[Published by the Bureau of the Comptroller of the Currency, Apr. 3, 1964] A Progress Report on Those Recommendations of the Advisory Committee to the Comptroller of the Currency on Which Action Has Been Taken LENDING POWERS 1. Recommendation.-The limits on a national bank's lending to any one borrower should be specified as 10 percent of the bank's capital, surplus and undivided profits or such higher percent not in excess of 15 percent as the Comptroller may approve in individual cases. Action taken.-The Comptroller has ruled that, for purposes of the lending statute, the word "surplus" includes undivided profits which are in fact earned surplus. This ruling, then, permits a national bank to loan to any one borrower an amount equal to 10 percent of the bank's capital, surplus, and undivided profits. Hearings in the House of Representatives have been concluded on a bill which would increase the basic lending limit of national banks from 10 percent of capital and surplus to 20 percent of capital and surplus. Another such bill is pending which would increase the lending limit from 10 to 15 percent of capital and surplus. 2. Recommendation.-Present inconsistencies on the subject of loans to corporate families should be eliminated. Action taken.-Separate loans to separate corporations are generally not combined, with the statutory exception that a loan to a subsidiary corporation must be combined with a loan to the parent corporation, where the parent corporation is indebted to the lender. Loans to subsidiary corporations where the parent is not indebted to the lender are not combined for purposes of the lending limit. 3. Recommendation. The law empowering national banks to make real estate loans should be amended to clearly define such loans and to make express provision for a limitation on the aggregate amount of such loans. All other statutory limitations on real estate loans should be eliminated, and the aggregate limitation on real estate loans should be the highest of (1) 100 percent of capital, surplus, and undivided profits; (2) 70 percent of savings and time deposits; or (3) 20 percent of total deposits. Action taken.-The Comptroller has defined a real estate loan as any loan secured by real estate where the bank relies upon such real estate as the primary security for the loan. Where the bank in its judgment relies principally upon other factors, such as the general credit standing of the borrower, guarantees, or security other than real estate, the loan does not constitute a real estate loan within the meaning of 12 U.S.C. 371 even though, as a matter of prudent banking practice, it is also secured by real estate. The governing law has been amended to provide an aggregate limitation on real estate loans of the greater of the bank's capital and surplus or 70 percent of its time and savings deposits. 4. Recommendation.-Real estate loans should be allowable up to 80 percent of appraised value and for periods up to 25 years on an amortized basis. Action taken.-Legislation has been introduced in both Houses of Congress which would permit national banks to make real estate loans on an amortized basis up to a maximum term of 30 years, and up to a maximum loan-to-appraisal ratio of 80 percent. Hearings in the House have been concluded but a report on the bill has not been issued. Hearings have been held in the Senate, but temporarily suspended. 5. Recommendation.-Time limits on an interim construction loan should be 18 months for residential and farm construction and 36 months for manufacturing and industrial construction, including apartments. Action taken.-The statutory period for interim construction loans for residence, farm, manufacturing and industrial purposes is presently 18 months by virtue of recent amendatory legislation. The Comptroller has ruled that where a bank makes a construction loan in primary reliance on a firm takeout commitment of a financially responsible lender, the loan does not constitute a real estate loan within the meaning of the otherwise applicable statute. Consequently, where such reliance is present, there is no longer any restriction as to the term of such interim construction loans. 6. Recommendation.-Loans, however secured, should be permitted to commercial enterprises and eleemosynary institutions, as well as to manufacturing and industrial businesses, where the bank relies primarily on the borrower's credit standing and forecast of operations. Action taken.-The Comptroller has ruled that a loan made in primary reliance upon factors other than real estate is not a real estate loan, even though additionally secured by conforming or nonconforming liens on real estate. 7. Recommendation.-The present restrictions on leasehold loans should be eliminated. Such loans should be treated as any other business loan subject to the usual credit considerations. Action taken.-The Comptroller has issued a revised regulation, which provides that the appraised value of a leasehold is to be determined by the use of acceptable and reliable methods of appraising leasehold values, including—in areas where such information is available-a consideration of the sales prices of comparable leaseholds. The revised regulation also excepts from the regulation all loans made in principal reliance on the insurance or guaranty of a governmental agency. 8. Recommendation.-The right of a national bank to participate in a real estate loan should be broadened to allow participation not only at the time of inception of a loan, but at any time thereafter. Action taken.