requirements applicable only
to Section 24(Seventh) Leases. The proposal retains the three-subpart
structure, but revises and reorganizes the rule's provisions to enhance
clarity. A derivation table showing these changes appears at the
conclusion of this preamble.
The Discussion portion of the preamble contains a section-by-
section description of the proposed revisions.
[[Page 46247]]
Discussion
Subpart A--General Provisions
Authority, Purpose, and Scope (Proposed Sec. 23.1)
Current Section 23.1(a) sets out the authority of national banks to
engage in personal property lease financing transactions. The proposal
does not change the authority provision, but it adds subsections
describing the purpose of part 23 and the scope of its respective
subparts. Current 23.1(b), which authorizes a national bank to recover
its acquisition and financing costs from rentals, tax benefits, and the
residual value of the leased property, is relocated to proposed
Sec. 23.3.
Definitions (Proposed Sec. 23.2)
The current regulation does not contain a definitions section.
Proposed Sec. 23.2 defines several terms, including ``CEBA Lease,''
``conforming lease,'' ``off-lease property,'' and ``Section 24(Seventh)
Lease'' for the purpose of making the operative provisions of the
regulation shorter and easier to read.
Current Sec. 23.2 contains both a definition of the term ``net
lease'' and operative provisions, including the so-called ``distress
clauses,'' which allow a national bank to take reasonable action to
protect its interest in leased property, and a provision that allows a
national bank to arrange for a third party to provide operational
services that the bank is precluded from providing under a net lease.
The definition of ``net lease'' is retained in proposed Sec. 23.2(d)
without substantive change; the operative provisions are moved to
proposed Sec. 23.4.
Proposed Sec. 23.2(c) contains a definition of the term ``full-
payout lease.'' The term is defined as a lease financing transaction in
which the unguaranteed portion of the estimated residual value of the
leased property \4\ on which a bank relies for recovery of its
acquisition and financing costs is no greater than 25 percent of the
cost of the leased property to the lessor. This estimated residual
value limit is the same as the limit that currently appears at
Sec. 23.11(a) of the current regulation. Other, operative provisions of
the current regulation that pertain to residual value are retained in
subpart C of part 23, as described below.
\4\ The ``estimated residual value'' is the estimated market
value of leased property at the end of the lease term; the
``unguaranteed portion'' of the estimated residual value is the
estimated residual value at the end of the lease term less any
portion of the estimated residual value guaranteed by the lessee,
the manufacturer, or a third party. See 12 CFR 23.1(b), 23.11.
---------------------------------------------------------------------------
The purpose of a residual value limit is to ensure that a lessor
bank relies primarily on the creditworthiness of the lessee to recover
its entire investment in the leased property. When the OCC adopted the
current residual value limit in 1979, it selected 25 percent as the
level that best protected national banks from the increased risk that
results from excessive reliance on residual value. That amount was
based in part on the OCC's experience at that time in examining and
supervising banks engaged in Section 24(Seventh) lease financing
activities. See 44 FR 22388, 22390 (April 13, 1979) (adoption of
interpretive rule establishing estimated residual value limit of 25
percent).\5\
\5\ In 1979, the regulations promulgated by the Board of
Governors of the Federal Reserve System (FRB) that authorized a bank
holding company or its subsidiary to engage in lease financing
activities limited the reliance placed on residual value to a
maximum of 20 percent of the cost of the property. In 1992, the FRB
decided to conform its residual value provisions to the OCC's limit
for Section 24(Seventh) Leases. The FRB based its decision, in part,
on the fact that the OCC had not identified any significant
increased risk from permitting reliance on the slightly higher level
of 25 percent. See 57 FR 20958, 20959-60 (May 18, 1992) (final
regulation; discussion of bases for FRB action). The FRB's
regulation appears at 12 CFR 225.25(b)(8).
---------------------------------------------------------------------------
Since then, national banks have been given authority to enter into
CEBA Leases, which are not subject to a maximum residual value limit
(but are restricted in aggregate amount to 10 percent of a national
bank's total consolidated assets). National banks do not appear to be
engaged in CEBA leasing to the full extent of their statutory
authority, and liberalization of the residual value limit for Section
24(Seventh) Leases may therefore be unnecessary.
