Assessments and Fees

AGENCY:

Office of Thrift Supervision, Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Office of Thrift Supervision (OTS) is proposing to amend its rules on assessments and fees. The proposed rule would replace examination fees for savings and loan holding companies (SLHCs) with semi-annual assessments on top-tier SLHCs. OTS would charge a base assessment amount on all top-tier SLHCs, and would add up to three additional components to this base amount. The three components would be based on the risk or complexity of the SLHC's business, its organizational form, and its condition. OTS is also considering assessing certain SLHCs that are large and complex enterprises (conglomerates) under a separate assessment procedure and solicits comments on these assessment procedures.

OTS also proposes to amend the existing rules governing the calculation of savings association semi-annual assessments. Specifically, OTS proposes to eliminate the alternative calculation for the asset size component currently available to small “qualifying savings associations.”

DATES:

Comments must be received on or before March 26, 2004.

ADDRESSES:

Mail: Send comments to Regulation Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, Attention: No. 2004-06. Commenters should be aware that there have been some unpredictable and lengthy delays in postal deliveries to the Washington, DC area and may prefer to make their comments via facsimile, e-mail, or hand delivery.

Delivery: Hand deliver comments to the Guard's Desk, East Lobby Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: Regulation Comments, Chief Counsel's Office, No. 2004-06.

Facsimiles: Send facsimile transmissions to Fax Number (202) 906-6518, Attention: No. 2004-06.

E-Mail: Send e-mails to regs.comments@ots.treas.gov, Attention: No. 2004-06, and include your name and telephone number.

Availability of comments: OTS will post comments and the related index on the OTS Internet Site at www.ots.treas.gov. You may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to public.info@ots.treas.gov, or send a facsimile transmission to (202) 906-7755. (Please identify the materials you would like to inspect to assist us in serving you.) We schedule appointments on business days between 10 a.m. and 4 p.m. In most cases, appointments will be available the business day after the date we receive a request.

FOR FURTHER INFORMATION CONTACT:

Donna Deale, Manager, Affiliates and Holding Company Supervision, (202) 906-7488; or Karen Osterloh, Special Counsel, Regulations and Legislation Division, Chief Counsel's Office, (202) 906-6639; Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

The Home Owners' Loan Act (HOLA) authorizes the OTS Director to assess fees against savings associations and holding companies to fund OTS's direct and indirect expenses as the Director deems necessary or appropriate. OTS also may assess savings associations and affiliates of savings associations for the costs of conducting examinations.

OTS has promulgated regulations implementing this authority at 12 CFR part 502. Under these rules, OTS currently charges each savings association a semi-annual assessment, which includes a size component, a condition component, and a complexity component. In addition, OTS charges an examination fee for thrifts that have trust assets that are under the $1 billion complexity component threshold. OTS also charges SLHCs and other thrift affiliates fees for investigating and examining their operations. These examination-related fees are assessed at an hourly rate for examiner time spent performing the examination.

II. Description of the Proposal

OTS proposes to revise its current rules to more accurately apportion the cost of OTS supervision among savings associations, SLHCs, and other affiliates. The agency has three primary goals: (1) Keep charges as low as possible while providing the agency with the resources essential to effectively supervise a changing industry; (2) tailor its charges to more accurately reflect the agency's costs of supervising institutions and their affiliates; and (3) provide institutions and their affiliates with consistent and predictable assessments to facilitate financial planning.

Consistent with these principles, OTS is proposing several amendments to its existing assessments rule. OTS expects to implement the proposed changes in the July 2004 semi-annual assessment.

OTS proposes the following changes. First, OTS proposes to eliminate most examination fees for SLHCs and instead charge semi-annual assessments to these entities. In addition, OTS proposes to revise the assessment procedures for savings associations by eliminating the alternative calculation for the asset size component currently available to small “qualifying savings associations.”

A. SLHC Semi-Annual Assessment

Under the existing assessment regulation at 12 CFR 502.50, OTS may assess fees for examining or investigating savings association affiliates, including SLHCs. OTS currently charges SLHCs for time spent conducting on-site examinations and working on off-site examination related issues.

As SLHCs have become more complex in both structure and nature of operations, OTS staff has spent substantially more off-site time addressing supervisory and examination related issues, as well as monitoring the financial condition of SLHCs. To attempt to better capture off-site time spent on these supervisory issues, OTS enhanced its system for tracking time devoted by regional and headquarters staff to specific SLHCs, and issued a Thrift Bulletin stating that OTS would bill SLHCs directly for these off-site services. Thrift Bulletin 48-19 (September 23, 2003).

Following the publication of the Thrift Bulletin, various members of the industry contacted OTS to discuss the proposed assessment of off-site examination hours. In addition to industry feedback, OTS conducted an analysis of off-site examination time records and collected input from staff on the process of collecting and tracking off-site examination time. Based on the industry and staff feedback, OTS has determined that the administrative burden of collecting and billing off-site hours outweighs the cost-recovery benefit.

In response to these developments, OTS is proposing a revision of its assessment regulation to permit OTS to recoup supervisory expenses related to the examination of SLHCs through semi-annual assessments rather than to directly bill for OTS hours. In connection with this change, OTS will cease charging most fees connected with staff time spent on SLHC and affiliate examination related issues.

