[Federal Register: November 20, 2009 (Volume 74, Number 223)]
[Rules and Regulations]
[Page 60137-60143]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no09-3]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2009-0018]
RIN 1557-AD25
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1361]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AD42
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. OTS-2009-0020]
RIN 1550-AC34
Risk-Based Capital Guidelines; Capital Adequacy Guidelines;
Capital Maintenance; Capital--Residential Mortgage Loans Modified
Pursuant to the Home Affordable Mortgage Program
AGENCY: Office of the Comptroller of the Currency, Department of the
Treasury; Board of Governors of the Federal Reserve System; Federal
Deposit Insurance Corporation; and Office of Thrift Supervision,
Department of the Treasury (the agencies).
ACTION: Final rule.
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SUMMARY: The agencies have adopted a final rule to allow banks, savings
associations, and bank holding companies (collectively, banking
organizations) to risk weight for purposes of the agencies' capital
guidelines mortgage loans modified pursuant to the Home Affordable
Mortgage Program (Program) implemented by the U.S. Department of the
Treasury (Treasury) with the same risk weight assigned to the loan
prior to the modification so long as the loan continues to meet other
applicable prudential criteria.
DATES: The final rule becomes effective December 21, 2009.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk Expert, Capital Policy Division,
(202) 874-6022, or Carl Kaminski, Senior Attorney, or Ron Shimabukuro,
Senior Counsel, Legislative and Regulatory Activities Division, (202)
874-5090, Office of the Comptroller of the Currency, 250 E Street, SW.,
Washington, DC 20219.
Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or
William Tiernay, Senior Supervisory Financial Analyst, (202) 872-7579,
Division of Banking Supervision and Regulation; or April Snyder,
Counsel, (202) 452-3099, or Benjamin W. McDonough, Counsel, (202) 452-
2036, Legal Division. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263-4869.
FDIC: Ryan Sheller, Senior Capital Markets Specialist, (202) 898-
6614, Capital Markets Branch, Division of Supervision and Consumer
Protection; or Mark Handzlik, Senior Attorney, (202) 898-3990, or
Michael Phillips, Counsel, (202) 898-3581, Supervision Branch, Legal
Division.
OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478,
Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906-6639,
Legislation and Regulation Division, Office of Thrift Supervision, 1700
G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Background
Under the agencies' general risk-based capital rules, loans that
are fully secured by first liens on one-to-four family residential
properties, that are either owner-occupied or rented, and that meet
certain prudential criteria (qualifying mortgage loans) are risk-
weighted at 50 percent.\1\ If a banking organization holds both a
first-lien and a junior-lien mortgage on the same property, and no
other party holds an intervening lien, the loans are treated as a
single loan secured by a first-lien mortgage and risk-weighted at 50
percent if the two loans, when aggregated, meet the conditions to be a
qualifying mortgage loan. Other junior-lien mortgage loans are risk-
weighted at 100 percent.\2\
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\1\ See 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC);
12 CFR parts 208 and 225.
\2\ See 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC);
12 CFR parts 208 and 225, Appendix A, section III.C.4. (Board); 12
CFR part 325, Appendix A, section II.C. (FDIC); and 12 CFR
567.6(1)(iv) (OTS).
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In general, to qualify for a 50 percent risk weight, a mortgage
loan must have been made in accordance with prudent underwriting
standards and may not be 90 days or more past due. Mortgage loans that
do not qualify for a 50 percent risk weight are assigned a 100 percent
risk weight. Each agency has additional provisions that address the
risk weighting of mortgage loans. Under the OCC's general risk-based
capital rules for national banks, to receive a 50 percent risk weight,
a mortgage loan must ``not [be] on nonaccrual or restructured.'' \3\
Under the Board's general risk-based capital rules for bank holding
companies and state member banks, mortgage loans must be ``performing
in accordance with their original terms'' and not carried in nonaccrual
status in order to receive a 50 percent risk weight.\4\ Generally,
mortgage loans that have been modified are considered to have been
restructured (OCC), or are not considered to be performing in
accordance with their original terms (Board). Therefore, under the
OCC's and Board's general risk-based capital rules, such loans
generally must be risk weighted at 100 percent. Under the FDIC's
general risk-based capital rules, a state nonmember bank may assign a
50 percent risk weight to any modified mortgage loan, so long as the
loan, as modified, is not 90 days or more past due or in nonaccrual
status and meets other applicable criteria for a 50 percent risk
weight.\5\ Under the OTS's general risk-based capital rules, a savings
association may assign a 50 percent risk weight to any modified
residential mortgage loan, so long as the loan, as modified, is not 90
days or more past due and meets other applicable criteria for a 50
percent risk weight.\6\
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\3\ 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC).