The OCC is interested in commenters' views on this question, and
specifically invites comment on whether the residual value limit for
Section 24(Seventh) Leases should be modified. In addressing this
question, commenters may wish to discuss the effect of Financial
Accounting Standards Board Statement of Financial Accounting Standard
13, ``Accounting for Leases,'' which, as a practical matter, may affect
the extent to which a national bank relies on residual value.
Commenters who support a more flexible limit on residual value for
Section 24(Seventh) Leases are asked to identify any increased risk
that may accompany a new limit and to discuss how the OCC should
address that risk.
Recovery of Investment (Proposed Sec. 23.3)
Proposed Sec. 23.3 is the same as current Sec. 23.1(b), which
requires that a national bank entering into a lease financing
transaction must reasonably expect to recover its full investment in
the leased property as well as its estimated financing costs over the
life of the lease from three sources: rentals, estimated tax benefits,
and the estimated residual value of the leased property.
As its placement in subpart A of part 23 indicates, the recovery of
investment provision applies both to CEBA Leases and to Section
24(Seventh) Leases. The maximum estimated residual value requirement
that appears in the definition of the term ``full-payout lease,''
however, applies only to Section 24(Seventh) Leases. Neither the
current regulation nor the proposal limits the extent to which a
national bank may rely on residual value to recover its acquisition and
financing costs in a CEBA Lease transaction.
Net Lease Requirement (Proposed Sec. 23.4)
A new paragraph (a) is added to proposed Sec. 23.4. This paragraph
contains an explicit statement of the requirement that national banks
may engage in a lease financing transaction, and in activities
incidental to the transaction, only if the lease is a net lease. The
current rule does not contain a plain statement of this basic
requirement. The statement is added for purposes of clarity and
completeness; it is not intended to change the requirement.
The incidental activities clause in proposed Sec. 23.4(a) reflects
the OCC's long-standing interpretations authorizing national banks to
engage in activities incidental to leasing. As the placement of the
incidental activities reference within subpart A of part 23 indicates,
the OCC takes the position that a national bank may engage in
incidental activities with respect both to Section 24(Seventh) Leases
and CEBA Leases.
The activities incidental to leasing that the OCC has authorized to
date for national banks acting as lessors include: \6\ providing
management,
[[Page 46248]]
marketing, and administrative services through an operating subsidiary;
offering credit life insurance to lessees; and acquiring rights under
maintenance contracts associated with purchased leases.\7\ The OCC does
not propose to include a list of permissible activities incidental to
leasing in part 23. Commenters are, however, invited to address the
desirability of retaining this case-by-case approach and to discuss
incidental activities that may be appropriate for OCC consideration. In
particular, the OCC is seeking comment on whether it should, on a case-
by-case basis, permit national banks to lease real estate when the real
estate lease is incidental to a personal property lease financing
transaction. This issue may arise, for example, when a bank wishes to
lease personalty, such as machinery, that is affixed to the land on
which it sits.
\6\ The OCC has also authorized national banks to engage in
incidental activities with respect to lease financing transactions
to which the bank is not a party. These activities include acting as
finder or performing similar functions as agent or broker. See 12
CFR 7.7200. They also include providing lease consulting services
such as financial advice; providing management, brokerage, and
finder services; and performing lease servicing for third parties.
See, e.g., OCC Interpretive Letter No. 567 (Oct. 29, 1991) reprinted
in [1991-92 Transfer Binder] Fed. Banking L. Rep. (CCH) para.
83,337; Letter from Wallace S. Nathan (Oct. 28, 1985) (unpublished);
Letter from Peter Liebesman (June 15, 1981) (unpublished).
Copies of unpublished letters are available in the OCC's public
comment file for this rulemaking.
\7\ See Letter from H. Joe Selby, Nov. 24, 1976 (unpublished)
(management, marketing, and administrative services through an
operating subsidiary); Letter from Peter Liebesman, Jan. 14, 1985
(unpublished) (credit life insurance); Letter from J.T. Watson, May
14, 1975 (unpublished) (rights under maintenance contracts
associated with purchased leases).
