[Federal Register: July 2, 2001 (Volume 66, Number 127)]
[Rules and Regulations]
[Page 34784-34792]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02jy01-2]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1, 7, and 23
[Docket No. 01-13]
RIN 1557-AB94
Investment Securities; Bank Activities and Operations; Leasing
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
publishing this final rule to amend its rules governing investment
securities, bank activities and operations, and leasing. The revisions
to the investment securities regulations incorporate the authority to
underwrite, deal in, and purchase certain municipal bonds that is
provided to well capitalized national banks by the Gramm-Leach-Bliley
Act (GLBA). The final rule also makes the following revisions to the
bank activities and operations regulations: it establishes the
conditions under which a school where a national bank participates in a
financial literacy program is not considered a branch under the
McFadden Act; it revises the OCC's regulation governing bank holidays
so that the wording of the rule conforms with the statute that
authorizes the Comptroller to declare mandatory bank closings; it
clarifies the scope of the term ``NSF fees'' for purposes of 12 U.S.C.
85, the statute that governs the rate of interest that national banks
may charge; it simplifies the OCC's current regulation governing
national banks' non-interest charges and fees; and it provides that
State law applies to a national bank operating subsidiary to the same
extent as it applies to the parent national bank. Finally, the
revisions to the leasing regulations authorize the OCC to vary the
percentage limit on the extent to which a national bank may rely on
estimated residual value to recover its costs in personal property
leasing arrangements. The purpose of these changes is to update and
revise the OCC's regulations to keep pace with developments in the law
and in the national banking system.
EFFECTIVE DATE: August 1, 2001.
FOR FURTHER INFORMATION CONTACT: For questions concerning 12 CFR 1.2,
contact Beth Kirby, Special Counsel, Securities and Corporate Practices
Division, (202) 874-5210. For questions concerning 12 CFR 7.3000,
contact Michele Meyer, Counsel, Legislative and Regulatory Activities
Division, (202) 874-5090. For questions concerning 12 CFR 7.1021,
7.4001, 7.4002 and 7.4006, contact Michele Meyer, Counsel, or Mark
Tenhundfeld, Assistant Director, Legislative and Regulatory Activities
Division, (202) 874-5090. For questions concerning 12 CFR 23.21,
contact Steven Key, Senior Attorney, Bank Activities and Structure
Division, (202) 874-5300.
SUPPLEMENTARY INFORMATION:
Introduction and Overview of Comments Received
On January 30, 2001, the OCC published in the Federal Register a
notice of proposed rulemaking (the NPRM, proposed rules, or the
proposal) concerning its rules governing investment securities, bank
activities and operations, and leasing. See 66 FR 8178. The proposed
revisions to the investment securities regulations incorporated the
authority to underwrite, deal in, and purchase certain municipal bonds
that is provided to well capitalized national banks by the Gramm-Leach-
Bliley Act (GLBA). The proposed rules also contained several revisions
to the OCC's bank activities and operations regulations. First, it
established the conditions under which a school where a national bank
participates in a financial literacy program is not considered a branch
under the McFadden Act. Second, it revised the OCC's regulation
governing bank holidays so that the wording of the rule conforms with
the statute that
[[Page 34785]]
authorizes the Comptroller to declare mandatory bank closings. Third,
the proposal clarified the scope of the term ``NSF fees'' for purposes
of 12 U.S.C. 85, the statute that governs the rate of interest that
national banks may charge. Fourth, it simplified the OCC's current
regulation governing national banks' non-interest charges and fees.
Fifth, it provided that State law applies to a national bank operating
subsidiary to the same extent as it applies to the parent national
bank. The proposal also contained revisions to the leasing regulations
that authorized the OCC to vary the percentage limit on the extent to
which a national bank may rely on estimated residual value to recover
its costs in personal property leasing arrangements.
The OCC received approximately 30 comments in response to the
proposed rules. Commenters included national banks, bank trade
associations, consumer groups, members of Congress, State regulators,
and individuals. The OCC received only one comment on the proposal to
amend part 1 and three on the proposed revision to part 23. The
majority of the comments concerned the proposed revisions to part 7. A
number of these comments addressed the definition of ``interest'' for
purposes of 12 U.S.C. 85 (revised Sec. 7.4001(a)) and whether that
definition should include some portion of the fee imposed by a national
bank when it pays a check notwithstanding that its customer's account
contains insufficient funds to cover the check. The remaining part 7
comments addressed the proposed changes to the OCC's current regulation
governing national banks' non-interest charges and fees (revised
Sec. 7.4002) and proposed new Sec. 7.4006, which addresses the
applicability of State law to a national bank operating subsidiary.
The OCC is adopting most of the provisions we proposed without
substantive changes. We have, however, modified certain provisions of
the proposal in light of the comments we received. The most significant
comments, and the OCC's responses, are discussed in the following
section-by-section analysis.
Section-by-Section Description of the Final Rule
A. Part 1--Investment Securities
Pursuant to 12 U.S.C. 24(Seventh), the total amount of investment
securities of any one obligor held by a national bank for its own
account generally may not exceed 10 percent of the bank's capital and
surplus. Section 24(Seventh), however, exempts certain types of
securities from this limitation and permits a bank to underwrite, deal
in, and purchase those securities without quantitative restriction.
Section 151 of GLBA \1\ amended section 24(Seventh) to exempt certain
municipal bonds from the 10-percent limit and to permit a national bank
to underwrite, deal in and purchase those securities without limit, if
the national bank is well capitalized under the statutory and
regulatory prompt corrective action standards.\2\ In the NPRM, we
proposed to amend part 1 of our regulations, which implements the
statutory investment securities provisions, to reflect this change in
the statute.
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\1\ Pub. L. 106-102, section 151, 113 Stat. 1338, 1384 (November
12, 1999).
\2\ 12 U.S.C. 1831o (statutory prompt corrective action
standards); 12 CFR part 6 (OCC's implementing regulation).