OTS's goal is to tailor its charges in relation to its supervisory efforts and to provide transparency and predictability to the industry regarding costs. The current system primarily bases SLHC fees on on-site examiner hours. This method does not capture the significant amount of OTS staff time devoted to off-site monitoring and supervision of SLHCs. Moreover, the current system can result in sharply fluctuating or unexpected examination billings. As conditions and activities at the SLHC change from year-to-year, OTS attempts to adjust its examination scope to conduct its work in a risk-focused manner. Therefore, examiners do not spend the same amount of time at a particular SLHC during each examination. The time spent on-site can also vary considerably depending upon the amount of time spent off-site both in preparation for and concluding the examination. OTS believes that the recovery of supervisory costs based on regular assessments offers a measure of predictability as to the amount and the timing of payments and will aid SLHCs in their budgetary planning processes.

OTS believes that the proposed change will better support our risk-focused examination and supervisory processes and encourage efforts to perform exam related SLHC work off premise, when possible. With SLHC assessment fees set at fixed rates based on a variety of factors, staff will be encouraged to conduct its SLHC supervision in the most effective and efficient manner based on each SHLC's overall profile. With fixed assessments, staff will not feel undue pressure to expand or restrict on-site examination time due to concerns about the potential examination charges.

In today's rulemaking, OTS proposes to eliminate most examination related fees for SLHCs, and substitute semi-annual assessments. In establishing the proposed assessment structure, OTS is aware that every type of SLHC does not require an equal amount of supervisory attention. Accordingly, OTS has developed a rule that considers important factors, such as the complexity and risk of the SLHC enterprise, the total amount of SLHC assets, the organizational form of the SLHC, and the condition of SLHCs in the holding company structure.

1. Assessment of Top-Tier SLHCs

In most cases, OTS performs only one examination of each SLHC structure, even though the examination often includes a review of multiple tiers of direct and indirect thrift ownership. Because our SLHC examination and supervisory efforts consider the entire holding company structure, OTS does not propose to assess any charge on intermediate-level SLHCs in a holding company structure. Instead, the proposed rule would institute a semi-annual assessment only on the top-tier SLHC. The top-tier SLHC is defined as the highest level of ownership by a registered holding company in the holding company structure.

Occasionally two or more SLHCs own a controlling interest in a savings association. This occurs, for example, where two companies each directly owns 50 percent of the savings association's voting stock. Where there are two or more distinct controlling interests in a savings association, OTS examines each ownership structure separately. Accordingly, OTS would impose a semi-annual assessment on the top-tier SLHC in each ownership path. OTS would not reduce the amount of the assessment to reflect overlaps in these ownership structures.

In some cases, a top-tier SLHC is a trust that holds a controlling interest in an intermediate-tier SLHC. When OTS examines such structures, the vast majority of its efforts are expended in the review of the intermediate tier SLHC. OTS specifically requests comment on whether it should assess the intermediate SLHC, rather than the top-tier SLHC, in these instances.

2. Calculation of Semi-Annual Assessment

OTS intends to calculate the semi-annual assessments for most SLHC enterprises under the procedures described at section II.A.2.a. of this preamble. OTS is also considering assessing those SLHCs that are large and particularly complex enterprises (conglomerates) under a separate assessment procedure described at section II.A.2.b. of this preamble.

a. Calculation of Semi-Annual Assessment—In General. OTS intends to calculate the semi-annual assessments for most SLHC enterprises as follows. First, OTS would impose a base assessment amount on top-tier SLHCs. OTS would then add up to three components to this base assessment amount. These three components would be based on the risk or complexity of the SLHC's business, its organizational form, and its condition. See proposed § 502.26. The calculation of the base charge and the three components is discussed below.

Base Charge. As noted above, OTS will establish the amount of the base assessment charge for top-tier SLHCs. The amount of the charge will reflect OTS's estimate of the base cost of conducting on- and off-site supervision of small low risk, noncomplex SLHCs. OTS anticipates that these costs will reflect the costs of conducting on-site examinations using the abbreviated holding company examination program, conducting off-site activities in preparation for such an examination, and performing off-site monitoring between examinations. OTS also will recover a portion of its operating costs, such as the cost of OTS facilities and examination support personnel allocated to these activities.

OTS is currently considering establishing a fixed charge of $ 3,000 for each semi-annual assessment. This charge would equate to approximately 21 hours at OTS's current billing rate of $145 per hour. OTS will separately publish the amount of the final fixed charge in a Thrift Bulletin. We specifically request comment on the amount of this base charge.

Risk and Complexity Component. The first component of the general SLHC semi-annual assessment is the risk and complexity component. OTS will compute the amount of this component using schedules that set out charges based on OTS holding company risk classifications and total consolidated holding company assets.

Currently, OTS classifies SLHCs into two categories. This process distinguishes low risk or noncomplex holding company enterprises (Category I) from those that have complex operations or structures or exhibit a higher risk profile (Category II). To recognize that OTS spends greater resources to supervise Category II SLHCs, the proposed rule would permit OTS to establish separate risk and complexity component schedules for different categories of SLHCs.