---------------------------------------------------------------------------
The substance of proposed Sec. 23.4(b) is the same as that of
current Sec. 23.2(b), (c), and (d), but the text has been revised so
that it is shorter and simpler. For example, the provisions specifying
the conditions under which a national bank may take appropriate action
to protect its interests have been amended so that they no longer
require that a change in condition be ``unexpected'' or that a bank's
increased exposure to risk be ``significant.'' As is the case in
current Sec. 23.2, proposed Sec. 23.4(b) provides that the actions a
national bank may take to salvage or protect its investment under the
distress clauses include the actions described in the definition of net
lease at Sec. 23.2(d).
Investment in Personal Property (Proposed Sec. 23.5)
Current Sec. 23.3, which governs the acquisition of property to be
leased, the disposition of the property at the conclusion of the lease
term or upon the lessee's default, and the use of short-term leases,
has been moved to proposed Sec. 23.5 with certain clarifying changes.
For example, the text of the provision covering bridge or interim
leases has been rewritten to state more clearly the current rule that a
bank's use of a bridge or interim lease pending the long-term
disposition of off-lease property does not extend the off-lease holding
period. Property is ``off-lease'' at the expiration of the lease term
or upon the lessee's default on the lease agreement prior to
expiration.
Current Sec. 23.3(b) requires that a national bank dispose of or
re-lease off-lease property as soon as practicable, but not later than
two years from the date the lease expires. Proposed Sec. 23.5(b) is
substantively the same but contains new language to clarify that the
two-year holding period runs either from the date the lease expires or
from the date of the lessee's default, depending on the reason that the
national bank takes possession or control of the leased property.
Both Section 24(Seventh) Leases and CEBA Leases are subject to this
holding period limitation for off-lease assets. Property that the bank
retains in anticipation of re-leasing must be revalued when it comes
off-lease at the lower of current fair market value or book value. Upon
the expiration of the two-year period, national banks are required to
write-off any remaining book value for off-lease assets.
The OCC has considered whether it should extend the holding period
for off-lease property. For example, a longer holding period may be
appropriate where markets for particular types of property become
depressed, and the two-year period might be insufficient to allow
national banks to proceed with the orderly liquidation or re-lease of
the property. The OCC, however, lacks empirical data on the experiences
national banks have had in attempting to liquidate or re-lease specific
kinds of off-lease property within the current holding period and,
accordingly, is not now proposing any change.
The OCC would consider modifying the holding period in the final
revisions of part 23 if commenters present persuasive reasons,
supported by empirical evidence, for doing so. Accordingly, the OCC
requests comment on the following issues: (1) Should the holding period
for off-lease assets be extended and, if so, should it be extended for
all categories of assets or only for particular categories? (2) If the
holding period were extended, what is a reasonable additional time
period, in general or for particular categories of assets? (3) What
evidence supports extension of the holding period? (4) If the holding
period were extended, how should the OCC ensure that banks do not use
the longer period to retain property for essentially speculative
purposes? The OCC invites specific comment on the experiences of
national banks in attempting to liquidate or re-lease specific kinds of
off-lease personal property that are relevant to the issue of extending
the holding period requirement.
Requirement for Separate Records (Proposed Sec. 23.6)
Proposed Sec. 23.6 retains the requirement in current Sec. 23.4
that national banks maintain separate records for CEBA Leases and
Section 24(Seventh) Leases. Minor revisions have been made to shorten
and clarify the text.
Applicability of Consumer Laws (Current Sec. 23.6; Removed in Proposal)
Current Sec. 23.6 states that nothing in part 23 shall be construed
to be in conflict with the duties, liabilities and standards imposed by
the Consumer Leasing Act of 1976, 12 U.S.C. 1667 et seq. (CLA). The OCC
is proposing to remove this section because other consumer protection
laws and regulations may also apply to personal property lease
financing, making the cross-reference potentially misleading. Of
course, this change does not affect the applicability of the CLA or any
other consumer credit laws to national banks' lease financing
activities, and national banks must know and comply with the full range
of requirements that govern these activities.
