to invest in secured or unsecured loans for commercial, corporate, business or agricultural purposes. The legislative history of the provision indicates that Congress intended to authorize, to a limited extent, "commercial lending" similar to that practiced by national banks. Many state chartered insured institutions have also been granted similar authority under state law.
During the past two years that this broader lending authority has been in effect, the FHLBB has observed that its traditional methods of classifying loans was not an effective method to categorize most commercial lending agreements. The old classification system was designed to evaluate home lending and focuses on the timely receipt of periodic repayments and other features of loans secured by real estate. This system, the FHLBB was concerned, might not adequately reflect the condition of commercial loans where payment schedules and other indicia of "current" status are of a different nature. As a result, the FHLBB felt it necessary to look at other methods of evaluating these types of loans.
The Bank Board noted a heightened interest in commercial lending by federal associations. An appropriate method of evaluating the assets securing those loans was desired before the scope of commercial lending activity increased further. The Bank Board also wanted a method that would serve to alert institutions and regulators on an early basis of any deterioration in the quality of commercial loan assets.
The proposed regulations were to apply only to commercial loans of the type described in section 5(c)(1)(R) of the Home Owners' Loan Act and 12 C.F.R. 545.46 (1985). Commercial loans secured by first liens on real estate and certain other assets traditionally assessed under the "scheduled items" approach were to be excluded. In the NPRM, however, the Bank Board specifically solicited comment on "whether a new evaluation method, if adopted, should also apply to all or some of those categories, for example, whether it should apply to commercial loans of all types, all loans that do not have regular payment schedules, . . . etc." 50 Fed.Reg. at 27291 (1985).
The federal bank regulatory agencies
had much experience in reviewing commercial lending. The Bank Board looked to the classification system used by the federal bank regulatory agencies to analyze the quality of commercial loans. The Bank Board proposed to adopt the basic concepts contained in the "Uniform Agreement on the Classification of Assets . . . Held by Banks" ("Uniform Agreement") issued in revised form on May 7, 1979, as the Joint Statement of the Office of the Controller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Conference of State Bank Supervisors. This latest Uniform Agreement further revised procedures first established in 1938.
The loan classification set forth in the Uniform Agreement expresses different degrees of risk of nonpayment of the loan. Problem assets are classified as either (1) Substandard, (2) Doubtful, or (3) Loss. Each category is defined as indicated below, following in substantial part the Uniform Agreement language and training materials used by the banking agencies.
A Substandard asset is inadequately protected by the current [net worth] and paying capacity of the obligor or of the collaterial [sic] pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the [insured institution] will sustain some loss if the deficiencies are not corrected. 12 C.F.R. § 561.16c(b)(1)(1985).