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Part 1 classifies permissible national bank investment securities
into several categories, or types.\3\ Type I securities are
securities--such as obligations issued by, or backed by the full faith
and credit of, the United States--that a national bank may purchase,
sell, deal in, and underwrite without regard to any capital and surplus
limitation. The proposal made several changes to part 1. First, it
added new Sec. 1.2(g), which defines the municipal bonds described in
section 151 of GLBA. As defined, the term ``municipal bonds'' means
obligations of a State or political subdivision other than general
obligations, and includes, inter alia, limited obligation bonds,
revenue bonds, and obligations that satisfy the requirements of section
142(b)(1) of the Internal Revenue Code of 1986, issued by or on behalf
of any State or political subdivision of a State, including any
municipal corporate instrumentality of 1 or more States, or any public
agency or authority of any State or political subdivision of a State.
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\3\ See, e.g., 12 CFR 1.2(i) and 1.3(a) (defining Type I
securities and providing that Type I securities are not subject to
the 10 percent capital and surplus limit); 12 CFR 1.2(j) and 1.3
(defining Type II securities and describing the quantitative limit);
and, 12 CFR 1.2(k) and 1.3(c) (defining Type III securities and
describing the quantitative limit).
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Second, we proposed amending the list of Type I securities, which
appears in redesignated Sec. 1.2(j) of the regulation, to add the
municipal bonds as defined in new Sec. 1.2(g), subject to the
requirement that the bank be well capitalized. The proposal applied the
definition of well capitalized that the OCC uses for purposes of prompt
corrective action standards.\4\
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\4\ See 12 CFR 6.4(b)(1) (defining the term ``well
capitalized'').
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In addition, we proposed modifying the section that defines certain
Type II securities, newly designated as Sec. 1.2(k), to make it clear
that obligations issued by a State or political subdivision or agency
of a State, for housing, university, or dormitory purposes are Type II
securities only when they do not qualify as Type I securities (which
would result if the subject bank is not well capitalized under prompt
corrective action standards). We also proposed modifying the paragraph
that defines Type III securities (newly redesignated as Sec. 1.2(l))
and uses municipal bonds as an example of that type, to make clear that
municipal bonds are Type III securities only when they do not qualify
as Type I securities (again, as a result of the national bank not being
well capitalized). As we noted in the preamble to the proposal,
regardless of the treatment of municipal bonds, safe and sound
underwriting practices require a national bank to understand the fiscal
condition of any municipality in whose bonds the bank invests.
The OCC received only one comment on the proposed changes to Part
1. The commenter pointed out that municipal bonds can be Type II
securities as well as Type I or Type III securities. The commenter
suggested that the OCC revise section 1.2 to clarify that municipal
bonds that are Type III securities would include only those municipal
bonds that do not satisfy the definition of Type I or Type II
securities.
We agree with this commenter, and the final rule reflects this
change from the proposal. Thus, under the final rule, a national bank
that is well capitalized may deal in, underwrite, purchase, and sell
municipal bonds for its own account without any limit tied to the
bank's capital and surplus. This authority applies to all municipal
bonds. If the bank is not well capitalized, then the universe of
municipal bonds is divided into two types: (a) Municipal bonds that are
investment securities representing obligations issued by a State, or a
political subdivision or agency of a State, for housing, university, or
dormitory purposes, and (b) all other types of municipal bonds. The
former are treated as Type II securities, while the latter are treated
as Type III securities.\5\
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\5\ While a bank's transactions in either Type II and Type III
securities are limited to 10 percent of the bank's capital and
surplus (see 12 CFR 1.3(b) and (c)), a national bank may deal in,
underwrite, purchase, and sell for its own account Type II
securities while the bank may only purchase and sell for its own
account Type III securities. Regardless of how a municipal bond is
designated, it must satisfy the requirement set out in part 1 that
the bond be an ``investment security,'' as that term is defined. See
12 CFR 1.2(e).
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[[Page 34786]]
The other proposed changes to part 1 are adopted without
modification in the final rule.
B. Part 7--Bank Activities and Operations
The final rule makes five changes to part 7. First, it adds new
Sec. 7.1021, which defines the circumstances under which a bank that
participates in a financial literacy program at a school is not
considered to have established a branch of the bank under the McFadden
Act. Second, the final rule amends Sec. 7.3000 to conform it with the
Comptroller's statutory authority to declare mandatory bank closings,
as provided in 12 U.S.C. 95(b)(1). Third, the final rule revises
current Sec. 7.4001 to clarify the scope of the term ``NSF fees'' for
purposes of 12 U.S.C. 85. Fourth, the final rule revises current
Sec. 7.4002, which governs non-interest charges and fees, to remove
language that may be confusing. Finally, the final rule adds new
Sec. 7.4006, which provides that State laws apply to a national bank
operating subsidiary to the same extent that they apply to the parent
national bank. These changes are discussed below.
Bank Participation in Financial Literacy Programs (New Sec. 7.1021)
The proposal added new Sec. 7.1021(b) to provide that a school's
premises or facility where a national bank participates in a financial
literacy program is not a branch of the national bank under the
McFadden Act \6\ if the bank does not ``establish and operate'' the
school premises or facility. The proposal was derived from the text of
the statute, which describes the circumstances under which a national
bank may ``establish and operate'' new branches and defines the term
``branch,'' \7\ and from Federal judicial precedents determining when
an off-premises location is a branch under these standards. Under those
precedents, the court first determines whether the national bank has
``establish[ed] and operate[d]'' the off-premises location in question.
If not, then the location will not be considered a ``branch'' for
purposes of 12 U.S.C. 36.\8\
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\6\ This proposal is consistent with the limitation, found in 12
U.S.C. 93a, which states that the general rulemaking authority
vested in the OCC by that section ``does not apply to section 36 of
[Title 12 of the United States Code].'' This limitation simply makes
clear that section 93a does not expand whatever authority the OCC
has pursuant to other statutes to adopt regulations affecting
national bank branching. Congress clearly contemplated that the OCC
would implement section 36, as is evidenced by the repeated
references to obtaining the OCC's approval throughout that section
(see, e.g., paragraphs (b)(1), (b)(2), (c), (g), and (i) of section
36). It would be illogical to conclude that the OCC, in implementing
the provisions requiring national banks to obtain the OCC's prior
approval under the sections cited, cannot interpret what the terms
of the statute mean or that the interpretation must be made on a
case-by-case basis. This rulemaking simply clarifies a situation
that falls outside the branching restrictions imposed by section 36.