Application of Lending Limits; Restrictions on Transactions With
Affiliates (Proposed Sec. 23.7)
The proposal continues to subject lease financing transactions to
lending limits and transactions with affiliates restrictions, but
clarifies that the transactions with affiliates restrictions apply only
if the lessee is an affiliate of the lessor bank. The proposal also
retains the reservation of the OCC's authority to impose other limits
or restrictions. These provisions currently appear at Sec. 23.5; they
are relocated in the proposal to Sec. 23.7.
Subpart B--CEBA Leases
Provisions Applicable to CEBA Leases (Proposed Secs. 23.8, 23.9, and
23.10)
Proposed Secs. 23.8, 23.9, and 23.10 contain the requirements
applicable to CEBA Leases, including a statement of the general rule
authorizing investment in CEBA Leases, the limits placed on banks'
exercise of their CEBA leasing authority, and a transition rule for
CEBA Leases entered into after CEBA's enactment but before the
effective date of the OCC's final implementing rule. The substance of
these provisions is the same as that of current Secs. 23.7. 23.8, and
23.9. Minor changes have been made to shorten and clarify the text.
[[Page 46249]]
Subpart C--Section 24(Seventh) Leases
General Rule (Proposed Sec. 23.11)
Current Sec. 23.10 states the general rule authorizing national
banks to engage in lease financing pursuant to 12 U.S.C 24(Seventh).
The substance of proposed Sec. 23.11 is the same as this current rule.
The reference to incidental activities in the current rule has been
deleted as redundant, however, given the treatment of incidental
activities in proposed Sec. 23.4. Other, minor revisions have been made
to shorten and clarify the text.
Estimated Residual Value (Proposed Sec. 23.12)
Current Sec. 23.11 prescribes not only the residual value limit
that applies to Section 24(Seventh) Leases but also certain other
provisions that apply to a bank's reliance on or estimate of residual
value. First, the amount of any estimated residual value guaranteed by
a manufacturer, the lessee, or a third party that is not an affiliate
of the bank may exceed 25 percent of the original cost of the property
if the bank has determined that the guarantor has the resources to meet
the guarantee and the bank can document its determination. Second, the
estimated residual value amounts must be reasonable given the type of
property leased and the relevant circumstances, so that realization of
the lessor bank's full investment and the cost of financing the
property primarily depends on the creditworthiness of the lessee and
any guarantor of the residual value, and not on the residual market
value of the leased item. Finally, when a bank leases personal property
to a government entity, its estimates of residual value may be based on
future transactions that it reasonably anticipates will occur.
The estimated residual value limit has been incorporated into a
definition of the term ``full-payout lease'' that appears in proposed
Sec. 23.2. The other provisions remain substantively unchanged but have
been moved to proposed Sec. 23.12 with minor revisions to shorten and
clarify the text.
Transition Rule (Proposed Sec. 23.13)
Current Sec. 23.12 provides that leases executed before June 12,
1979,\8\ are not subject to part 23 and prescribes rules for renewing
those leases. Proposed Sec. 23.13 retains these provisions with minor
revisions to shorten and clarify the text.
\8\ June 12, 1979, was the effective date of the OCC's final
rule amending 12 CFR 7.3400 to reflect the Ninth Circuit's decision
in the M&M Leasing case.
---------------------------------------------------------------------------
The OCC welcomes comments on any aspect of the proposed regulation,
particularly on those issues specifically noted in this preamble.
Derivation Table
[This table directs readers to the provision(s) of the current
regulation, if any, upon which the proposed revision is based.]
------------------------------------------------------------------------
Original
Revised provision provision Comments
------------------------------------------------------------------------
Sec. 23.1................................ Sec. 23.1(a) Modified.
Sec. 23.2(a), (b), (c)................... ............. Added.
Sec. 23.2(d)............................. Sec. 23.2(a) Modified.
Sec. 23.3................................ Sec. 23.1(b) Modified.
Sec. 23.4(a)............................. ............. Added.
Sec. 23.4(b)............................. Sec. 23.2 Modified.
(b), (c),
(d).
Sec. 23.5................................ Sec. 23.3... Modified.
Sec. 23.6................................ Sec. 23.4... Modified.
Sec. 23.7................................ Sec. 23.5... Modified.
Sec. 23.6... Removed.