In assigning a particular SLHC to a risk category, OTS assesses the following factors:

• SLHC financial condition. OTS will review whether the SLHC lacks a consistent source of reliable cash flow and stable earnings from operations, other than proceeds from the thrift or affiliates that are regulated financial entities; is significantly leveraged, either with high debt levels, hybrid instruments with debt-like features, or highly volatile instruments; has major investments that can rapidly require significant cash expenditures; is in a cyclical industry that is distressed or experiencing adverse trends; has a history of volatile operations; or has recently had a downgrade in debt rating by a major debt rating agency.
• Financial independence. OTS will consider whether the savings association or affiliates that are regulated financial entities are dependent on the SLHC for access to capital markets and whether they are unlikely to survive the financial collapse of the SLHC or a major SLHC affiliate.
• Operational independence. OTS will determine whether the management and board of the savings association or affiliates that are regulated financial entities consistently act in a manner beholden to the SLHC; their operational systems are dependent on the SLHC or any affiliate; the thrift or affiliates that are regulated financial entities have few full time employees dedicated to them; audit functions are consolidated within the SLHC, rather than in a separate audit department; key functions are performed by the SLHC or any other affiliate; the compensation of employees is tied directly or indirectly to the performance of the SLHC; or there are significant or abusive inter-company or insider transactions.
• Reputational risk. In reviewing this factor, OTS reviews whether the public identity of the thrift or affiliates that are regulated financial entities are linked to the SLHC through similar names or marketing strategies; whether there is significant cross-selling of proprietary products; whether the thrift and affiliates that are regulated financial entities serve only to facilitate the sales of SLHC services and products; or whether all assets or liabilities of the thrift or affiliates that are regulated financial entities come from the SLHC or other affiliates.
• Management experience. In reviewing this factor, OTS considers the management experience of the SLHC in running regulated financial entities; whether the thrift (or affiliates that are regulated financial entities) are de novo entities or have existing management with a proven track record; whether the SLHC is newly established or has a record of successful operation; or whether the SLHC is engaged in a significantly different business other than financial services.

If a holding company enterprise is classified as Category I, OTS considers the structure to be noncomplex and to have relatively low risk. OTS examination and supervision of these entities requires limited OTS resources. Typically, OTS will examine these entities using an abbreviated examination program, although the examination staff may also apply some of the more detailed procedures from the CORE Holding Company Examination Program. OTS intends to assess these enterprises a lower amount under the risk and complexity component.

Category II holding company structures, on the other hand, include complex structures and entities that exhibit characteristics that present a higher degree of risk. OTS examinations of these entities generally require greater resources in order to review the current and prospective risks that the entity may pose to the thrift. Usually, OTS will examine these entities using the CORE Holding Company Examination Program, although all CORE procedures may not be required.

Similar to the size component currently assessed on thrifts, amounts assessed under the risk and complexity component would increase as the amount of the total consolidated SLHC assets increase. This would reflect the fact that OTS's supervisory efforts and related costs typically increase as the overall size of the top-tier SLHC increases. Because a flat rate for all asset sizes would fail to reflect economies of scale in the supervision of larger structures, the scheduled amounts established under this section would also reflect marginal assessment rates that decrease as asset size increases.

OTS will establish and publish these schedules in a Thrift Bulletin. To assist commenters in assessing the impact of the proposed rule, OTS is considering establishing the following schedules under the risk and complexity component:

In applying the assessment schedules, OTS will use the most recent risk classification assigned by OTS of which a SLHC enterprise has been notified in writing before an assessment's due date. OTS does not currently inform SLHC enterprises whether they are identified as a Category I or Category II holding company. At publication, approximately 80 percent of SLHCs are Category I. To assist commenters in responding to the issues raised in this proposed rulemaking, OTS regional staff will inform SLHC enterprises of their risk classification category upon request.

Using the proposed schedule, the risk and complexity component for a Category I SLHC with total consolidated assets of $1.0 billion is $2,500. Assuming the organizational form component and condition component do not apply to the SLHC, OTS would add the base assessment amount ($3,000) and the risk and complexity component ($2,500), and would impose a semi-annual assessment of $5,500 on this SLHC.

Organizational Form Component. The second component of the general SLHC semi-annual assessment is the organizational form component. OTS-regulated SLHCs can own thrifts in a variety of forms, including stock holding companies, mutual holding companies, and trust holding companies. Certain SLHCs own thrifts that operate as trust only institutions and do not accept insured deposits from the public. In addition, OTS regulates certain holding companies under section 10(l) of the HOLA, which permits a state savings bank (or state cooperative bank) to elect to be treated as a savings association for the purposes of regulating the holding company.

OTS may incur different supervisory costs to properly supervise SLHC with a particular organizational form. To allow OTS to tailor its assessments to these costs of supervising a particular form of SLHC, the proposed rule would permit OTS to modify the amount of the assessment charged under the organizational form component. OTS would compute the amount of the organizational form component by adding the base assessment to the risk and complexity component, and multiplying this total by a factor (positive or negative) established for the particular organizational form. OTS would establish the applicable factors in a Thrift Bulletin. See proposed § 502.28.