\7\ See 12 U.S.C. 36(c) (describing the circumstances under
which a national bank may ``establish and operate'' new branches);
12 U.S.C. 36(j) (defining the term ``branch'' to include ``any
branch bank, branch office, branch agency, additional office, or any
branch place of business located in any State or Territory of the
United States or in the District of Columbia at which deposits are
received, or checks paid, or money lent.'').
\8\ See, e.g., First National Bank in Plant City v. Dickinson,
396 U.S. 122, 126-29, 134-37 (1969); Cades v. H & R Block, Inc., 43
F.3d 869, 874 (4th Cir. 1994).
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Consistent with the statute and applicable precedent, the proposed
rule stated that a bank may participate in a financial literacy program
if the bank does not establish or operate the school premises or
facility on which the program is conducted and the principal purpose of
the program is educational. As noted in the proposal, a program would
be considered principally educational if it is designed to teach
students the principles of personal economics or the benefits of saving
for the future, without being designed for the purpose of making
profits.\9\
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\9\ Students in the financial literacy program need not be of
any particular age or income background in order for the program to
be eligible under this proposal. If the students are low- or
moderate-income individuals, however, a bank's participation in a
school savings program may also be given positive consideration
under the Community Reinvestment Act as a community development
service. See Community Reinvestment Act; Interagency Questions and
Answers Regarding Community Reinvestment, 64 FR 23, 618 (May 3,
1999) (Q and A 3 addressing 12 CFR 25.12(j), 228.23(j), 345.23(j),
and 563e.12(i) (examples of community development services)).
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The OCC received only supportive comments on proposed new
Sec. 7.1021(b) and adopts it without modification in the final rule.
Bank Holidays (Revised Sec. 7.3000)
Under 12 U.S.C. 95(b)(1), in the event of natural or other
emergency conditions existing in any State, the Comptroller may
proclaim any day a legal holiday for national banks located in that
State or affected area. In such a case, the Comptroller may require
national banks to close on the day or days designated. If a State or
State official designates any day as a legal holiday for ceremonial or
emergency reasons, a national bank may either close or remain open
unless the Comptroller directs otherwise by written order.
The NPRM proposed amending 12 CFR 7.3000, which implements 12
U.S.C. 95(b)(1), to more closely conform with the statute. The OCC
received no comments on this portion of the proposal, and the final
rule adopts Sec. 7.3000 without change. Thus, under the final rule, if
the Comptroller or a State declares a legal holiday due to emergency
conditions, a national bank may temporarily limit or suspend operations
at its affected offices or it may choose to continue its operations
unless the Comptroller by written order directs otherwise.
Definition of ``Interest'' for Purposes of 12 U.S.C. 85 (Revised
Sec. 7.4001(a))
The OCC proposed revising Sec. 7.4001 to clarify the scope of the
term ``NSF fees'' for purposes of 12 U.S.C. 85. Section 85 governs the
interest rates that national banks may charge, but it does not define
the term ``interest.'' Section 7.4001 generally defines the charges
that are considered ``interest'' for purposes of section 85, and then
sets out a nonexclusive list of charges covered by that definition. The
list includes ``NSF fees.''
The inclusion of ``NSF fees'' in the definition of ``interest'' was
intended to codify a position the OCC took in Interpretive Letter 452,
issued in 1988.\10\ IL 452 concluded that charges imposed by a credit
card bank on its customers who paid their accounts with checks drawn on
insufficient funds were ``interest'' within the meaning of section 85.
The charges were referred to as ``NSF charges'' in the letter. The
term, however, also is commonly used to refer to fees imposed by a
bank on its checking account customers whenever a customer writes a
check against insufficient funds, regardless of whether the check was
intended to pay an obligation due to the bank. These different uses of
the term ``NSF fees'' have created ambiguity about the scope of the
term as used in Sec. 7.4001(a).
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\10\ Interpretive Letter No. 452 (Aug. 11, 1988), reprinted in
[1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,676
(IL 452).
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The proposal invited comments on a change to Sec. 7.4001(a) that
would clarify that the term ``NSF fees'' includes only those fees
imposed by a creditor bank when a borrower attempts to pay an
obligation to that bank with a check drawn on insufficient funds. Fees
that a bank charges for its deposit account services--including
overdraft and returned check charges--are not covered by the term ``NSF
fees'' as that term is used in Sec. 7.4001(a). The OCC received no
objections on that proposed change. Thus, we are clarifying the definition
of ``interest'' by stating in the final rule that interest
[[Page 34787]]
includes creditor-imposed NSF fees that are charged when a borrower
tenders payment on a debt with a check drawn on insufficient funds.
We also invited comment on whether the term ``NSF fees'' as used in
Sec. 7.4001(a) should include at least some portion of the fee imposed
by a national bank in the more common scenario when it pays a check
notwithstanding that its customer's account contains insufficient funds
to cover the check. We received numerous comments on this issue, the
majority of which opposed including in the definition of ``interest''
any portion of the fee imposed by a national bank when it pays an
overdraft.\11\ Commenters raised a number of complex and fact-specific
concerns related to inclusion of any portion of a charge imposed in
connection with paying an overdraft constitutes ``interest'' for
purposes of section 85. Accordingly, we have not amended Sec. 7.4001(a)
to address this issue.
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\11\ In the most recent Federal case related to this issue of
which the OCC is aware, the court held that overdraft fees were not
``interest'' within the meaning of 12 U.S.C. 85 and current
Sec. 7.4001(a). Video Trax, Inc. v. NationsBank, N.A., 33 F. Supp.
2d 1041 (S.D. Fla. 1998); aff'd per curiam 205 F.3d 1358 (11th Cir.
2000); cert. denied, 121 S.Ct. 66 (2000).
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National Bank Non-Interest Charges (Revised Sec. 7.4002)
Current Sec. 7.4002 sets out the basic authority to impose non-
interest charges and fees, including deposit account service charges.
