PART 5-LOANS MADE BY NATIONAL BANKS SECURED BY LIENS UPON LEASEHOLDS

Sec.

5.1

5.2

5.3 5.4

Scope and application.

General authorization.

Appraisals.

Convenants and restrictions.

5.5 Loans insured or guaranteed.

AUTHORITY: The provisions of this Part 5 issued under sec. 24, 38 Stat. 273, as amended; 12 U.S.C. 371.

SOURCE: The provisions of this Part 5 appear at 25 F.R. 2158, Mar. 16, 1960, unless otherwise noted.

§ 5.1 Scope and application.

This part is issued by the Comptroller of the Currency under authority of section 24 of the Federal Reserve Act, as amended (12 U.S.C. 371). It applies to real estate loans made by national banks secured by liens on leaseholds.

be determined by the use of accepted and reliable methods of appraising leasehold values including, in areas where such information is available, a consideration of the sales prices of comparable leaseholds.

[28 F.R. 14239, Dec. 24, 1963]

§ 5.4 Covenants and restrictions.

In order to qualify as an acceptable leasehold for security for a real estate loan made by a national bank, the covenants and restrictions contained in the lease which provide for forfeiture or reversion in the event of a breach must not be more onerous or burdensome than those contained in leases in general use in the area in which such bank is located, and the lease should permit acquisition of the leasehold by the lending bank by voluntary conveyance or assignment by the lessee, and acquisition and sale under judicial process, without being subject to such restrictions as would jeopardize recovery of the security value of such leasehold.

Reference is made to our recent conference concerning the question of national banks acting as travel agents which has been the subject to prior correspondence and conferences with you over the past several months.

It

As you know, we have had this matter under study for a period of some months. appears clear that national banks may, as an incidental power, provide travel services for their customers, as they have been doing for many years, and that they may have the reasonable rights and benefits that flow therefrom. We believe that you concede that national banks may as an incidental power furnish such services, but you take the position that they may not participate in the carriers' conference system which establishes uniform rates of compensation, and uniform obligations to perform, on all participating travel agents.

Whether national banks may so participate and whether they can or should enter into agreements in this connection would appear to be a matter to be determined by the banks concerned and their respective counsel, based upon the facts and circumstances of each particular case. As you know, some national banks have been doing So.

It is anticipated that the above position will be made public at an early date.

§ 7.2 National banks; service charges.

The Comptroller of the Currency has issued formal instructions concerning the service charges of banks as indicated in the following letter addressed to the presidents of all national banks: To the presidents of all national banks:

So that there may be no misunderstanding with respect to the policy of this Office concerning the service charges of banks, I am issuing these formal instructions to all national banks.

Agreements, arrangements, undertakings, understandings, etc., among banks, through clearing houses or otherwise, concerning service charges are not permissible in any form. It is the responsibility of the Board of Directors of each national bank to terminate promptly any of these practices which it may now be following.

Wherever a national bank has been involved in any of the practices cited, it should now review its scale of service charges independently of any other bank, and take appropriate corporate action to re-establish a scale of service charges independent of any relationships with any other bank. In tak

ing this action, it is appropriate to make such changes in the scale of service charges as are deemed necessary or desirable in the light of the individual bank's costs and competitive position. This review and re-establishment of the scale of service charges should be undertaken, even though there may have been no overt or implicit agreement, wherever there have been discussions of such charges among banks or their officers, either independently or in group meetings, or where the scale of service charges was adopted with knowledge of prospective adoption of similar charges by competitor banks.

It is recognized that identical charges for identical services may occur where there are no agreements or understandings among banks. Nevertheless, wherever this occurs, each national bank must be prepared to demonstrate conclusively that its scale of service charges was decided unilaterally, and not on the basis of any agreement or understanding, or even of discussion, among banks or their officers.

Our examiners have been instructed to explore, regularly and in detail, the methods by which the existing scale of service charges was determined by each national bank. At the time of the next examination of your bank, inquiry shall be made to determine whether appropriate action has been taken, where necessary, to conform to these instructions.