Sec. 23.8................................ Sec. 23.7... Modified.
Sec. 23.9................................ Sec. 23.8... Modified.
Sec. 23.10............................... Sec. 23.9... Modified.
Sec. 23.11............................... Sec. 23.10.. Modified.
Sec. 23.12............................... Sec. 23.11.. Modified.
Sec. 23.13............................... Sec. 23.12.. Modified.
------------------------------------------------------------------------
Regulatory Flexibility Act
It is hereby certified that this proposal, if adopted as a final
rule, will not have a significant economic impact on a substantial
number of small entities. Accordingly, a regulatory flexibility
analysis is not required. This proposal, if adopted as a final rule,
will reduce the regulatory burden on national banks, regardless of
size, by simplifying and clarifying existing regulatory requirements.
Executive Order 12866
The OCC has determined that this proposal is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Reform Act of 1995
The OCC has determined that the requirements of this proposal will
not result in expenditures by State, local, and tribal governments, or
by the private sector, of more than $100 million in any one year.
Accordingly, a budgetary impact statement is not required under section
202 of the Unfunded Mandates Reform Act of 1995.
List of Subjects in 12 CFR Part 23
National banks, Banking, Leasing, Lease financing transactions.
Authority and Issuance
For the reasons set out in the preamble, part 23 of title 12,
chapter I, of the Code of Federal Regulations is proposed to be amended
as set forth below:
1. Part 23 is revised to read as follows:
PART 23--LEASING
Subpart A--General Provisions
Sec.
23.1 Authority, purpose, and scope.
23.2 Definitions.
23.3 Recovery of investment.
23.4 Net lease requirement.
23.5 Investment in personal property.
23.6 Requirement for separate records.
23.7 Application of lending limits; restrictions on transactions
with affiliates.
Subpart B--CEBA Leases
23.8 General rule.
23.9 Lease term.
23.10 Transition rule.
Subpart C--Section 24(Seventh) Leases
23.11 General rule.
23.12 Estimated residual value.
23.13 Transition rule.
Authority: 12 U.S.C. 1; 12 U.S.C. 24(Seventh) and 24(Tenth); 12
U.S.C. 93a.
Subpart A--General Provisions
Sec. 23.1 Authority, purpose, and scope.
(a) Authority. A national bank may engage in personal property
lease financing transactions pursuant to 12 U.S.C. 24(Seventh) and 12
U.S.C. 24(Tenth).
(b) Purpose. The purpose of this part is to set forth standards for
personal property lease financing transactions authorized for national
banks.
(c) Scope. A national bank that enters into a lease under the
authority of 12 U.S.C. 24(Seventh) must comply with subparts A and C of
this part. A national bank that enters into a lease under the authority
of 12 U.S.C. 24(Tenth) must comply with subparts A and B of this part.
Sec. 23.2 Definitions.
(a) CEBA Lease means a personal property lease entered into under
the authority of 12 U.S.C. 24(Tenth).
(b) Conforming lease means:
(1) A CEBA Lease that conforms with the requirements of subparts A
and B of this part; or
(2) A Section 24(Seventh) Lease that conforms with the requirements
of subparts A and C of this part.
(c) Full-payout lease means a lease financing transaction in which
any unguaranteed portion of the estimated residual value relied upon by
the bank to yield the return of its full investment in the leased
property, plus the estimated cost of financing the property over the
term of the lease, does not exceed 25 percent of the original cost of
the property to the lessor.
[[Page 46250]]
(d) Net lease means a lease under which the bank will not, directly
or indirectly, provide or be obligated to provide for:
(1) Servicing, repair, or maintenance of the leased property during
the lease term;
(2) Purchasing parts and accessories for the leased property;
however, improvements and additions to the leased property may be
leased to the lessee upon the lessee's request in accordance with any
applicable requirements for maximum estimated residual value;
(3) Loan of replacement or substitute property while the leased
property is being serviced;
(4) Purchasing insurance for the lessee, except where the lessee
has failed in its contractual obligation to purchase or maintain the
required insurance; or
(5) Renewal of any license or registration for the property unless
renewal by the bank is necessary to protect its interest as owner or
financier of the property.