It provides that the decision to do so and the determination of the
amounts of charges and fees are business decisions to be made by each
bank, in its discretion, according to sound banking judgment and safe
and sound banking principles. It also provides that a bank ``reasonably
establishes'' non-interest charges and fees if it considers, among
other factors, the four factors enumerated in the regulation. As noted
in the preamble to the proposal, the OCC construes Sec. 7.4002 to mean
that a national bank that considers at least these four factors in
setting its non-interest charges and fees has satisfied the requirement
that the charges and fees be set according to safe and sound banking
principles and, therefore, faces no supervisory impediment to
exercising the authority to set charges and fees that the regulation
describes.\12\
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\12\ See Brief Amicus Curiae of the Office of the Comptroller of
the Currency in Support of National Bank Plaintiffs, Bank of
America, N.A. v. San Francisco, No. C 99 4817 VRW (N.D. Ca.) (citing
OCC opinion letters construing and describing the operation of 12
CFR 7.4002). On July 11, 2000, the U.S. District Court for the
Northern District of California granted the plaintiffs in this case
permanent injunctive relief against San Francisco and Santa Monica
city ordinances that purported to prohibit national banks from
charging fees for providing banking services through automatic
teller machines (ATMs). The case is currently pending appeal in the
U.S. Court of Appeals for the Ninth Circuit.
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The proposal was intended to eliminate certain ambiguities in the
text of Sec. 7.4002 without altering the substance of the regulation or
the way in which the OCC intends that it operate. First, the proposal
eliminated two examples in Sec. 7.4002(a) of the types of non-interest
charges and fees that national banks may impose: charges a bank's board
determines to be reasonable on dormant accounts and reasonable fees for
credit reports or investigations. The OCC removed these examples in the
proposal because the explicit reference to the two types of fees is
unnecessary and could be misinterpreted as a limitation on a national
bank's ability to charge other types of fees. We note, however, that
dormant account charges and fees for credit reports and investigations
continue to be permissible non-interest charges and fees even though
they are no longer specifically mentioned in the rule.
One commenter objected to the removal of the examples concerning
the imposition of reasonable deposit account service charges and
reasonable fees for credit reports or investigations. This commenter
believed that removing these examples removed a requirement that non-
interest charges and fees be reasonable. However, as noted below in the
discussion of the proposed changes to Sec. 7.4002(b), this comment
misconstrues the OCC's regulation. The imposition of non-interest
charges and fees is governed by the standards set out in
Sec. 7.4002(b), as revised (namely, that the charges and fees be
arrived at on a competitive basis and be made according to sound
banking judgment and safe and sound banking principles). If a bank
adheres to those standards, the OCC will not substitute its judgment
about how much a bank should charge for a given product or service.
Thus, we have concluded that it is unnecessary to retain the examples
in Sec. 7.4002(a), and have, accordingly, adopted the changes as
proposed.
We also proposed to amend Sec. 7.4002(b), to clarify what a bank's
obligations are under that section. Previously, the sentence in
Sec. 7.4002(b) that introduces the four factors provided that a bank
``reasonably establishes'' non-interest charges and fees if it
considers those factors among others. The proposal revised that
sentence to say that a bank establishes non-interest charges and fees
``in accordance with safe and sound banking principles'' if it employs
a decision-making process through which it considers the four factors.
This new language was intended to convey that the bank must exercise
sound banking judgment and rely on safe and sound banking principles in
setting charges and fees.
As proposed, Sec. 7.4002(b) was also revised to clarify that the
authorization it contains to establish fees and charges necessarily
includes the authorization to decide the amount and method by which
they are computed. Thus, for example, fees resulting from the method
the bank employs to post checks presented for payment are included
within the authorization provided by Sec. 7.4002.
The OCC received several comments on the proposed change to
Sec. 7.4002(b), both from those favoring its adoption and those
opposed. The latter were concerned that removing the ``reasonably
establishes'' language eliminates an implied limitation on the fees a
national bank may charge. We have never construed this language to
permit the OCC to substitute its judgment about the appropriate pricing
of a product or service for a bank's judgment, however. As the current
text of the regulation says, the amount and type of fees established by
a national bank are decisions committed to the business judgment of the
bank. The ``reasonably establishes'' language was intended to describe
the process of exercising that judgment; it was never intended to limit
a national bank's authority to exercise its business judgment.
Accordingly, like the proposal, the final rule clarifies that
consideration of the four factors is a process requirement to be
implemented by the bank and more clearly establishes the connection
between the required process and the safety and soundness
considerations that underlie it. The four factors are the same as under
the current regulation, including the factor addressing the maintenance
of the bank's safety and soundness. We expect that, pursuant to this
factor, a bank would consider any risks, such as reputation or
litigation risk, that would be affected by the imposition of a
particular fee. We note that consideration of the four factors is
relevant both when establishing a new fee and when changing a fee that
already has been established. The reference to factors other than the
four that are enumerated in Sec. 7.4002(b) has been retained in the
final rule in order to avoid creating any doubt about a national bank's
ability to rely on factors
[[Page 34788]]
in addition to those stated in the regulation.
The OCC also proposed to amend Sec. 7.4002(d), which addresses our
evaluations of whether Federal law preempts State laws that purport to
limit or prohibit a national bank's ability to impose a charge or fee.
The first clause of former Sec. 7.4002(d) stated that the OCC evaluates
on a case-by-case basis whether a national bank may establish fees
pursuant to Sec. 7.4002(a) and (b); the second clause provided that, in
determining whether a State law purporting to limit or prohibit such
fees is preempted, the OCC applies preemption principles derived from
the Supremacy Clause of the United States Constitution and applicable
judicial precedent. While the first clause simply underscored that a
national bank's establishment of fees is governed by the preceding
paragraphs of Sec. 7.4002, it has been construed by some as requiring
the OCC's confirmation prior to a bank charging a fee that the process
followed by the bank in setting the fee conformed to the Sec. 7.4002(b)
factors and raises no safety and soundness concerns. To clarify that
OCC confirmation is not required, we proposed to remove the first
clause from Sec. 7.4002(d) and retain only a statement that is intended
to convey that the law as articulated by the Supreme Court and the
lower Federal courts governs issues of Federal preemption.