OTS is currently considering applying this component only to section 10(l) holding companies. OTS regulation of section 10(l) holding companies presents many challenges. OTS's primary regulatory goal for section 10(l) holding companies is the same as its regulatory goal for SLHCs—to understand how holding company operations may affect the operations of the subsidiary depository institution. When OTS examines a SLHC that controls a savings association, it already has a thorough knowledge of thrift operations because it has examined the thrift. As a result, OTS can focus its primary efforts on understanding the operations of the SLHC. When it undertakes the examination of a section 10(l) holding company, however, OTS has little direct information on the operations of the state subsidiary depository institution and must undertake a more extensive review to understand those operations. OTS is also responsible for ensuring that the state subsidiary depository institution complies with a number of requirements applicable under section 10 of the HOLA. For example, a state savings bank (or a cooperative bank) that is deemed to be a savings association for purposes of section 10 of the HOLA must comply with section 10(d) of the HOLA, which subjects it to additional transactions with affiliate restrictions. In addition, section 10(f) of the HOLA requires the subsidiary insured institution to file advance notices of dividend declarations with OTS. OTS must also ensure that the state savings bank (or a cooperative bank) meets the requirements of a qualified thrift lender. See 12 U.S.C. 1467a(l)(2).

This review also requires OTS to work closely with other federal and state regulators. For example, OTS examiners must communicate with these regulators to determine whether they have any special concerns with the depository subsidiary/holding company relationship. They must also obtain data from one or more of 50 state regulators, which may or may not be in an automated format readily transferable and usable by OTS. OTS also attempts to coordinate with appropriate regulators to conduct its examination of section 10(l) holding companies in conjunction with the examination of the subsidiary depository institution.

To assist commenters in assessing the impact of the proposed rule, OTS is considering establishing an organizational form component multipler of 50 percent for section 10(l) holding companies. Building on the example described above, the base assessment ($3,000) plus the risk and complexity component for a Category I SLHC with consolidated assets of $1.0 billion ($2,500) would total $5,500. If this SLHC is a section 10(l) holding company, its complexity component would be an additional $2,750 (50 percent times $5,500). Assuming the SLHC was not subject to the condition component discussed below, its semi-annual assessment would be $8,250.

OTS specifically requests comment whether the organizational form component should apply to other types of SLHCs. For example, OTS supervises several large insurance companies and securities firms that control savings associations that provide only trust services and do not accept insured deposits from the public. Because the proposed assessment is based on the amount of consolidated holding company assets, OTS is concerned that the assessment for these companies, as calculated under the proposed rule, may not correspond to the actual costs of supervision. Under the proposed rule, an organizational form component may be a positive or negative amount. In these instances, it may be appropriate to calculate a negative amount under the organizational component. Accordingly, OTS specifically requests comment on how it should treat SLHCs where the sole savings association in the structure is a trust-only institution.

Condition Component. The third component of the general SLHC assessment is the condition component. Under proposed § 502.29, OTS would add an additional amount to an assessment if the most recent examination rating assigned to the top-tier SLHC (or the most recent examination rating assigned to any savings and loan holding company directly or indirectly controlled by the top-tier SLHC) was “unsatisfactory.” OTS will use the most recent examination rating of which the SLHC has been notified in writing before an assessment due date.

Under OTS's holding company rating system, an unsatisfactory rating is reserved for SLHCs that have a detrimental or burdensome effect on the thrift. These companies typically exhibit troublesome operating weaknesses. Either the SLHC inordinately relies on the thrift for cash flow, revenue, or dividends, or the thrift is inordinately reliant upon the SLHC for critical operating systems. Without immediate corrective action, the thrift's viability may be impaired.

Historically, OTS has not frequently assigned unsatisfactory ratings to SLHCs. Currently, only 11 SLHCs have unsatisfactory ratings. Nonetheless, OTS must devote considerably more resources to the supervision of these few SLHC structures than it devotes to SLHCs with satisfactory or above average ratings. For similar reasons, OTS imposes an additional assessment amount on savings associations that receive a “3,” “4,” or “5” rating under the Uniform Financial Institutions Rating System (UFIRS) (also referred to as the CAMELS rating system). See 12 CFR 502.20.

Under the proposed rule, the condition component of the SLHC assessment would be equal to 100 percent of the total of the base assessment, the risk and complexity component, and the organizational component. As a result, the semi-annual assessment for a SLHC rated as unsatisfactory would be twice as much as a similar SLHC rated as satisfactory. Building on the example described more fully above, the semi-annual assessment for an unsatisfactory-rated, section 10(l) SLHC in Category I with consolidated assets of $1.0 billion would be $16,500.

b. Calculation of Semi-Annual Assessment— Conglomerates. OTS also supervises a limited, select number of large and particularly complex enterprises (conglomerates) that are made up of a number of different companies, or legal entities that operate in diversified fields. Unlike traditional SLHCs, these conglomerates are often highly integrated and are managed with less regard for separate corporate existence and with more focus on product lines or geographic areas. OTS examines and supervises these SLHCs along functional or centralized lines in order to match the SLHC's business practices. OTS's supervision of these entities often involves increased planning and off-site monitoring; a more formalized supervisory process that focuses OTS's efforts on major risk areas and evaluates the enterprise across business lines; and substantial coordination with other domestic and foreign regulators. See Holding Company Handbook, Section 940, Large and Complex Enterprises (Conglomerates). The examination and regulation of these conglomerates consume a disproportionate amount of agency resources vis a vis other SLHCs.