\4\ 12 CFR parts 208 and 225, Appendix A, section III.C.3.
(Board).
\5\ 12 CFR Part 325, Appendix A, section II.C. (FDIC).
\6\ 12 CFR 567.1, 12 CFR 567.6(a)(1)(iii) (OTS).
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On June 30, 2009, the agencies published in the Federal Register an
interim final rule (interim rule) to allow banking organizations to
risk weight mortgage loans modified under the Program using the same
risk weight assigned to the loan prior to the modification, so long as
the loan continues to meet other applicable
[[Page 60138]]
prudential criteria.\7\ In many circumstances, this means that an
eligible mortgage loan modified in accordance with the Program will
continue to receive a 50 percent risk weight for purposes of the
agencies' general risk-based capital guidelines. The agencies are now
adopting the interim rule as a final rule (final rule) with changes
that clarify the regulatory capital treatment of mortgage loans during
the Program's trial modification period (trial period). The revisions
provided under the final rule relative to the FDIC's and OTS' general
risk-based capital rules are clarifying in nature.
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\7\ 74 FR 31160 (June 30, 2009); 74 FR 34499 (July 16, 2009)
(OCC technical correction).
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Home Affordable Mortgage Program
On March 4, 2009, Treasury announced guidelines under the Program
to promote sustainable loan modifications for homeowners at risk of
losing their homes due to foreclosure.\8\ The Program provides a
detailed framework for servicers to modify mortgages on owner-occupied
residential properties and offers financial incentives to lenders and
servicers that participate in the Program.\9\ The Program also provides
financial incentives for homeowners whose mortgages are modified
pursuant to Program guidelines to remain current on their mortgages
after modification.\10\ Taken together, these incentives are intended
to help responsible homeowners remain in their homes and avoid
foreclosure, which is in turn intended to help ease the current
downward pressures on house prices and the costs that families,
communities, and the economy incur from unnecessary foreclosures.
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\8\ Further details about the Program, including Program terms
and borrower eligibility criteria, are available at http://
www.makinghomeaffordable.gov.
\9\ For ease of reference, the term ``servicer'' refers both to
servicers that service loans held by other entities and to lenders
who service loans that they hold themselves. The term ``lender''
refers to the beneficial owner or owners of the mortgage.
\10\ A separate aspect of the Program, the Home Affordable
Refinance Program, also provides incentives for refinancing certain
mortgage loans owned or guaranteed by Fannie Mae or Freddie Mac.
This final rule does not apply to mortgage loans refinanced under
the Home Affordable Refinance Program.
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Under the Program, Treasury has partnered with lenders and loan
servicers to offer at-risk homeowners loan modifications under which
the homeowners may obtain more affordable monthly mortgage payments.