-The Comptroller has ruled that a national bank may participate at the outset with others in the making of a real estate loan, or may subsequently purchase an existing real estate loan in its entirety. Portions of a real estate loan may be purchased when the bank thereby becomes the owner of the entire loan. The Comptroller has also ruled that a national bank may purchase or sell participations in existing real estate loans when the interests of the participating banks are adequately protected by the terms of the participation agreement. 9. Recommendation.-National banks should be permitted to take into account the value of nonreal estate security by treating only the excess of the loan over the loan value of nonreal estate security as a real estate loan. Action taken.-Adopted. 10. Recommendation.-The takeout provisions of the present law should be extended to include financing arrangements similar to takeout commitments, such as purchase-leasebacks and other purchase agreements from which the construction loan is to be repaid. Action taken.-Adopted. 11. Recommendation.-National banks should be permitted to make loans up to 75 percent of appraised value of growing timber, land, and improvements thereon for periods up to 20 years on an amortized basis. If the loan is unamortized, it should be permitted up to 60 percent of such value for periods up to 5 years. Action taken.-The House of Representatives has passed a measure which would increase the maximum permissible loan on forest tracts to 60 percent of the appraised fair market value of the growing timber, plus the value of the lands and improvements offered as security. The maximum loan terms would be increased to 3 years for unamortized loans and to 15 years for amortized loans. Senate committee hearings on the measure have been completed, with favorable action anticipated. 12. Recommendation.-A crop loan, whether or not secured by a lien on the crop land, should not be subject to the restrictions pertaining to real estate loans. Action taken.-Adopted in the case of a loan made in principal reliance upon a credit factor other than the security of real estate. 13. Recommendation.-Limits on loans by banks to their executive officers should be raised to $10,000, and home mortgage loans should be exempt from this limit. Action taken.-The Comptroller has issued an interpretative regulation defining an "executive" officer for purposes of the governing statute to mean an officer having both voice in the formulation of bank policy and responsibility for the implementation thereof. Where one or both of these conditions is missing, there is no statutory limitation on loans by a national bank to its officers. INVESTMENT POWERS 1. Recommendation.-Present regulations regarding disposal of corporate securities acquired for debts previously contracted should be liberalized to grant national banks more discretion as to such disposal. Action taken.-Adopted by the Comptroller of the Currency as a matter of internal policy to be followed by his staff. 2. Recommendation.-Government securities bought under repurchase agreements should be treated as investments rather than loans. Action taken.-Adopted, and made applicable to all securities. POWER TO UNDERWRITE REVENUE BONDS Recommendation.-National banks should be permitted, subject to a limit of 10 percent of capital, surplus, and individed profits as to any one issuer, to underwrite revenue bonds of States or political subdivisions of quality suitable for bank investment. Action taken.-The Comptroller has promulgated an entirely revised investment securities regulation which affords banks broader latitude in their underwriting activities. Obligations of a governmental authority possessing resources sufficient to justify reliance on its faith and credit may be underwritten if in the underwriter's prudent banking judgment there is evidence that the obligor will perform all it undertakes to perform in connection with the security, and that the security may be sold with reasonable promptness at a price corresponding reasonably to its fair value. Such prudent banking judgment may be premised on the obligor's record, as well as on future prospects. Revenue bonds falling within this definition are eligible for underwriting and dealing in. Prudent banking judgment is the only criterion as to the amount of securities of any one issuer which may be underwritten. There are pending before Congress several measures which would enlarge the statutory authority of national banks to underwrite revenue bonds. House hearings on H.R. 5845 have been completed, and a committee vote on the bill is expected in early April. TRUST POWERS 1. Recommendation.—The granting and regulating of trust powers of national banks should be administered by the Comptroller. Action taken.-Adopted through legislation. 2. Recommendation.-The ability of national banks to offer trust services should keep pace with the changing needs of the public for such services. This can best be accomplished by frequent reexamination of the pertinent regulations. There is a need now for such a reexamination. Action taken.-Adopted. A new trust regulation for national banks has been issued which radically revises previous practices permitted in this area, including an authorization to commingle funds of managing agency accounts. The Internal Revenue Service has issued a ruling that a collective investment fund composed of managing agency accounts, held by a bank as trustee in accordance with the provisions of the trust regulation, qualifies as a "common trust fund" within the meaning of section 584 of the Internal Revenue Code. Collective investment bills (H.R. 8499, H.R. 9410, and S. 2223) are pending before the House Interstate Commerce Committee and the Senate Banking and Currency Committee. These bills provide specific exemptions from securities laws for collective investment funds, including those for investment of Smathers-Keogh trusts and managing agency accounts. Hearings on these measures have not been scheduled. The new regulation is under constant reexamination to assure its continuing utility as an instrument of service offered by national banks to the public. BORROWING POWERS 1. Recommendation.