One of the goals of the proposed rule is to closely tailor OTS charges to the actual costs of supervision. To ensure that the costs of supervision for conglomerates are not subsidized by other SLHCs, OTS intends to assess complex conglomerates (i.e., those SLHCs examined under section 940 of the Holding Company Handbook) under separate assessment procedures. OTS anticipates that these assessments will substantially exceed the amounts prescribed for other SLHCs under the proposed rule. OTS has not included rule text addressing these procedures as part of today's rulemaking because it believes that information gathered through the public comment process will be critical in crafting these procedures. However, OTS intends to describe the possible assessment procedures in sufficient detail to permit their codification in the final rule.

OTS is considering various approaches to calculating assessments for complex conglomerates. For example, OTS may impose:

• A set charge or flat fee.
• A variable charge that is based upon a percentage of the total holding company assets or some other financial measure. The applicable percentage may vary as the size of holding company assets (or other financial measure) increases or may represent a multiple of the Category II SLHC assessment schedule.
• An additional charge for complex multinational conglomerates with activities that require a high degree of coordination with other regulators. See e.g., Holding Company Handbook, Section 940A, Financial Activities in the European Union.
• A fee structure that combines some of the elements listed above. For example, OTS may include a flat fee for each complex conglomerate and an additional charge based on a percentage of total holding company assets.

OTS requests comment on these possible calculations and any alternative methods for calculating semi-annual assessments for complex conglomerates.

3. Collection of Semi-Annual SLHC Assessments

Under the proposed rule, OTS will bill SLHCs using the same procedures it uses to bill the semi-annual assessments from savings associations. OTS will bill each SLHC enterprise semi-annually for assessments. Assessments would be due January 31 and July 31 of each year. At least seven days before the assessment is due, OTS will mail the top-tier of the SLHC enterprise a notice that indicates the amount of the assessment, explains how OTS calculated the amount, and specifies when payment is due. See proposed § 502.25. The proposed rule would clarify that where an assessment due date is a Saturday, Sunday, or Federal holiday, assessments would be due on the first day preceding the due date that is not also a Saturday, Sunday or Federal holiday.

Proposed § 502.35(b) would permit a SLHC to establish an account at an insured depository institution and authorize OTS to debit the account for the semi-annual SLHC assessment. If the top-tier SLHC does not establish such an account or does not maintain funds in the account sufficient to pay the semi-annual assessment when it is due, the proposed rule would permit OTS to charge the SLHC a fee to cover OTS administrative costs of collecting and billing for the assessment. This fee is in addition to interest on delinquent assessments charged under proposed § 502.45. Like other fees and assessments, OTS will establish the amount of the fee and publish the amount of the fee in a Thrift Bulletin.

While OTS anticipates that it will have its new SLHC assessment structure in place for the July 2004 semi-annual assessment, it does not believe that it will be prepared to directly debit SLHC accounts at insured depository institutions until the January 2005 semi-annual assessment. Accordingly, OTS will not assess a fee for a SLHC's failure to establish the direct debit account until the January 2005 semi-annual assessment.

Proposed § 502.45(a) states that an assessment is delinquent if it is not paid by the due date. OTS will charge interest on delinquent assessments that accrues at a rate (that OTS will determine quarterly) equal to 150 percent of the average of the bond-equivalent rates of 13-week Treasury bills auctioned during the calendar quarter preceding the assessment.

Pursuant to the authority in section 9(c) of the HOLA, proposed § 502.45(b) states that if a SLHC fails to pay an assessment within 60 days of the due date, OTS may assess and collect the assessment with interest from a subsidiary savings association. If a SLHC controls more than one savings association, the Director may assess and collect the assessment from each savings association as the Director may prescribe.

B. Savings Association Semi-Annual Assessment

Under 12 CFR part 502, OTS currently charges each savings association a semi-annual assessment. OTS determines each institution's semi-annual assessment by totaling three components. These components address the following factors:

• Asset size. To compute the asset size component, OTS applies an assessment rate to the total asset size of the institution as reported on the TFR. The applicable rate schedule incorporates OTS fixed rates as an explicit fixed charge and marginal assessment rates that decrease in size as the asset size increases. OTS provides a lower alternate asset size component for certain small savings associations (“qualifying savings associations”).
• Condition. OTS assesses an additional assessment amount based on the condition of the institution, as determined by the most recent composite rating under the CAMELS rating system. This additional amount is equal to 50% of the size component for 3-rated institutions, and 100% percent of the size component for 4- or 5-rated institutions.
• Complexity. The complexity component addresses certain complex assets or activities, including trust assets administered by a thrift, assets covered by a thrift's recourse obligations or direct credit substitutes, and loans serviced by the thrift for others. OTS applies the complexity component only where the thrift exceeds $1 billion in an asset category.

As noted above, OTS provides an alternate asset size component calculation for qualifying savings associations. To be eligible for this calculation, a savings association must have been a savings association as of January 1, 1999, and its total assets must not exceed $100 million at the end of the current or any previous quarter. Under the alternate calculation, the asset size component for a qualifying savings association is its assessment calculated under pre-1998 assessment tables.

OTS developed the alternative asset size component in its 1998 rulemaking. 63 FR 65663 (November 30, 1998). One of the primary purposes of the 1998 rule changes was to make OTS assessments more equitable for institutions of all sizes. In analyzing the effects of various assessment rates, however, OTS feared that its changes to the asset size component would have a disproportionate impact on the smallest institutions, which might not have been in a position to absorb new costs. 63 FR 65665.

