The FDIC Board of Directors proposed to ease limits on the
volume of mortgage servicing assets that state nonmember banks
can recognize in calculating asset levels and Tier 1 capital.
However, under the proposed rule, servicing assets derived from
financial instruments other than mortgages would continue to be
deducted from both assets and Tier 1 capital in a bank's regulatory
capital calculations.
Servicing rights arise from contracts to service loans owned
by others, usually for a fee. Over the past two years, the accounting
rules for servicing rights under generally accepted accounting
principles (GAAP) have changed significantly.
Servicing rights, or assets, are divided into two types --
purchased rights, which are bought from others; and originated
rights, which an institution generally obtains when it makes a loan
and sells or securitizes the loan while retaining the servicing rights.
Prior to 1996, only purchased servicing rights could be recorded as
assets. In 1996, the Financial Accounting Standards Board's
Statement No. 122, "Accounting for Mortgage Servicing Rights,"
permitted institutions also to count originated rights as an asset.
Beginning this year, institutions must follow the Financial
Accounting Standards Board's Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Under this standard, institutions now record
servicing assets (or liabilities) on the balance sheet for all financial
assets that are serviced for others, including financial assets other
than mortgages, regardless of the manner in which the servicing is
acquired. In addition, Statement No. 125 changed the interest cash
flows that institutions must include in their measurement of
servicing assets compared to previous accounting rules.
Under the proposed rule, when determining an institution's
risk-based and leverage capital ratios, the total amount of its
mortgage servicing assets (MSAs) -- either purchased or
originated -- and "purchased credit card relationships (PCCRs)"
that may be included in regulatory capital would be increased from
50 percent to 100 percent of Tier 1 capital. Treatment of
PCCRs -- the value of the customer relationships that is obtained with
the purchase of credit card accounts -- would not be changed under
the proposed rule. They would continue to be subject to a sublimit of
25 percent of Tier 1 capital. Consistent with current capital standards,
the amount of MSAs and PCCRs that may be recognized for Tier 1
capital purposes also would remain limited to the lesser of 90
percent of fair value or 100 percent of book value (net of any
valuation allowance).
The FDIC previously limited the amount of mortgage
servicing rights that an institution can include in regulatory capital
because of the significant adverse impact on capital that could
result from a high concentration of these assets, which are
potentially volatile due to interest-rate and prepayment risk.
However, the FDIC believes that a higher limit is more reasonable
in light of the specific valuation and impairment guidance for
servicing assets in the current accounting standards. In addition,
some institutions may exceed the current Tier 1 capital limitation
only because of changes in the measurement of MSAs under
Statement No. 125.
The FDIC is not proposing to change the existing
regulatory capital treatment of non-mortgage servicing assets,
which must be fully deducted from Tier 1 capital. Although the
markets for some types of non-mortgage servicing assets are
growing, these markets are not as fully developed as the mortgage
servicing market. Because of the uncertainty surrounding the
valuation of these servicing assets, the FDIC would continue to
exclude them from capital.
The proposal also seeks comment on whether assets
representing rights to future interest cash flows from serviced
assets in excess of contractually specified servicing fees, so-called
"interest-only strips receivable," should be subject to the same
regulatory capital limits as servicing assets.
The proposed capital rule has been developed in
consultation with the three other federal regulators of banks and
savings associations. Written comments on the proposal are due
within 60 days of its publication in the Federal Register.
Congress created the Federal Deposit Insurance Corporation in 1933 to
restore public confidence in the nation's banking system. The FDIC
insures deposits at the nation's 11,337 banks and savings associations
and it promotes the safety and soundness of these institutions by
identifying, monitoring and addressing risks to which they are exposed.
FDIC press releases and other information are available on the Internet
via the World Wide Web at www.fdic.gov and
may also be obtained
through the FDIC's Public Information Center (800-276-6003 or (703) 562-2200).