(R.S. 5240; 12 U.S.C. 1, 481) [27 F.R. 2278, Mar. 9, 1962]

§ 7.3

National banks; investment in mortgage loans guaranteed by Administrator of Veterans Affairs.

The Comptroller of the Currency has interpreted section 24 of the Federal Reserve Act (12 U.S.C. 371), 38 U.S.C. 1802 (f) and 38 CFR 36.4600, 27 F.R. 2686 as indicated in the following letter addressed to counsel for a national bank:

We have your letter of April 9, 1962, requesting our opinion as to whether or not your client, a national bank, may properly under the provisions of section 24 of the Federal Reserve Act purchase from the Veterans' Administration (VA) residential mortgage loans which will shortly be offered for sale by the VA pursuant to section 36.4600 of the VA regulations.

The loans in question arise in the following manner: The VA has accumulated various residential properties by foreclosure or assignment as a result of defaults on mortgages guaranteed by the VA for veterans. The VA disposes of these houses on the best terms and conditions it can obtain in the market without reference to whether or not the purchaser is a veteran. In order to dispose of these properties, the VA has taken purchase money mortgages. It is these purchase money mortgages which the VA now proposes under its new regulation, section 36.4600, to sell to national banks and other financial institutions with the 100 percent guarantee of the Veterans' Administration.

The guarantee will take the form of an agreement by the VA to repurchase the loan from the national bank in the event of default which continues for a designated period of time and in certain other events of default, all of which are set forth in detail in section 36.4600 of the VA regulations.

The regulations of the VA authorizing the Administrator to make these guarantees have been issued pursuant to the authority granted to the Administrator in section 1820, Chapter 37 of Title 38 of the United States Code. Section 1820 confers the power on the Administrator to purchase and sell "upon such terms and for such prices as he deems to be reasonable" any real or personal property which has come into his possession pursuant to the operation of the Veterans' Administration. It would appear that the undertaking of the Administrator to guarantee the mortgages in question would be within his authority to dispose of such mortgages on such terms as he deems to be reasonable.

Section 1802 (f) of Chapter 37, Title 38 provides as follows:

"(f) Any loan at least 20 per centum of which is guaranteed under this chapter may be made by any national bank or Federal savings and loan association, or by any bank, trust company, building and loan association, or insurance company, organized or authorized to do business in the District of

Columbia. Any such loan may be so made without regard to the limitations and restrictions of any other law relating to(1) ratio of amount of loan to the value of the property;

(2) maturity of loan;

(3) requirement for mortgage or other security;

(4) dignity of lien; or

(5) percentage of assets which may be invested in real estate loans."

The five restrictions listed in section 1802 (f) Title 38 just quoted, refer to section 24, Federal Reserve Act (12 U.S.C. 371). Since it appears that section 36.4600 of the VA regulations has been issued pursuant to authority granted in Chapter 37 of Title 38, United States Code, and since under section 1802 (f) any loan which is guaranteed in an amount over 20 percent by the Administrator pursuant to Chapter 37 of Title 38 may be held by a national bank without regard to the limitations and restrictions numbered 1 through 5, as listed in section 1802(f), we are of the opinion that a national bank may purchase these guaranteed residential mortgage loans without reference to the enumerated 5 restrictions of section 24 of the Federal Reserve Act.

[27 F.R. 4470, May 10, 1962]

§ 7.5 Appointment of directors.

(a) The Comptroller of the Currency has been requested to interpret the National Bank Act, 12 U.S.C. section 1 et seq., with respect to the propriety of action by the board of directors of a national bank to increase the number of directors between meetings of stockholders, and to appoint persons to fill such vacancies.

(b) The best interest of the bank and of the community are served when wellqualified persons may be added to the board of directors during the year without the expense attendant upon the calling of a special meeting of stockholders, and without the necessity of the resignation of an incumbent director of the bank in order to create a vacancy.

