The opinion of the court was delivered by: JOHNSON
NORMA HOLLOWAY JOHNSON, District Judge.
I. The Classification of Assets Regulations
On July 2, 1986, the Federal Home Loan Bank Board published in the Federal Register a Notice of Proposed Rulemaking ("NPRM"). The FHLBB, as operating head of the FSLIC, proposed to adopt a new method of classifying certain commercial loans, and to revise its regulation regarding the reevaluation of assets by its examination staff. The reasons given in the NRPM for the new rule were as follows.
The FHLBB has statutory authority to conduct examinations of institutions the accounts of which are insured by the FSLIC. Section 403(b) of the National Housing Act ("NHA"), 12 U.S.C. § 1726(b) (1982) provides for examinations of insured institutions when from time to time necessary, in the judgment of the FSLIC, for the institutions protection and the protection of the FSLIC insurance fund. Pursuant to this authority, the FHLBB may examine and evaluate insured institutions' assets and require reporting and treatment of these assets for regulatory evaluation purposes. The NHA also requires all insured institutions to provide adequate reserves established in accordance with FHLBB regulations.
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).
An asset classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 12 C.F.R. § 561.16c(b)(2).
Assets classified Loss are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. 12 C.F.R. § 561.16c(b)(3).
Under the proposed regulations, assets classified as Substandard would be treated as a type of scheduled item. The institutions regulatory net-worth requirement would be increased to reflect 20 percent of such loans. Loans classified as Doubtful would require establishment of a specific reserve of 50 percent, and loans classified as Loss, 100 percent. As specific reserves do not count as eligible net worth items, the institutions' net-worth would be reduced accordingly.
In the NPRM the Bank Board noted that the proposal differed from commercial bank treatment in a number of ways. First, bank assets classified as Substandard do not require the establishment of reserves, nor do they increase banks' net-worth requirements. Second, the bank reserves established for assets classified as Doubtful and Loss reduce retained earnings of commercial banks but are later added back in calculating bank reserves so there is no additional reserve requirement as a result of the classification as there is under the proposed rule.
These differences were justified by the Bank Board by the fact that banks, unlike the federal associations, are subject to variable net-worth requirements based upon the quality of their assets. Additionally, it was pointed out that in practice, uncollectible bank loans are required to be promptly charged off, thus directly reducing bank net-worth.
The Bank Board also proposed to revise 12 C.F.R. 563.17-2(b), the appraisal provision in the Board's Examinations and Audits regulation for insured institutions. Rather than requiring the use of an appraisal to reevaluate real estate secured loans, the proposed change allows for evaluations that take into account economic factors that directly affect the immediate value of the assets from the insured institution's point of view. Examiners would consider factors such as market concentration, overbuilding in the geographic area, the ability of the borrower to complete the project, remaining funds, and the like. Finally, the Board proposed a Statement of Policy, 12 C.F.R. § 571.1a, meant to give insured institutions as much guidance as possible in classifying assets.
In response to the NPRM the Bank Board received 56 written comments from regulated federal associations, industry associations, and other federal agencies. The comments generally supported the institution of a classification system and supported the adoption of the system used by the federal regulatory agencies. About half of the commenters opposed the expansion of the regulations to include commercial loans secured by real estate. The Bank Board's traditional scheduled items approach, it was argued, was sufficient to protect against losses. A minority of commenters favored the extension of the regulations to include real estate secured loans. They argued that this would result in greater uniformity among financial institutions.
The overwhelming objection made by commenters was that the proposed revision to the regulations regarding reevaluation of real estate would give examiners too much discretion. The Bank Board was urged to formulate more specific and objective criteria to review, evaluate, and ...