OTS is proposing to abandon the alternative asset size computation for qualifying savings associations. OTS's assessment regulation, to the maximum extent possible, attempts to tailor rates and charges to the agency's costs of supervising particular institutions. While OTS believes that it may have been appropriate to provide qualifying savings associations with an initial period to adjust to the 1998 assessment regime, OTS questions whether it is equitable to continue to require non-qualifying savings associations to carry some of the cost burdens for qualifying savings associations.

Non-qualifying savings associations, which include some small savings associations, have now carried an extra burden for qualifying institutions for five years. The burden has not remained static, but rather has increased over the five-year period, as a result of two factors.

First, more savings associations use the alternative computation method. The alternative computation did not initially benefit all qualifying savings associations. Based on the assessment rates for the January 1999 semi-annual assessment, only qualifying savings associations with less than $67.5 million in assets benefited from lower assessments under the alternative asset size computation. As a result of subsequent revisions to OTS's assessment schedules reflecting inflation and increased costs, all qualifying savings associations now benefit from the alternative computation.

In addition, non-qualifying savings associations have shouldered, and in the absence of regulatory change will continue to shoulder, an increasing burden as OTS modifies its assessment schedule to adjust for increases in costs. As noted above, assessments computed using the alternative asset size computation remain fixed at 1998 levels, even as OTS has periodically increased the base assessment rate and marginal rates to reflect inflation. As a result, qualifying savings associations now receive a much greater reduction to their assessment. For example, the asset size component computed under the standard method for an institution with $67 million in assets was $11,584 for the January 1999 semi-annual assessment. The alternate computation reduced the asset size component to $11,575, a net reduction of only $9. See TB 48-15 (November 30, 1998). For the January 2004 semi-annual assessment, however, the asset size component computed under the standard method for a $67 million institution is $13,252. The alternate computation reduced the asset component to $11,575, a net reduction of $1,677. Because the alternate computation remains fixed at 1998 levels, the amount of this disparity under the alternative computation will become more pronounced as OTS revises its assessment schedules upward over time.

OTS believes that all institutions, even small institutions, should be able to plan for, adjust to, and carry the burden of inflation-related and cost changes to the assessments schedule. Accordingly, OTS does not believe that it is appropriate to hold assessments for certain institutions at pre-1998 levels, and compel other institutions to carry an increased burden. Accordingly, OTS proposes to delete the alternative computation under the asset size computation.

To help interested persons understand this proposal and to provide the greatest opportunity to review the probable assessment rates that will apply to all savings associations, OTS is publishing the asset size schedule that will apply if the proposed rule is finalized without substantive changes. This schedule reflects the rates for non-qualifying small institutions contained in TB 48-20 (December 2, 2003).

By contrast, the alternative size assessment schedule for qualifying small institutions proposed for deletion in this rule is as follows:

OTS encourages comments on all aspects of this proposal.

III. Solicitation of Comments Regarding the Use of Plain Language

Section 722 of the Gramm-Leach Bliley Act (12 U.S.C. 4809) requires federal banking agencies to use “plain language” in all proposed and final rules published after January 1, 2000. OTS invites comments on how to make this proposed rule easier to understand. For example:

(1) Have we organized the material to suit your needs? If not, how could the material be better organized?

(2) Do we clearly state the requirements in the rule? If not, how could the rule be more clearly stated?

(3) Does the rule contain technical language or jargon that is not clear? If so, what language requires clarification?

(4) Would a different format (grouping and order of sections, use of headings, paragraphing) make the rule easier to understand? If so, what changes to the format would make the rule easier to understand?

IV. Executive Order 12866

The Director of OTS has determined that this final rule does not constitute a “significant regulatory action” for the purposes of Executive Order 12866.

V. Regulatory Flexibility Act Analysis

Under section 605(b) of the Regulatory Flexibility Act of 1980, OTS has evaluated the impact that this final rule will have on small businesses, small organizations, and small governmental jurisdictions. As required, OTS has prepared the following initial regulatory flexibility analysis (IRFA).

A. Legal Basis for the Rule; Objectives of the Rule

The HOLA authorizes the Director to assess fees against savings associations and holding companies to fund OTS's direct and indirect expenses as the Director deems necessary or appropriate. OTS also may assess savings associations and affiliates of savings associations for the costs of conducting examinations.

OTS has promulgated regulations implementing this authority at 12 CFR part 502. Under these rules, OTS currently charges each savings association a semi-annual assessment, which includes a size component, a condition component, and a complexity component. In addition, OTS charges thrifts an examination fee for thrifts that have trust assets that are under the $1 billion complexity component threshold. OTS also charges SLHCs and other thrift affiliates fees for investigating and examining their operations. These examination related fees are assessed at an hourly rate for examiner time spent preparing for and conducting the examination.

OTS is proposing this rule to more accurately apportion the cost of OTS supervision among savings associations, SLHCs, and other affiliates. The agency has three primary goals: (1) Keep charges as low as possible while providing the agency with the resources essential to effectively supervise a changing industry; (2) tailor its charges to more accurately reflect the agency's costs of supervising institutions and their affiliates; and (3) providing institutions and their affiliates with consistent and predictable assessments to facilitate financial planning.