—In view of fundamental changes that have occurred in the banking business, the present eligibility requirements on Federal Reserve bank discounts and advances to member banks should be repealed, the penalty rate provision eliminated, and advances to any member bank "secured to the satisfaction" of the Reserve bank authorized at the regular discount rate. Action taken.-The Board of Governors of the Federal Reserve System has recommended legislation which would repeal or amend existing discount and advance provisions of the Federal Reserve Act. The theory of "sound assets" would become the criteria for borrowing rather than present technical eligibility requirements. The proposed measure would also delete the present penalty rate provision of regulation A. Congressional hearings on the measure have not been scheduled. 2. Recommendation. The limitation on borrowing by national banks from lenders other than the Federal Reserve should be increased to an amount equal to the capital, surplus, and undivided profits of the borrower. Action taken.-The Comptroller has ruled that transactions in the Federal funds market and sales of securities under repurchase agreements do not constitute borrowings. BRANCHING POWERS Recommendation.-The expanding needs of our economy for banking facilities and services requires a reexamination of both Federal and State laws with respect to the branching privileges of banks. Action taken.-There are a number of detailed studies of the many aspects of branching presently underway in the Office of the Comptroller. An initial report on the subject has been furnished to the chairmen of the congressional Banking Committees and was released by the Comptroller to the public in midMarch. The executive committees of the ABA State and National bank divisions have recently recommended that the association undertake a study of unit, group, and branch banking. OTHER POWERS 1. Recommendation.-Banks should be permitted to invest in corporations to perform clerical, maintenance, or other specialized services. To derive the maximum benefit from such corporations, banks should be allowed to form these corporations by themselves, in conjunction with nonbank corporations, or in any other manner for any purpose incidental to the operation of the bank. Action taken.-National banks by statute have been authorized to invest an amount not in excess of 10 percent of capital and surplus in the stock of a corporation organized to perform for two or more banks such services as "check and deposit sorting and posting, computation and posting of interest and other credits and charges, preparation and mailing of checks, statements, notices, and similar item or any other clerical, bookkeeping, accounting, statistical, or similar functions performed for a bank." 2. Recommendation.-National banks should be permitted to discount leases of personal property, or otherwise acquire a lessor's interest in the lease and leased property, without recourse to the lessor; and to purchase personal property for the purpose of simultaneous leasing. Action taken.-Each of the three recommended techniques of lease financing has been specifically approved by the Comptroller. The Comptroller has further ruled that national banks may carry on indirectly activities which are incidental to banking transactions and in which they may engage directly. This would include acting as agents in the issuance of insurance, providing travel services, the leasing of personal property, and the performance of such other services as are incidental to the business of banking. 3. Recommendation.-The majority of the committee recommends that inplant and mobile banking be greatly liberalized. Specifically, any national bank should be authorized to have in-plant or mobile facilities subject to the approval of the Comptroller of the Currency. Action taken.-In States permitting branch banking, in-plant facilities may be operated with the approval of the Comptroller of the Currency. To date, however, the Comptroller has not received any applications requesting authorization to operate a mobile office. 4. Recommendation.—Appropriate legislation should be enacted expressly to permit any national bank to act as broker or agent in the writing of credit life, disability, health, and accident insurance issued in connection with a loan by the bank, and to participate in premium experience refunds based on the work actually performed by it in connection with the servicing of such insurance. Action taken.-The power of a national bank to engage in such activities has been recognized in rulings of the Comptroller of the Currency. 5. Recommendation.-A national bank should be permitted to invest in bank premises an amount up to its full capital stock or 50 percent of its capital, surplus, and undivided profits, whichever of the two amounts is greater. Action taken.-The Comptroller has ruled that. as an administrative matter. a national bank ordinarily will be permitted to invest in premises. in addition to the statutory 100 percent of capital, an amount which will bring the total investment in bank premises to 50 percent of its capital stock, surplus, and undivided profits where a reasonable need for such increased investment can be shown. 6. Recommendation.-Real estate acquired by a bank and held by it in good faith for future banking use should be permitted to be carried as bank premises rather than as other real estate owned. Action taken.-Adopted. |