The Program applies to a spectrum of outstanding loans, some of which
meet all of the prudential criteria under the agencies' general risk-
based capital rules and receive a 50 percent risk weight and some of
which otherwise receive a 100 percent risk weight under the agencies'
general risk-based capital rules.\11\ Servicers who elect to
participate in the Program are required to apply the Program guidelines
to all eligible loans \12\ unless explicitly prohibited by the
governing pooling and servicing agreement and/or other lender servicing
agreements. If a mortgage loan qualifies for modification under the
Program, the Program guidelines require the lender to first reduce
payments on eligible first-lien loans to an amount representing no
greater than a 38 percent initial front-end debt-to-income ratio.\13\
Treasury then will match further reductions in monthly payments with
the lender dollar-for-dollar to achieve a 31 percent front-end debt-to-
income ratio on the first-lien mortgage.\14\ Borrowers whose back-end
debt-to-income ratio exceeds 55 percent must agree to work with a
foreclosure prevention counselor approved by the Department of Housing
and Urban Development.\15\
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\11\ See 12 CFR Part 3, Appendix A, sections 3(a)(3)(iii) and
3(a)(4) (OCC); 12 CFR parts 208 and 225, Appendix A, sections
III.C.3. and III.C.4. (Board); 12 CFR part 325, Appendix A, section
II.C. (FDIC); and 12 CFR 567.1 and 567.6 (OTS).
\12\ For a mortgage to be eligible for the Program, the property
securing the mortgage loan must be a one-to-four family owner-
occupied property that is the primary residence of the mortgagee.
The property cannot be vacant or condemned, and the mortgage must
have an unpaid principal balance (prior to capitalization of
arrearages) at or below the Fannie Mae conforming loan limit for the
type of property.
\13\ A front-end debt-to-income ratio measures how much of the
borrower's gross (pretax) monthly income is represented by the
borrower's required payment on the first-lien mortgage, including
real estate taxes and insurance.
\14\ To qualify for the Treasury match, servicers must follow an
established sequence of actions (capitalize arrearages, reduce
interest rate, extend term or amortization period, and then defer
principal) to reduce the front-end debt-to-income ratio on the loan
from 38 percent to 31 percent. Servicers may reduce principal on the
loan at any stage during the modification sequence to meet
affordability targets.
\15\ A back-end debt-to-income ratio measures how much of a
borrower's gross (pretax) monthly income would go toward monthly
mortgage and nonmortgage debt service obligations.
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In addition to the incentives for lenders, servicers are eligible
for other incentive payments to encourage participation in the Program.
Servicers receive an up-front servicer incentive payment of $1,000 for
each eligible first-lien modification. Lenders and servicers are
eligible for one-time incentive payments of $1,500 and $500,
respectively, for early modifications of first-lien mortgages--that is,
modifications made while the borrower is still current on mortgage
payments but at risk of imminent default. To encourage ongoing
performance of modified loans, servicers also will receive ``Pay for
Success'' incentive payments of up to $1,000 per year for up to three
years for first-lien mortgages as long as borrowers remain in the
Program. A borrower can likewise receive ``Pay for Performance
Success'' incentive payments that reduce the principal balance on the
borrower's first-lien mortgage up to $1,000 per year for up to five
years if the borrower remains current on monthly payments on the
modified first-lien mortgage. Lenders also may receive a home price
depreciation reserve payment to offset certain losses if a modified
loan subsequently defaults.
For second-lien mortgages, lenders are eligible to receive
incentive payments based on the difference between the interest rate on
the modified first-lien mortgage and the reduced interest rate (either
1 percent or 2 percent) on the second-lien mortgage following
modification.\16\ Servicers may receive a one-time $500 incentive
payment for successful second-lien modifications, as well as additional
incentive payments of up to $250 per year for up to three years for
second-lien mortgages as long as both the modified first-lien and
second-lien mortgages remain current. A borrower also may receive
incentive payments of up to $250 per year for a modified second-lien
mortgage loan for up to five years for remaining current on the loan,
which will be paid to reduce the unpaid principal of the first-lien
mortgage. However, second-lien modification incentives only will be
paid with respect to a given property if the first-lien mortgage on the
property also is modified under the Program.\17\
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\16\ Participating servicers are required to follow certain
steps in modifying amortizing second-lien mortgages, including
reducing the interest rate to 1 percent or 2 percent. Lenders may
receive an incentive payment from Treasury equal to half of the
difference between (i) the interest rate on the first lien as
modified and (ii) 1 percent, subject to a floor.
\17\ In some cases, servicers may choose to accept a lump-sum
payment from Treasury to extinguish some or all of a second-lien
mortgage under a pre-set formula.
