OCC 2001-49
OCC Bulletin
Subject: Risk-Based Capital-Recourse, Direct Credit 
         Substitutes and Residual Interests
Description: Final Rule
Date: December 6, 2001

TO:  Chief Executive Officers of National Banks, 
     Department and Division Heads, Examining Personnel 
     and Other Interested Parties

PURPOSE

This bulletin transmits the final rule on Recourse, 
Direct Credit Substitutes and Residual Interests in 
Asset Securitizations that was published in the Federal 
Register on November 29.

SUMMARY

The final rule amends the agencies' regulatory capital 
standards to align more closely the risk-based capital 
treatment of recourse obligations and direct credit 
substitutes.  It also varies the capital requirements for
positions in securitized transactions and certain other 
exposures according to their relative credit risk and 
requires capital commensurate with the risks associated 
with residual interests.

The final rule is a result of the combination of two 
separate notices of proposed rulemaking: a proposed rule 
on Recourse and Direct Credit Substitutes 
(65 FR 12320, March 8, 2000), and a proposed rule on 
Residual Interests in Asset Securitizations or Other 
Transfers of Financial Assets (65 FR 57993, September 27,
2000).  The two proposals overlapped in scope in that 
both addressed leveraged credit risk.  Recognizing the 
overlap and interaction between the two proposals, a 
single final rule that combines aspects of the two 
proposals has been developed.

The final rule amends the regulatory capital standards as
follows:

· It defines the terms "recourse", "residual interest" 
  and related terms, and revises the definition of 
  "direct credit substitute";
· It provides more consistent risk-based capital 
  treatment for recourse obligations and direct credit 
  substitutes;
· It varies the capital requirements for positions in 
  securitization transactions according to their relative 
  risk exposure, using credit ratings from rating agencies 
  to measure the level of risk;
· It permits the limited use of a banking organization's 
  qualifying internal risk rating system to determine the
  capital requirement for certain unrated direct credit 
  substitutes;
· It permits the limited use of a rating agency's review 
  of the credit risk of positions in structured programs 
  and qualifying software to determine the capital 
  requirement for certain unrated direct credit 
  substitutes and recourse exposures (but not residual 
  interests);
· It requires a banking organization to deduct credit-
  enhancing interest-only strips, whether retained or 
  purchased, that are in excess of 25 percent of Tier 1 
  capital from Tier 1 capital and from assets;
· It requires a banking organization to maintain risk-
  based capital in an amount equal to the face amount of 
  a residual interest that does not qualify for the ratings-
  based approach; and
· It permits the modification of a stated risk weight, 
  credit conversion factor or credit equivalent amount, 
  if warranted, on a case-by-case basis.

The rule is effective January 1, 2002.  Any transactions 
settled on or after that date are subject to the final 
rule.  Banking organizations that have settled 
transactions before January 1, 2002 that result in 
increased capital requirements under the rule may delay 
the application of the rule to those transactions until 
December 31, 2002.  Banking organizations may elect early
adoption, as of November 29, 2001, of any provision of 
the final rule.

FOR FURTHER INFORMATION CONTACT:

Amrit Sekhon, risk expert, Capital Policy at 
(202) 874-5211 or Laura Goldman, senior attorney, 
Legislative and Regulatory Activities Division at 
(202) 874-5090.


________________________
Jonathan L. Fiechter
Senior Deputy Comptroller
International and Economic Affairs


Attachment 66 FR 59614