(c) The Comptroller is of the opinion that, if so authorized by the bank's Articles of Association or an amendment thereto, a majority of the full board of directors of a national bank may properly increase the number of directors within the limits specified in 12 U.S.C. 71a and appoint persons to fill the resulting vacancies between meetings of stockholders. It is, however, the Comptroller's view that such authority should not be exercised to increase the number of directors to a number which: (1) Exceeds by more than two the number of

99-127 O-69-7

directors last elected by shareholders where such number was fifteen or less; (2) which exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more.

(R.S. 324 et seq. as amended; 12 U.S.C. 1 et seq.) [27 F.R. 12811, Dec. 28, 1962, as amended at 30 F.R. 10981, Aug. 25, 1965]

§ 7.6 Preemptive rights.

(a) The Comptroller has been requested to reconsider the position expressed in paragraph 6110 of the Digest of Opinions, which states that all stockholders of a national banking association are entitled, in preference to any other persons, to the opportunity to purchase additional stock resulting from an increase in the bank's capital, in proportion to the number of shares held by them respectively.

(b) The Comptroller is of the opinion that, by vote of the holders of two-thirds of its voting stock, a national banking association may properly adopt Articles of Association or amend existing Articles of Association in order to modify or eliminate pre-emptive rights. The statement to the contrary in paragraph 6110 of the Digest of Opinions is hereby revoked.

(R.S. 324 et seq., as amended; 12 U.S.C. 1 et seq.) [27 F.R. 12811, Dec. 28, 1962] § 7.7 National banks; capital notes and

debentures; relation to lending limit. The Comptroller of the Currency has ruled on the question of whether the proceeds of capital notes and capital debentures issued by National Banks may be included in the aggregate of unimpaired capital funds for the purpose of the loan limitation contained in 12 U.S.C. 84. The following is the text of a letter addressed to the President of a National Bank containing said ruling:

You have requested our opinion as to whether the proceeds of the $15,000,000, 5 percent Capital Notes due January 1, 1989, to be issued by the National Bank will be considered as part of the unimpaired capital funds of the bank for the purpose of the computation of the bank's loan limit.

The limit on loans to a single borrower is contained in 12 U.S.C. 84. That section provides that the total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per centum of the amount of the capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund.

Under the terms of the aforesaid Capital Notes, the right of payment of principal and interest thereon is expressly subordinated to the prior payment in full of all deposit liabilities of the Bank, whether outstanding at the date of the Capital Notes or incurred after the date of the Capital Notes. Capital Notes or debentures so limited have all of the protective effect of capital and surplus insofar as depositors are involved. An examination of the legislative history of the lending restrictions contained in 12 U.S.C. 84 indicated that protection of the depositors is the primary purpose of restricting the amount of loans to any person to a stated percentage of the capital and surplus. Consequently, capital debentures and notes which stand in the same relationship to depositors as traditionally recognized forms of capital and surplus may well be included in the loan base. The fact that, as to shareholders, the capital notes and debentures would have a preferential position is just as immaterial as is the fact that preferred shareholders take precedence over common shareholders.

We conclude that the proceeds of capital notes, capital debentures or other similar obligations issued by a National Bank, provided that such debentures, notes or other similar obligations are subordinate in right of payment to the prior payment in full of all deposit liabilities of the bank, may be included as part of the aggregate amount of unimpaired capital stock and unimpaired surplus funds for the purpose of the computation of the limit on loans to individual borrowers contained in 12 U.S.C. 84.

[28 F.R. 14239, Dec. 24, 1963]

§ 7.9 Loans to executive officers.

The Comptroller of the Currency has been asked by many national banks whether title alone makes an officer an "executive officer" within the meaning of 12 U.S.C. 375a. The Comptroller is of the opinion that the term "executive officer," as contemplated by the provisions of 12 U.S.C. 375a, means each officer of a bank who, by virtue of his position, has both voice in the formulation of the policy of the bank and responsibility for the implementation of such policy. Under this definition a person who acts solely as a director would not be an "executive officer." Similarly, those officers whose sole responsibility is for the administration of the bank's policies are excluded from the definition "executive officer." Under this definition, it is the responsibility of and function performed by the individual, and not his title, which determines whether he is an "executive officer."

(b) Banks, unlike most other businesses, often have a number of respon