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Before a loan may be modified under the Program, a borrower must
successfully complete a trial period of at least 90 days. During the
trial period, a borrower makes payments on the eligible mortgage loan
under modified terms. To complete the trial period successfully, the
borrower must be current at the end of the trial period and provide
certain information.\18\ The Program provides no incentive payments to
the lender, servicer, or
[[Page 60139]]
borrower during the trial period and no payments if the borrower does
not successfully complete the trial period.
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\18\ Under the Program, borrowers in certain states with unique
foreclosure law requirements (foreclosure restart states) will be
considered to have failed the trial period if they are not current
at the time the foreclosure sale is scheduled.
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Comments on the Interim Rule
The agencies received six comments on the interim rule, one from a
banking organization, four from trade groups representing the financial
industry, and one from an individual. The commenters that addressed the
interim final rule unanimously supported it, asserting that it is
consistent with the important policy objectives of the Program and does
not compromise the goals of safety and soundness. Commenters requested
that the agencies clarify whether the rule's capital treatment is
available for a mortgage loan that has been modified on a preliminary
basis under the Program, but which still is within the trial period
(and, thus, has not been permanently modified). Commenters also
requested clarification regarding the circumstances under which a
mortgage loan that was risk-weighted at 100 percent immediately prior
to modification under the Program could receive a 50 percent risk
weight. Some commenters suggested that such a loan should receive a 50
percent risk weight following completion of the trial period or
following receipt of the first pay-for-performance incentive payments.
Other commenters requested that the agencies clarify that a sustained
period of repayment performance could include payments made after a
loan had been modified under the Program. The agencies also received a
comment on the interaction between private mortgage insurance and loan
modifications, which was beyond the scope of the interim rule.
Based on an analysis of the comments, the agencies have modified
the rule to specify that a mortgage modified on a permanent or trial
basis pursuant to the Program and that was risk-weighted at 50 percent
may continue to receive a 50 percent risk weight provided it meets
other prudential criteria.\19\
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\19\ The agencies intended the interim rule to apply to loans
modified on both a trial and permanent basis under the Program.
Accordingly, the modifications to the final rule are clarifying in
nature.
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As noted in the preamble to the interim rule, under the agencies'
existing practice, past due and nonaccrual loans that receive a 100
percent risk weight may return to a 50 percent risk weight under
certain circumstances, including after demonstration of a sustained
period of repayment performance. Because borrower characteristics, such
as debt service capacity, impact a borrower's creditworthiness, the
degree of appropriate reliance on a fixed period of payment performance
may vary for different borrowers.\20\ For these reasons, the agencies
have not established a specific period of repayments that would
constitute a ``sustained period of performance'' for a particular loan.
The agencies confirm that a borrower's payments on a mortgage loan
modified under the Program, including during the trial period, may be
considered in assessing whether the borrower has demonstrated a
sustained period of repayment performance.
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\20\ The instructions for the Consolidated Reports of Condition
and Income (Call Report) and the Thrift Financial Report (TFR)
define a sustained period of repayment performance as a period
generally lasting ``* * * a minimum of six months and would involve
payments of cash or cash equivalents. (In returning the asset to
accrual status, sustained historical repayment performance for a
reasonable time prior to the restructuring may be taken into
account.)'' Call Reports instructions are available at http://
www.federalreserve.gov/reportforms/CategoryIndex.cfm?WhichCategory=3
and TFR instructions are available at http://files.ots.treas.gov/
4210058.pdf.