We received a number of comments on proposed Sec. 7.4002(d), many
of which expressed concern that the proposed clarifying changes were,
in fact, substantive changes to the rule. Several questioned whether
the removal of the case-by-case evaluation language in former
Sec. 7.4002(d) meant that the OCC is seeking to eliminate case-by-case
analyses of preemption questions. As previously noted, the reference in
former Sec. 7.4002(d) to paragraphs (a) and (b) have caused some to
interpret Sec. 7.4002(d) as requiring banks to seek our confirmation
that the process followed by a given bank raises no safety and
soundness concerns. In order to avoid this confusion going forward, the
OCC proposed to remove the reference to the case-by-case evaluation of
whether a national bank establishes its non-interest charges and fees
pursuant to paragraphs (a) and (b) of Sec. 7.4002. This does not,
however, modify the OCC's practice of responding to requests for
opinions on preemption questions on a case-by-case basis. We will
continue to review these requests on a case-by-case basis and, in so
doing, we will continue to apply the preemption standards articulated
by the United States Supreme Court in Barnett Bank of Marion County,
N.A. v. Nelson, 517 U.S. 25 (1996) and other applicable Federal
judicial precedents. Minor changes to the language of the proposal have
been made to clarify that point and to retain language from the former
rule regarding the types of State laws at issue.
Several commenters also questioned the timing of the proposed
changes to Sec. 7.4002(d) in light of the pending appeal, in the U.S.
Court of Appeals for the Ninth Circuit, of Bank of America v. City of
San Francisco, Docket No. 00-16394. These commenters believe that by
modifying the rule during litigation over its meaning, the OCC's
proposal would have a chilling effect on State and municipal efforts to
regulate national banks' fees. As explained above, our revisions to
Sec. 7.4002(d) do not change the OCC's process for evaluating whether
State laws that limit or prohibit national banks' fees are preempted by
the National Bank Act.\13\
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\13\ Although no substantive change is effected by the proposed
revisions to Sec. 7.4002(d), we note that the Supreme Court has held
that the OCC may revise a rule during the pendency of litigation
over matters governed by that rule. See Smiley v. Citibank (South
Dakota), N.A., 517 U.S. 735, 741 (1996) (upholding the OCC's
regulation defining the term ``interest'' for purposes of 12 U.S.C.
85).
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Applicability of State Law to National Bank Subsidiaries (New
Sec. 7.4006)
Proposed Sec. 7.4006 clarified that State laws apply to a national
bank operating subsidiary to the same extent as those laws apply to the
parent national bank. The majority of commenters who addressed this
issue supported the proposal. Many of these commenters said that it is
a permissible exercise of the authority granted by the National Bank
Act for national banks to create operating subsidiaries that exercise
both direct and incidental powers under 12 U.S.C. Section 24(Seventh).
These commenters noted that operating subsidiaries have long been
authorized for national banks and provide national banks with a
convenient alternative to conduct activities that the bank could
conduct directly. Further, they agreed that operating subsidiaries are,
in essence, incorporated departments or divisions of the bank and,
accordingly, should not be treated differently than their parent banks
under State laws.\14\
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\14\ Several commenters also requested that the final rule
include, as an example, the express statement that 12 CFR 34 (Real
Estate Lending and Appraisals) applies to operating subsidiaries.
Inclusion of this statement in new Sec. 7.4006 is unnecessary,
however, because current Sec. 34.1(b) already provides that part 34
applies to national banks and their operating subsidiaries.
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A number of commenters, however, were opposed to the provision.
These commenters read proposed Sec. 7.4006 to mean that the OCC has
concluded that certain types of State laws--several commenters
mentioned licensing, corporate governance, and consumer protection laws
in particular--do not apply to national bank operating subsidiaries.
Some commenters also expressed a more general concern that Federal
oversight of national bank operating subsidiaries is inadequate, and
that States should be permitted to enforce compliance with State laws
to protect the parent bank from any reputation or safety and soundness
risks that may result from operating subsidiaries' noncompliance with
those laws.
In our view, these comments do not warrant modification of proposed
Sec. 7.4006. For decades national banks have been authorized to use the
operating subsidiary as a convenient and useful corporate form for
conducting activities that the parent bank could conduct directly.
Operating subsidiaries often have been described as the equivalent of
departments or divisions of their parent banks.
Recent legislation has recognized this status of national bank
operating subsidiaries. In GLBA, for example, Congress expressly
acknowledged the authority of national banks to own subsidiaries that
engage ``solely in activities that national banks are permitted to
engage in directly and are conducted subject to the same terms and
conditions that govern the conduct of such activities by national
banks.''\15\ Similarly, the OCC operating subsidiary regulation
provides that an operating subsidiary conducts its activities subject
to the same authorization, terms, and conditions that apply to the
conduct of those activities by its parent bank.\16\ A fundamental
component of these descriptions of the characteristics of operating
subsidiaries in GLBA and the OCC's rule is that state laws apply to
operating subsidiaries to the same extent as they apply to the parent
national bank. Thus, unless otherwise provided by Federal law or OCC
regulation, State laws, such as licensing requirements, are applicable
to a national bank operating subsidiary only to the extent that they
are applicable to national banks.\17\
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\15\ Pub. L. 106-102, Sec. 121, 113 Stat. at 1378, codified at
12 U.S.C. 24a(g)(3).
\16\ 12 CFR 5.34(e)(3).
\17\ See, e.g., Letter to Thomas A. Plant and Daniel Morton from
Julie L. Williams, dated May 16, 2001 (published at 66 FR 28593 (May
23, 2001)) (Michigan law requiring national banks to obtain license
to finance sales of motor vehicles would be preempted); letter to
Thomas Vartanian from Julie L. Williams, dated March 7, 2000 (State
licensing laws would be preempted to the extent that they apply to
auction of certificates of deposit by national bank over the
Internet) (published at 65 FR 15037 (March 20, 2000)); OCC Interpr.
Ltr. No. 749 (Sept. 13, 1996), reprinted in [1996-1997 Transfer
Binder] Fed. Banking L. Rep. (CCH) P 81-114 (State law requiring
national banks to be licensed by the state to sell annuities would
be preempted); OCC Interpr. Ltr. 644 (March 24, 1994) reprinted in
[1994 Transfer Binder] Fed. Banking L. Rep. (CCH) P 83,553 (State
registration and fee requirements imposed on mortgage lenders would
be preempted).