B. Impact of the Rule

The proposed rule would affect small savings associations and small SLHCs. It would not affect other small businesses, small organizations, or small governmental jurisdictions. OTS addresses the impact of the rule on small savings associations and small SLHCs below. OTS also considered various alternatives to the proposed rule to reduce the impact of the rule on small savings associations and small SLHCs. These alternatives are also discussed below.

1. Effect on Small SLHCs

a. Size standard for small SLHCs. The Small Business Administration (SBA) prescribes size standards for various economic activities and industries using the North American Industry Classification System (NAICS). Under the SBA's standards, companies that are primarily engaged in holding securities of (or other equity interests in) depository institutions for the purpose of controlling those companies are addressed at NAICS Codes 551111 and 551112 (Office of Bank Holding Companies and Offices of Other Holding Companies). Companies within this group are considered to be small if they have annual receipts of $6 million or less. Companies that are primarily engaged in holding the securities of depository institutions and operating these entities are classified under NAICS Codes 522110-522190. Companies classified in this group are considered to be small if their total assets are less than $150 million.

In this IRFA, OTS has analyzed the impact of this rule using both the $150 million asset size standard and the $6 million annual receipts standard. OTS specifically requests comment on its use of these standards. Commenters are invited to address whether these or other size standards are appropriate.

b. Impact on small SLHCs. The proposed rule would replace examination fees for SLHCs with semi-annual assessments on each top-tier SLHC. For small SLHCs, OTS would impose a base assessment amount, and would add up to three components to this base amount. The three components would be based on the risk and complexity of the SLHC's business, its organizational form, and its condition. No small SLHC would be subject to the alternative assessment on conglomerate enterprises.

OTS calculates that there are 946 OTS-regulated SLHCs, including many intermediate holding companies within a single ownership structure. The proposed rule would charge semi-annual assessment fees only on the top-tier SLHC in each holding company structure. OTS regulates 509 top tier SLHCs. Of these 509 top tier SLHCs, 163 have total consolidated assets of less than $150 million and are considered to be small under the asset size standard. OTS estimates that 103 top-tier SLHCs have annual receipts of $6 million or less and would be considered to be small under the annual receipts standard.

The proposed assessment amount would affect all of these small SLHCs in varying degrees. Specifically, the various aspects of the rule would have the following impacts:

Base assessment charge. The base assessment charge will affect all small SLHCs. Under the current proposal, these small SLHCs would be assessed a charge of $3,000 for each semi-annual assessment (or $6,000 per year).

Risk and complexity component. Under the anticipated schedules, OTS is not proposing to impose any additional charge on small Category I SLHCs under the risk and complexity component. Small Category II SLHCs, however, would be assessed an additional semi-annual charge of $1,000 to $3,000 (or $2,000 to $6,000 per year) under the anticipated schedules, depending on total consolidated assets.

There are 147 small Category I SLHCs and 16 small Category II SLHCs under the asset size standard. OTS estimates that there are 93 small Category I SLHCs and 10 small Category II SLHCs under the annual receipts standard.

Organizational form component. The proposed organizational form component would apply only to section 10(l) SLHCs. For small section 10(l) holding companies that are Category I SLHCs, this component would increase the semi-annual assessment by an additional 50 percent or $1,500 ($3,000 per year). For small section 10(l) holding companies that are Category II SLHCs, this component would also increase the semi-annual assessment by 50 percent. The increase to the semi-annual assessment for these SLHCs under this component would range from $2,000 to $3,000 ($4,000 to $6,000 per year). The actual amount of the increase will depend upon total consolidated SLHC assets.

OTS regulates 47 section 10(l) SLHCs. Nineteen of these section 10(l) SLHCs are small under the asset size standard. Of these 19 small section 10(l) SLHCs, 14 are Category I and 5 are Category II. OTS estimates that 12 section 10(l) SLHCs are small under the annual receipts standard, and that 9 of these small SLHCs are Category I and 3 of these SLHCs are Category II.

Condition component. The proposed rule would impose an additional charge on SLHCs that are rated “unsatisfactory.” For these small SLHCs, the proposed condition component would increase the assessment by 100 percent. Applying the asset size standard, only 5 small SLHCs are rated unsatisfactory. Under the annual receipts standard, only 3 small SLHC are rated unsatisfactory.

The following chart summarizes the impact of the proposed rule on the semi-annual assessment for small SLHCs:

As noted above, for the five SLHCs that are rated unsatisfactory, the amount of the semi-annual assessment is doubled.

The amounts charged under the new assessments rule for SLHC would be offset by the elimination of the periodic SLHC examination fees. Although the amount of this offset will vary from SLHC-to-SLHC, OTS estimates that the average examination for a small SLHC is conducted every 18 months, and consumes approximately 39 examiner hours. At the current OTS billing rate of $145 per hour, OTS estimates that the average small SLHC will avoid on-site examination charges of $5,655 or an annualized charge of $3,770 per year.

In any event, OTS has considered alternatives to the proposed assessment rule. OTS considered, for example, assessing all SLHCs the same base assessment amount; computing the semi-annual assessment amount for all SLHCs using the same asset-based assessment schedule; and continuing to assess only on-site examination and off-site examination related fees rather than semi-annual assessments.