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Commenters also requested that the agencies (1) allow a banking
organization to risk weight at 50 percent, rather than 100 percent, a
second-lien mortgage loan that is modified under the Program if the
first-lien mortgage loan on the property is owned by another entity,
that first-lien mortgage is also modified under the Program, and there
is no intervening lien; and (2) allow loans modified pursuant to the
Program or similar programs that continue to qualify for 50 percent
risk weight to be excluded from troubled debt restructurings reported
in quarterly bank regulatory reports. Under the general risk-based
capital rules all second-lien mortgage loans receive a 100 percent risk
weight, unless the banking organization that holds the loan also holds
the first lien, there is no intervening lien, and the loan meets other
prudential criteria. The agencies believe this treatment is
commensurate with the risks of junior positions, as lenders have
limited access to collateral in the event of default. Therefore, the
agencies have determined that allowing a banking organization to risk
weight junior-lien mortgage loans at less than 100 percent is not
appropriate other than in those circumstances already permitted by the
agencies general risk-based capital rules. With respect to whether
mortgage loans modified under the Program are considered troubled debt
restructurings, the question of how these loans should be classified
and reported will be determined under generally accepted accounting
principles.
Final Rule
Based on the above considerations, the agencies have adopted the
interim rule in final form with the modification discussed above. Under
the final rule as under the interim rule mortgage loans modified under
the Program will retain the risk weight appropriate to the mortgage
loan prior to modification, as long as other applicable prudential
criteria remain satisfied. Accordingly, under the final rule, a
qualifying mortgage loan appropriately risk weighted at 50 percent
before modification under the Program would continue to be risk
weighted at 50 percent during the trial period and after modification,
provided it meets other prudential criteria. If a borrower does not
successfully complete the trial period and the loan is not modified
under the Program on a permanent basis, the loan would qualify for the
50 percent risk weight category if it meets the conditions to be a
qualifying mortgage loan under the general risk-based capital rules. If
the loan does not meet the conditions, it would receive a 100 percent
risk weight. A mortgage loan appropriately risk weighted at 100 percent
prior to modification under the Program would continue to be risk
weighted at 100 percent during and after the trial period.
Consistent with the OCC's and the Board's general risk-based
capital rules, if a mortgage loan were to become 90 days or more past
due or carried in non-accrual status or otherwise restructured after
being modified under the Program, the loan would be assigned a risk
weight of 100 percent. Consistent with the FDIC's general risk-based
capital rules, if a mortgage loan were to again be restructured after
being modified under the Program, the loan could be assigned a risk
weight of 50 percent provided the loan, as modified, is not 90 days or
more past due or in nonaccrual status and meets the other applicable
criteria for a 50 percent risk weight. Consistent with the OTS's
general risk-based capital rules, if a mortgage loan were to again be
restructured after being modified under the Program, the loan could be
assigned a risk weight of 50 percent provided the loan, as modified, is
not 90 days or more past due and meets the other applicable criteria
for a 50 percent risk weight.
Additionally, in certain circumstances under the general risk-based
capital rules (as with, for example, a direct credit substitute or
recourse obligation), a banking organization is permitted to look
through an exposure to the risk
[[Page 60140]]
weight of a residential mortgage loan underlying that exposure. In such
cases, the banking organizations would follow the capital treatment
provided for in the agencies' general risk-based capital rules, as
modified by the final rule, when the underlying residential mortgage
loan has been modified pursuant to the Program.
The agencies believe that treating mortgage loans modified under
the Program in the manner described above is appropriate in light of
the special and unique incentive features of the Program and the fact
that the Program is offered by the federal government in order to
achieve the public policy objective of promoting sustainable loan
modifications for homeowners at risk of foreclosure in a way that
balances the interests of borrowers, servicers, and lenders. As
previously described, the Program requires that a borrower's front-end
debt-to-income ratio on a first-lien mortgage modified under the
Program be reduced to no greater than 31 percent, which should improve
the borrower's ability to repay the modified loan, and, importantly,
provides for Treasury to match reductions in monthly payments dollar-
for-dollar to reduce the borrower's front-end debt-to-income ratio from
38 percent to 31 percent. In addition, as described above, the Program
provides material financial incentives for servicers and lenders to
take actions to reduce the likelihood of defaults, as well as
incentives for servicers and borrowers designed to help borrowers
remain current on modified loans. The structure and amount of these
cash payments meaningfully align the financial incentives for
servicers, lenders, and borrowers to encourage and increase the
likelihood of participating borrowers remaining current on their
mortgages. Each of these incentives is important to the agencies'
determination with respect to the appropriate regulatory capital
treatment of mortgage loans modified under the Program.