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[[Page 34789]]
We disagree with those commenters who believe that new Sec. 7.4006
will adversely affect the oversight of operating subsidiaries either
from a consumer protection or a safety and soundness standpoint. The
OCC considers the overall risk exposure of a national bank as part of
its supervisory processes, including safety and soundness and
compliance risk originating in, or resulting from, the bank's operating
subsidiaries. Moreover, in specified cases, State law standards do
apply both to a national bank and its operating subsidiary. For
example, GLBA provides that insurance activities are to be functionally
regulated by the States.\18\ In its so-called safe-harbor provisions,
section 104 of GLBA describes certain State insurance laws that are
immune from preemption and that, therefore, apply to the conduct of
insurance sales activities by either a depository institution or its
subsidiary.
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\18\ Pub. L. 106-102, section; 301, 113 Stat. at 1407, 15 U.S.C.
6711.
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The preamble to the proposal noted that the Office of Thrift
Supervision (OTS) has taken a similar approach with respect to the
applicability of State law to the operating subsidiaries of Federal
savings associations,\19\ and that several courts have upheld this OTS
rule.\20\ Although the national banking laws differ in particular
respects from the HOLA, national banks and Federal thrifts share the
characteristics of a Federal charter. Like national banks, Federal
thrifts are instrumentalities created by Congress for a national
purpose--the HOLA was enacted in 1933 for the purpose of promoting home
ownership in the United States. See, e.g., Fidelity Federal Savings and
Loan Ass'n v. de la Cuesta, 458 U.S. 141, 152-53 (1982). Like national
banks, the charter and powers of Federal thrifts derive exclusively
from Federal law. The same preemption principles developed in Federal
judicial precedents under the Supremacy Clause apply to both national
banks and Federal thrifts. See First National Bank of McCook v.
Fulkerson, No. 98-D-1024 (D. Co. March 7, 2000) slip op. at 7
(principle of Federal preemption applies similarly to national banks
and Federal savings associations). Moreover, as with national banks,
consideration of the special Federal character of Federal thrifts has
informed courts' application of these traditional preemption
principles. See Conference of State Bank Supervisors v. Conover, 710
F.2d 878, 881-83 (D.C. Cir. 1983) (per curiam) (applying de la Cuesta
to conclude that OCC regulations governing adjustable rate mortgages
preempted State law).
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\19\ 12 CFR 559.3(n). See 61 FR 66561, 66563 (December 18, 1996)
(preamble to OTS final rule adopting section 559.3(n), explaining
that the basis for the OTS rule is that the operating subsidiary of
a Federal savings association ``is treated as the equivalent of a
department of the parent thrift for regulatory and reporting
purposes'').
\20\ See WPS Financial, Inc. v. Dean, No. 99 C 0345 C (W.D. Wi.
Nov. 26, 1999); Chaires v. Chevy Chase Bank, FSB, 131 Md. App. 64,
748 A.2d 34, 44 (Md. Ct. Sp. App. 2000).
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In view of these similarities, differences in outcome on questions
about what State laws apply to national banks and Federal thrifts are
not warranted unless a Federal law provides otherwise,\21\ and similar
conclusions should be reached regarding the application of State laws
to national banks and their operating subsidiaries as are reached for
Federal thrifts and their operating subsidiaries.
---------------------------------------------------------------------------
\21\ See, e.g., 12 U.S.C. 1462a(f) (stating that no provision of
law administered by the Director of the Office of Thrift Supervision
shall be construed as superseding any homestead provision of any
State constitution or implementing statute in effect on September
29, 1994, or any subsequent amendment, that exempts the homestead of
any person form foreclosure or forced sale for the payment of debts,
other than a purchase money obligation relating to the homestead,
taxes due on the homestead, or an obligation arising from work and
material used in constructing improvements on the homestead). There
is no comparable provision in the laws applicable to national banks.
---------------------------------------------------------------------------
For these reasons, Sec. 7.4006 is adopted as proposed.
C. Part 23--Leasing
Estimated Residual Value for Section 24 (Seventh) Leases (Revised
Sec. 23.21)
Twelve CFR 23 authorizes national banks to engage in leasing
activities pursuant to two distinct sources of authority: 12 U.S.C. 24
(Tenth), which expressly authorizes leasing subject to certain
conditions specified in that statute, including a 10%-of-assets limit
on the amount of the activity that the national bank may conduct; and
12 U.S.C. 24 (Seventh), which authorizes leasing as an activity that is
part of the business of banking without imposing a percentage-of-assets
limit.\22\ These leases must be ``full-payout leases.'' That term is
defined to mean a lease in which the national bank reasonably expects
to recover its investment in the leased property, plus its cost of
financing, from rental payments, estimated tax benefits, and the
estimated residual value of the leased property at the expiration of
the lease term. The rules for section 24 (Seventh) leases further
provide that the bank's estimate of the residual value of the leased
property must be reasonable in light of the nature of the property and
all the circumstances surrounding the lease transaction and that, in
any event, the unguaranteed amount of residual value relied upon may
not exceed 25% of the bank's original cost of the property. See 12 CFR
23.3, 23.2(e), and former Sec. 23.21.
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\22\ M&M Leasing v. Seattle First National Bank, 563 F.2d 1377
(9th Cir. 1977), cert. denied, 436 U.S. 956 (1978) (bank leasing of
personal property permissible because it was functionally equivalent
to loaning money on personal security).
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Because the OCC's experience supervising national banks that engage
in the leasing business suggested that the 25% residual value limit may
not be appropriate for all types of personal property leasing, we
proposed to modify former Sec. 23.21 to provide that the limit on the
unguaranteed amount of estimated residual value is either 25% or the
percentage for a particular type of personal property that is specified
in guidance published by the OCC. This would permit the OCC to
establish a different percentage requirement than 25% if a different
limit is warranted. If the OCC does not specify a different limit, the
25% limit would continue to apply. In the proposal, we stated that we
would apprise national banks of any different limit or limits
established under this provision by publishing an OCC bulletin, which
would subsequently be incorporated into the Comptroller's Handbook
booklet on Lease Financing.