(e) Off-lease property means personal property that reverts to a
national bank's possession or control upon the expiration of a lease or
upon the default of the lessee.
(f) Section 24(Seventh) Lease means a personal property lease
entered into under the authority of 12 U.S.C. 24(Seventh).
Sec. 23.3 Recovery of investment.
A national bank that enters into a lease financing transaction must
reasonably expect to realize the return of its full investment in the
leased property, plus the estimated cost of financing the property over
the term of the lease, from:
(1) Rentals;
(2) Estimated tax benefits; and
(3) The estimated residual value of the property at the expiration
of the term of the lease.
Sec. 23.4 Net lease requirement.
(a) General rule. A national bank may engage in a lease financing
transaction and activities incidental to the transaction only if the
lease qualifies as a net lease.
(b) Exceptions--(1) Change in conditions. If, in good faith, a
national bank believes that there has been a change in conditions that
threatens its financial position by increasing its exposure to loss,
then the bank may:
(i) As the owner and lessor under a net lease, take reasonable and
appropriate action (including the actions specified in Sec. 23.2(d)) to
salvage or protect the value of the property or its interests arising
under the lease;
(ii) As the assignee of a lessor's interest in a lease, become the
owner and lessor of the leased property pursuant to its contractual
rights, or take any reasonable and appropriate action (including the
actions specified in Sec. 23.2(d)) to salvage or protect the value of
the property or its interests arising under the lease.
(2) Provisions to protect the bank's interests. A national bank may
include any provisions in a lease, or make any additional agreements,
to protect its financial position or investment in the event of a
change in conditions that would increase its exposure to loss.
(3) Arranging for services by a third party. A national bank may
arrange for any of the services enumerated in Sec. 23.2(d) to be
provided to a lessee by a third party at the expense of the lessee.
Sec. 23.5 Investment in personal property.
(a) Requirement for written agreement. A national bank may acquire
specific personal property to be leased only after the bank has entered
into either:
(1) A legally binding written agreement that indemnifies the bank
against loss in connection with its acquisition of the property; or
(2) A legally binding written commitment to enter into a conforming
lease.
(b) Two-year holding period. At the expiration of the lease
(including any renewals or extensions with the same lessee), or in the
event of a default on a lease agreement prior to the expiration of the
lease term, a national bank shall either liquidate the property or re-
lease it under a conforming lease as soon as practicable. In any event,
liquidation or re-lease shall occur not later than two years from the
date of the expiration of the lease or the date of the lessee's
default. Property that the bank retains in anticipation of re-leasing
must be revalued at the lower of current fair market value or book
value before the bank enters into any subsequent lease.
(c) Bridge or interim leases. During the two-year holding period
allowed by paragraph (b) of this section, a bank may enter into a
short-term bridge or interim lease pending the sale of off-lease
property or the re-lease of the property under a long-term conforming
lease. A short-term bridge or interim lease must be a net lease, but it
need not comply with any other requirement of subpart B or C of this
part.
Sec. 23.6 Requirement for separate records.
If a national bank enters into both CEBA Leases and Section
24(Seventh) Leases, the bank's records must distinguish the CEBA Leases
from the Section 24(Seventh) Leases.
Sec. 23.7 Application of lending limits; restrictions on transactions
with affiliates.
A national bank's lease financing transactions are subject to the
lending limits prescribed by 12 U.S.C. 84 or, if the lessee is an
affiliate of the bank (as defined by 12 U.S.C. 371c), to the
restrictions on transactions with affiliates prescribed by 12 U.S.C.
371c and 371c-1. The OCC may also determine that other limits or
restrictions apply.
Subpart B--CEBA Leases
Sec. 23.8 General rule.
Pursuant to 12 U.S.C. 24(Tenth), a national bank may invest in
tangible personal property, including, without limitation, vehicles,
manufactured homes, machinery, equipment, or furniture for lease
financing transactions, or may become the owner and lessor of tangible
personal property by purchasing the property from another lessor in
connection with the bank's purchase of the related lease, provided
that: the lease is a conforming lease; and the aggregate book value of
all tangible personal property held for lease under the authority of 12
U.S.C. 24(Tenth) does not exceed 10 percent of the bank's consolidated
assets.