OTS does not believe that the first two alternatives would further the goal of tailoring OTS charges more closely to the costs of supervising various types of SLHCs, and could result in some SLHCs subsidizing the increased costs of supervising others. For the reasons set forth in the preamble, OTS further believes that continuing to assess examination fees would not provide SLHCs with consistency and predictability of assessments to facilitate financial planning.

OTS specifically requests comments on each of these alternatives, and any other alternatives that may minimize the impact of the rule on small SLHCs consistent with the goals of this rulemaking.

2. Effect on Small Savings Associations

This proposed rule would effect small savings associations by eliminating the alternative calculation of the size component currently available to certain small savings associations. To be eligible for this calculation, a savings association must have been a savings association as of January 1, 1999, and its total assets must not exceed $100 million at the end of the current or any previous quarter.

Small savings associations are defined as institutions with assets under $150 million. OTS estimates that it regulates approximately 478 small savings associations and that 289 of these small savings associations will take advantage of the alternative size calculation for the January 2004 assessment.

Under the alternate calculation, the asset size component for a qualifying savings association is its assessment calculated under pre-1998 assessment schedules, rather than the current assessment schedules. Unlike the pre-1998 assessment schedules, the current assessment schedules use rates that have been adjusted for inflation and include a base charge for certain fixed costs that are the same or nearly the same for all institutions. Because the amount of the size component varies with the size of the institution, the impact of the proposed change on the 289 small thrifts will vary. Using the most recent assessment table published in TB 48-20 for the January 2004 semi-annual assessment, the asset size component computed under the standard method and the alternative methods for institutions of various selected sizes is illustrated by the following chart:

Approximately 20 of the 289 small savings associations are currently rated “3” and are subject to an additional assessment under the condition component. This additional assessment is equal to 50 percent of the size component. For these 20 thrifts, the overall benefit of the alternative size calculation is 150 percent of the amount in the final column of the chart. Thus, the overall semi-annual benefit from the alternative size calculation for any individual 3-rated savings association will range from $1,413 to $3,063, depending on the institution's asset size. Three small savings associations are rated “4” or “5” and are subject to an additional assessment under the condition component that is equal to 100 percent of the size component. For these three institutions, the overall benefit of the alternative size calculation is 200 percent of figure in the final column of the chart. The overall semi-annual benefit from the alternative size calculation for any individual 4- or 5-rated savings association will range from $1,884 to $4,084, depending on the institution's asset size.

OTS considered various alternatives to the proposed rule. For example, it considered retaining the alternative asset size component for qualifying savings associations, prescribing a separate asset size schedule for smaller institutions with a lower base assessment rate or lower rates for smaller institutions, or phasing out the alternative schedule over time.

OTS's assessment regulation, to the maximum extent possible, attempts to tailor rates and charges to the agency's costs of supervising particular institutions. While it may have been appropriate to provide qualifying savings associations with an initial period to adjust to the assessment regulation originally adopted in 1998, it is not equitable to continue to require non-qualifying savings associations to carry the cost burdens for qualifying savings associations. Non-qualifying savings associations, which include many small savings associations, have carried an extra burden for qualifying institutions for five years. As described above at Section II.B.1., the burden has not remained static, but rather has increased over the five-year period. OTS believes that all institutions, even small institutions, should be able to plan for, adjust to, and carry the burden of inflation-related and cost changes reflected in OTS's assessments schedule. Accordingly, OTS does not believe that it is appropriate to compel other institutions to continue to carry an increased burden.

OTS specifically requests comments on each of these alternatives, and any other alternatives that may minimize the impact of the rule on small savings associations consistent with the goals of this rulemaking.

C. Other Matters

The proposed rule imposes no reporting, recordkeeping, or other compliance requirements. The current savings association assessment and the new SLHC assessment would be based on information contained in TFRs or in report H-(b)11, which savings associations and their SLHCs otherwise must file with OTS. While state-regulated depository institutions held by section 10(l) SLHCs do not currently submit holding company asset size information to OTS in Schedule HC of the TFR, OTS is considering revising its TFR filing requirements to collect this information electronically through Schedule HC filings.

OTS will continue to use its current collection procedures for savings associations and would use similar procedures for billing and collecting semi-annual assessments from SLHCs.

No federal rules duplicate, overlap, or conflict with this final rule.

VI. Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4 (Unfunded Mandates Act), requires an agency to prepare a budgetary impact statement before promulgating a rule that includes a federal mandate that may result in 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 an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. OTS has determined that the final rule will not result in expenditures by state, local, or tribal governments or by the private sector of $100 million or more. Accordingly, this rulemaking is not subject to section 202 of the Unfunded Mandates Act.

List of Subjects in 12 CFR Part 502

• Assessments
• Federal home loan banks
• Reporting and recordkeeping requirements
• Savings associations

Accordingly, the Office of Thrift Supervision proposes to amend part 502, chapter V, title 12, Code of Federal Regulations as set forth below.

PART 502—ASSESSMENTS AND FEES

1. The authority citation for part 502 continues to read as follows:

Authority: 12 U.S.C. 1462a, 1463, 1467, 1467a.

2. In § 502.5, revise paragraphs (b) and (c) to read as follows:

Subpart A—Assessments

Savings Associations—Calculation of Assessments