The OCC received several comments on the proposed changes to part
23 from national banks and bank trade groups questioning whether the
proposal was establishing 25% as a floor or whether the OCC might
intend to reduce the residual value limit. Those commenters argued, as
a matter of policy, that the OCC should not lower the residual value
limit below 25% and, as a matter of law, that the OCC would be required
by the Administrative Procedure Act (APA), 5 U.S.C. 553(b), to use
notice-and-comment rulemaking to effect any such reduction.
The OCC did not intend in the proposal to establish 25% as a floor.
We believe that some types of leased property may warrant use of a
higher or lower residual value. Establishing a 25% floor in Sec. 23.21
would deprive the OCC of flexibility it may need in the future to
respond to changes in the leasing business. Moreover, we do not believe
that the APA's rulemaking requirements would be triggered by
[[Page 34790]]
such a supervisory response.\23\ Pursuant to this rulemaking, we are
amending our rule in a way that preserves flexibility for the OCC to
apply a different limit when faced with a given set of facts. This
enables the OCC to apply a different limit without having to amend its
rule. Interested parties are, as a result of this rulemaking, informed
that the OCC may exercise its discretion to apply the limit that it
thinks appropriate in a given circumstance. Accordingly, we have
adopted the rule as proposed.
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\23\ When adopting a rule, the APA requires that an agency
provide notice to the public of: (1) what it proposes to do; and (2)
the bases for its proposed actions. Kenneth Culp Davis & Richard J.
Pierce, Jr. Administrative Law Sec. 7.3. We have complied with these
requirements in this rulemaking by providing public notice of the
OCC's intention to modify former Sec. 23.21, for the reasons
discussed above, in such a way that will permit the OCC to establish
a different percentage requirement than 25% if a different limit is
warranted in the future.
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Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 604 of the RFA is not required if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities and publishes its certification
and a short, explanatory statement in the Federal Register along with
its rule.
Pursuant to section 605(b) of the RFA, the OCC hereby certifies
that this final rule will not have a significant economic impact on a
substantial number of small entities. The final rule implements
statutory provisions and codifies caselaw and OCC interpretations, but
adds no new requirements. Accordingly, a regulatory flexibility
analysis is not needed.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C.
1532 (Unfunded Mandates Act), requires that the agency prepare a
budgetary impact statement before promulgating any rule likely to
result in a Federal mandate that may result in the expenditure by
State, local, and tribal governments, in the aggregate or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
also requires the agency to identify and consider a reasonable number
of regulatory alternatives before promulgating the rule. The OCC has
determined that this final rule will not result in expenditures by
State, local, and tribal governments, or by the private sector, of $100
million or more in any one year. Accordingly, the OCC has not prepared
a budgetary impact statement or specifically addressed any regulatory
alternatives. As noted above, the final rule adds no new requirements.
Executive Order 13132--Federalism Summary Impact Statement \24\
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\24\ Executive Order 13132 provides that a ``federalism summary
impact statement'' consists of a description of the extent of the
agency's prior consultation with State and local officials, a
summary of the nature of their concerns, the agency's position
reflecting the need to issue the regulation, and a statement of the
extent to which the concerns of State and local officials have been
met. The following discussion, together with the preamble discussion
concerning the provisions mentioned by the commenters on this issue,
satisfies those requirements.
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Executive Order 13132 requires Federal agencies, including the OCC,
to certify their compliance with that Order when they transmit to the
Office of Management and Budget (OMB) any draft final regulation that
has federalism implications. Under the Order, a regulation has
federalism implications if it has ``substantial direct effects on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government.'' In the case of a regulation that has
federalism implications and that preempts State law, the Order imposes
certain specific requirements that the agency must satisfy, to the
extent practicable and permitted by law, prior to the formal
promulgation of the regulation.
In general, the Executive Order requires the agency to adhere
strictly to Federal constitutional principles in developing rules that
have federalism implications; provides guidance about an agency's
interpretation of statutes that authorize regulations that preempt
State law; and requires consultation with State officials before the
agency issues a final rule that has federalism implications or that
preempts State law.
It is not clear that Executive Order 13132 applies to this
rulemaking. The proposed change to Sec. 7.4002(d) and the proposed
addition of new Sec. 7.4006 were cited by some commenters as having the
effect of preempting State law. However, as previously discussed, the
changes to Sec. 7.4002(d) are not intended to affect any substantive
change in our rule governing non-interest charges and fees. Rather,
those changes remove language that created the misimpression that the
OCC must approve the process a bank used when deciding to impose a non-
interest charge or fee. The changes do not affect the OCC's intention
to address questions of preemption on a case-by-case basis, according
to preemption principles derived from the United States Constitution,
as interpreted through judicial precedent. Section 7.4006 generally
provides that national bank operating subsidiaries are subject to State
law to the extent State law applies to their parent bank. The section
itself does not effect preemption of any State law; it reflects the
conclusion we believe a Federal court would reach, even in the absence
of the regulation, pursuant to the Supremacy Clause and applicable
Federal judicial precedent.
Even if the Executive Order were applicable to this rule, the final
rule satisfies the requirements of that Order. If an agency promulgates
a regulation that has federalism implications and preempts State law,
the Executive Order requires the agency to consult with State and local
officials, to publish a ``federalism summary impact statement,'' and to
make written comments from State and local officials available to the
Director of OMB.
In addition to publishing our proposal for comment by all
interested parties, including State and local officials, we also
brought the proposal to the attention of the Conference of State Bank
Supervisors and specifically invited its views, and the views of its
constituent members, on the revisions we proposed. In the preamble to
this final rule, we have described the comments we received from State
officials or their representatives and our responses thereto. Finally,
we have made those written comments we received from State or local
officials available to the Director of OMB.
Effective Date
Any new regulation that imposes ``additional reporting, disclosure,
or other requirements on insured depository institutions shall take
effect on the first day of a calendar quarter which begins on or after
the date on which the regulations are published in final form,'' unless
certain exceptions apply. Riegle Community Development and Regulatory
Improvement Act of 1994, Pub. L. 103-325, Sec. 302(b) (September 23,
1994). This rulemaking imposes no such additional reporting,
disclosure, or other requirements. Accordingly, the requirement to
delay the effective date until the first day of the next calendar
quarter does not apply, and the rule will become effective 30 days
after publication, in accordance with 5 U.S.C. 553(d).