Sec. 23.9 Lease term.
(a) Initial term. A CEBA Lease must have an initial term of not
less than 90 days.
(b) Exception. The 90-day term requirement prescribed by paragraph
(a) of this section does not apply to the acquisition of property
subject to an existing lease with a remaining maturity of less than 90
days, provided that, at its inception the lease was a conforming lease.
Sec. 23.10 Transition rule.
(a) General rule. CEBA Leases entered into prior to July 22, 1991,
may continue to be administered in accordance with the lease financing
terms agreed to by the bank/lessor and the lessee. For purposes of
applying the lending limits and the restrictions on transactions with
affiliates described in Sec. 23.7, however, a bank that enters into a
new extension of credit to a customer, including a lease, shall include
all outstanding leases regardless of the date on which they were made.
(b) Renewal of non-conforming leases. A national bank may renew a
CEBA Lease that was entered into prior to July 22, 1991, and that is
not a conforming lease only if the following conditions are satisfied:
[[Page 46251]]
(1) The bank entered into the CEBA Lease in good faith;
(2) The expiring lease contains a binding agreement requiring that
the bank renew the lease at the lessee's option, and the bank cannot
reasonably avoid its commitment to do so; and
(3) The bank determines in good faith and demonstrates by
appropriate documentation that renewal of the lease is necessary to
avoid financial loss and to recover its investment in and its cost of
financing the property.
Subpart C--Section 24(Seventh) Leases
Sec. 23.11 General rule.
Pursuant to 12 U.S.C. 24(Seventh), a national bank may become the
legal or beneficial owner and lessor of, or otherwise acquire, personal
property; or may become the owner and lessor of personal property by
purchasing the property from another lessor in connection with the
bank's purchase of the related lease, provided that: the lease is a
net, full-payout lease representing a noncancelable obligation of the
lessee (notwithstanding the possible early termination of that lease);
and the lease is a conforming lease.
Sec. 23.12 Estimated residual value.
(a) Recovery of investment and costs. A national bank's estimates
of the residual value of the property and the portion of the estimated
residual value that the bank relies upon to satisfy the requirements of
a full-payout lease, as defined in Sec. 23.2(c), must be reasonable in
light of the nature of the leased property and all circumstances
relevant to the transaction. The bank's realization of its full
investment in the leased property, plus the estimated cost of financing
the property over the term of the lease, must depend primarily on the
creditworthiness of the lessee and any guarantor of the residual value,
and not on the residual value of the leased item.
(b) Estimated residual value subject to guarantee. The amount of
any estimated residual value guaranteed by the manufacturer, the
lessee, or a third party may exceed 25 percent of the original cost of
the property if the bank determines and demonstrates by appropriate
documentation that the guarantor has the resources to meet the
guarantee and the guarantor is not an affiliate of the bank, as defined
by 12 U.S.C. 371c.
(c) Leases to government entities. Calculations of estimated
residual value on leases of personal property to Federal, State, or
local government entities may be based on future transactions or
renewals that the bank reasonably anticipates will occur.
Sec. 23.13 Transition rule.
(a) Exclusion. Subpart A and this subpart shall not apply to any
Sec. 24(Seventh) Leases executed prior to June 12, 1979. For purposes
of applying the lending limits and the restrictions on transactions
with affiliates described in Sec. 23.7, however, a bank that enters
into a new extension of credit to a customer, including a lease shall
include all outstanding leases regardless of the date on which they
were made.
(b) Renewal of non-conforming leases. A national bank may renew a
Section 24(Seventh) Lease that was entered into prior to June 12, 1979,
and that is not a conforming lease only if the following conditions are
satisfied:
(1) The bank entered into the Section 24(Seventh) Lease in good
faith;
(2) The expiring lease contains a binding agreement requiring that
the bank renew the lease at the lessee's option, and the bank cannot
reasonably avoid its commitment to do so; and
(3) The bank determines in good faith and demonstrates by
appropriate documentation that renewal of the lease is necessary to
avoid financial loss and to recover its investment in and its cost of
financing the property.
Dated: August 14, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-21983 Filed 9-5-95; 8:45 am]
BILLING CODE 4810-33-P
