OCC Issues New Version of the “Lease Financing” Booklet of the Comptroller Handbook

On September 27, 2023, the Office of the Comptroller of the Currency (OCC) issued Version 2.0 of the Lease Financing booklet of the OCC’s Comptroller Handbook, which replaced Version 1.0 published in August 2014 and updated in June 2016 and January 2017, respectively. See Lease Financing, Comptroller's Handbook (occ.gov). OCC examiners reference the booklet for their examination and supervision of leasing programs offered by national banks, federal savings associations, and federal branches and agencies of foreign banking organizations (collectively “banks”). To prepare for OCC examination, banks should review the booklet to better understand and appreciate how their regulator will assess their leasing programs and operations.

Substantive revisions to the booklet in Version 2.0 include:

• Updating sections due to Financial Accounting Standards Board (FASB) changes to lease accounting standards; and
• Expanding and deepening the scope of guidance and review related to risk management and examination procedures.

Change in Accounting Standards

Over the past several years, FASB implemented changes to the lease accounting treatment applicable to various types of leases and lessors. FASB issued Accounting Standards Update (ASU) 2016-2, “Leases (Topic 842)” (referred to herein as “ASC Topic 842) in February 2016, which, along with subsequent guidance¹, superseded ASC Topic 840, “Leases”.  See “Accounting for Leases by Lessors” beginning on page 8.

Lease Financing booklet Version 2.0 emphasizes that risk management policies, procedures, and practices related to leasing programs must incorporate expertise in accounting standards. ASC Topic 842 governs the category of lease effective at lease commencement as either sales-type, direct financing, or operating, and the lease category then determines the applicable tax treatment. Prior FASB accounting standards included leveraged leases as an additional lease category; leveraged lease accounting is no longer permitted under ASC Topic 842, although lessors may apply this accounting treatment to leases in effect before the lessor’s accounting transition date. Other updates related to ASC Topic 842 include accounting treatment for sale-leaseback transactions and applying the applicable lease accounting standards in annual impairment reviews.

More Robust Risk Management Systems and Exam Procedures  

In line with banking regulatory trends, Version 2.0 expands upon prior guidance and heightens expectations of banks during examination. The description of eight categories of risk applying to leasing programs are substantially similar in Versions 1.0 and 2.0 of the Lease Financing Booklet. The risk categories are credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation. See “Risks Associated With Lease Financing” beginning on page 17. The risk management systems that the OCC expects to be implemented by banks to identify, measure, monitor, and control these risks has grown in sophistication and breadth, as has the detail included in the procedures for OCC examinations. 

The expansion of risk management system attributes key to bank safety and soundness include, but are not limited to the following, in the “Risk Management” section beginning on page 22:

• Policies. Where Version 1.0 simply stated that banks should adopt “prudent” policies and procedures, Version 2.0 adds a list of 21 considerations that banks should address in leasing policies, such as targeted geographic footprints and restrictions, appraisal and valuation and residual requirements, and periodic review and risk rating requirements.
• Personnel. Version 2.0 states that management and personnel compensation should be appropriately balanced between production, lease quality, and portfolio administration.
• Underwriting Standards. Like Policies, Version 2.0 expands upon Version 1.0 with a longer and more detailed list of underwriting standards typical to sound risk management.
• Financial and Repayment Capacity Analysis. Version 2.0 includes guidance related to syndicated lease transactions and small-dollar leases.
• Valuation and Residual Analysis. Version 2.0 suggests additional obligations for banks such as making the valuation of leased property independent from the leasing function, maintaining several specific types of reporting for effective asset valuation, and conducting annual impairment reviews.

Version 2.0 materially increases expectations for banks related to managing interest rate risk and liquidity risk. (See pp. 28 – 30.) The previous version briefly stated that banks should use a variety of techniques to manage interest rate risk and evaluate whether portions of leasing portfolios may need liquidated to fulfill other obligations or take advantage of opportunities. In Version 2.0, the OCC adds control systems that banks should be using to manage these risks, including an internal audit program, credit risk review that is independent of internal audit, management information systems, and “comprehensive and rigorous oversight” of third-party relationships.

Finally, the exam procedures in Version 2.0 applying to the OCC’s supervision of banks’ leasing programs swell to several additional pages describing the various assessments that examiners should perform, relative to the scope of the banking operation. Especially expanded are the following analyses: quantity of credit risk; quantity of operational risk; quantity of compliance risk as applied to business activity factors and any bank history of noncompliance; quantity of strategic risk; and quantity of reputation risk (see pp. 33– 44).

Conclusion  

Revisions in Version 2.0 of the Lease Financing booklet to the Comptroller Handbook are driven primarily by changes in lease accounting standards and increased regulatory scrutiny of banks overall. Banks that have completed their lease accounting transition in years prior are well-positioned for this aspect of OCC examination of leasing programs. While the addition of many risk management requirements increases regulatory demands on banks, Version 2.0 also provides extensive detail and checklists to enable banks to adequately prepare for examination.

¹ FASB provided further explanation to ASC Topic 842 in the following: ASU 2018-10, “Codification Improvements to Topic 842, Leases”; ASU 2018-11, “Leases (Topic 842): Targeted Improvements”; ASU 2018-20, “Narrow-Scope Improvements for Lessors”; and ASU 2019-01, “Leases (Topic 842): Codification Improvements”.