[[Page 34791]]
List of Subjects
12 CFR Part 1
Banks, banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 7
Credit, Insurance, Investments, National banks, Reporting and
recordkeeping requirements, Securities, Surety bonds.
12 CFR Part 23
National banks.
Authority and Issuance
For the reasons set forth in the preamble, parts 1, 7 , and 23 of
chapter I of title 12 of the Code of Federal Regulations are amended as
follows:
PART 1--INVESTMENT SECURITIES
1. The authority citation for part 1 continues to read as follows:
Authority: 12 U.S.C. 1, et seq., 12 U.S.C. 24(Seventh), and 93a.
2. In Sec. 1.2, current paragraphs (g) through (m) are redesignated
as (h) through (n), a new paragraph (g) is added, and newly designated
paragraphs (j)(4), (k)(1), and (l) are revised to read as follows:
Sec. 1.2 Definitions.
* * * * *
(g) Municipal bonds means obligations of a State or political
subdivision other than general obligations, and includes limited
obligation bonds, revenue bonds, and obligations that satisfy the
requirements of section 142(b)(1) of the Internal Revenue Code of 1986
issued by or on behalf of any State or political subdivision of a
State, including any municipal corporate instrumentality of 1 or more
States, or any public agency or authority of any State or political
subdivision of a State.
* * * * *
(j) * * *
(4) General obligations of a State of the United States or any
political subdivision thereof; and municipal bonds if the national bank
is well capitalized as defined in 12 CFR 6.4(b)(1);
* * * * *
(k) * * *
(1) Obligations issued by a State, or a political subdivision or
agency of a State, for housing, university, or dormitory purposes that
would not satisfy the definition of Type I securities pursuant to
paragraph (j) of Sec. 1.2;
* * * * *
(l) Type III security means an investment security that does not
qualify as a Type I, II, IV, or V security. Examples of Type III
securities include corporate bonds and municipal bonds that do not
satisfy the definition of Type I securities pursuant to paragraph (j)
of Sec. 1.2 or the definition of Type II securities pursuant to
paragraph (k) of Sec. 1.2.
* * * * *
PART 7--BANK ACTIVITIES AND OPERATIONS
3. The authority citation for part 7 is revised to read as follows:
Authority: 12 U.S.C. 1 et seq., 92, 92a, 93, 93a, 481, 484,
1818.
4. A new Sec. 7.1021 is added to subpart A to read as follows:
Sec. 7.1021 National bank participation in financial literacy
programs.
A national bank may participate in a financial literacy program on
the premises of, or at a facility used by, a school. The school
premises or facility will not be considered a branch of the bank if:
(a) The bank does not establish and operate the school premises or
facility on which the financial literacy program is conducted; and
(b) The principal purpose of the financial literacy program is
educational. For example, a program is educational if it is designed to
teach students the principles of personal economics or the benefits of
saving for the future, and is not designed for the purpose of profit-
making.
5. In Sec. 7.3000, the last sentence of paragraph (b) is removed
and two sentences are added in its place to read as follows:
Sec. 7.3000 Bank hours and legal holidays.
* * * * *
(b) * * * When the Comptroller, a State, or a legally authorized
State official declares a legal holiday due to emergency conditions, a
national bank may temporarily limit or suspend operations at its
affected offices. Alternatively, the national bank may continue its
operations unless the Comptroller by written order directs otherwise.
* * * * *
6. In Sec. 7.4001, the second sentence of paragraph (a) is revised
to read as follows:
Sec. 7.4001 Charging interest at rates permitted competing
institutions; charging interest to corporate borrowers.
(a) * * * It includes, among other things, the following fees
connected with credit extension or availability: numerical periodic
rates, late fees, creditor-imposed not sufficient funds (NSF) fees
charged when a borrower tenders payment on a debt with a check drawn on
insufficient funds, overlimit fees, annual fees, cash advance fees, and
membership fees. * * *
* * * * *
7. Section 7.4002 is revised to read as follows:
Sec. 7.4002 National bank charges.
(a) Authority to impose charges and fees. A national bank may
charge its customers non-interest charges and fees, including deposit
account service charges.
(b) Considerations. (1) All charges and fees should be arrived at
by each bank on a competitive basis and not on the basis of any
agreement, arrangement, undertaking, understanding, or discussion with
other banks or their officers.
(2) The establishment of non-interest charges and fees, their
amounts, and the method of calculating them are business decisions to
be made by each bank, in its discretion, according to sound banking
judgment and safe and sound banking principles. A national bank
establishes non-interest charges and fees in accordance with safe and
sound banking principles if the bank employs a decision-making process
through which it considers the following factors, among others:
(i) The cost incurred by the bank in providing the service;
(ii) The deterrence of misuse by customers of banking services;
(iii) The enhancement of the competitive position of the bank in
accordance with the bank's business plan and marketing strategy; and
(iv) The maintenance of the safety and soundness of the
institution.
(c) Interest. Charges and fees that are ``interest'' within the
meaning of 12 U.S.C. 85 are governed by Sec. 7.4001 and not by this
section.
(d) State law. The OCC applies preemption principles derived from
the United States Constitution, as interpreted through judicial
precedent, when determining whether State laws apply that purport to
limit or prohibit charges and fees described in this section.
(e) National bank as fiduciary. This section does not apply to
charges imposed by a national bank in its capacity as a fiduciary,
which are governed by 12 CFR part 9.
8. A new Sec. 7.4006 is added to read as follows:
[[Page 34792]]
Sec. 7.4006 Applicability of State law to national bank operating
subsidiaries.
Unless otherwise provided by Federal law or OCC regulation, State
laws apply to national bank operating subsidiaries to the same extent
that those laws apply to the parent national bank.
PART 23--LEASING
9. The authority citation for part 23 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 93a.
10. In Sec. 23.21, paragraph (a)(2) is revised to read as follows:
Sec. 23.21 Estimated residual value.
* * * * *
(a) * * *
(2) Any unguaranteed amount must not exceed 25 percent of the
original cost of the property to the bank or the percentage for a
particular type of property specified in published OCC guidance.
* * * * *
Dated: June 21, 2001.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 01-16328 Filed 6-29-01; 8:45 am]
BILLING CODE 4810-33-P