Regulatory Analysis
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that, in connection with a notice of proposed
rulemaking, an agency prepare and make available for public comment an
initial regulatory flexibility analysis that describes the impact of a
proposed rule on small entities.\21\ Under regulations issued by the
Small Business Administration,\22\ a small entity includes a commercial
bank, bank holding company, or savings association with assets of $175
million or less (a small banking organization). As of June 30, 2009,
approximately 2,533 small bank holding companies, 386 small savings
associations, 749 small national banks, 432 small state member banks,
and 3,040 small state nonmember banks existed. As a general matter, the
Board's general risk-based capital rules apply only to a bank holding
company that has consolidated assets of $500 million or more.
Therefore, the changes to the Board's capital adequacy guidelines for
bank holding companies will not affect small bank holding companies.
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\21\ See 5 U.S.C. 603(a).
\22\ See 13 CFR 121.201.
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This rulemaking does not involve the issuance of a notice of
proposed rulemaking and, therefore, the requirements of the RFA do not
apply. However, the agencies note that the rule does not impose any
additional obligations, restrictions, burdens, or reporting,
recordkeeping or compliance requirements on banks or savings
associations, including small banking organizations, nor does it
duplicate, overlap or conflict with other federal rules. The rule also
will benefit small banking organizations that are subject to the
agencies' general risk-based capital rules by allowing mortgage loans
modified under the Program to retain the risk weight assigned to the
loan prior to the modification.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506), the agencies have reviewed the final rule to
assess any information collections. There are no collections of
information as defined by the Paperwork Reduction Act in the final
rule.
OCC/OTS Executive Order 12866
Executive Order 12866 requires federal agencies to prepare a
regulatory impact analysis for agency actions that are found to be
``significant regulatory actions.'' Significant regulatory actions
include, among other things, rulemakings that ``have an annual effect
on the economy of $100 million or more or adversely affect in a
material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or state,
local, or tribal governments or communities.'' The OCC and the OTS each
determined that its portion of the final rule is not a significant
regulatory action under Executive Order 12866.
OCC/OTS Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act of 1995 \23\ (UMRA) requires that
an agency prepare a budgetary impact statement before promulgating a
rule that includes a federal mandate that may result in the expenditure
by state, local, and tribal governments, in the aggregate, or by the
private sector of $100 million or more (adjusted annually for
inflation) in any one year. If a budgetary impact statement is
required, section 205 of the UMRA also requires an agency to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule. The OCC and the OTS each have determined that its
final rule will not result in expenditures by state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year. Accordingly, neither the OCC nor the
OTS has prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered.
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\23\ See Public Law 104-4.
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List of Subjects
12 CFR Part 3
Administrative practice and procedure, Banks, Banking, Capital,
National banks, Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements, Risk.
12 CFR Part 225
Administrative Practice and Procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 325
Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings
associations, State nonmember banks.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Risk, Savings
associations.
[[Page 60141]]
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
0
For the reasons stated in the common preamble, the Office of the
Comptroller of the Currency amends Part 3 of chapter I of Title 12,
Code of Federal Regulations as follows:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.
0
2. In appendix A to Part 3, in section 3, revise paragraph (a)(3)(iii)
to read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
* * * * *
Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-
Balance Sheet Items
* * * * *
(a) * * *
(3) * * *
(iii) Loans secured by first mortgages on one-to-four family
residential properties, either owner occupied or rented, provided
that such loans are not otherwise 90 days or more past due, or on
nonaccrual or restructured. It is presumed that such loans will meet
the prudent underwriting standards. For the purposes of the risk-
based capital guidelines, a loan modified on a permanent or trial
basis solely pursuant to the U.S. Department of Treasury's Home
Affordable Mortgage Program will not be considered to have been
restructured. If a bank holds a first lien and junior lien on a one-
to-four family residential property and no other party holds an
intervening lien, the transaction is treated as a single loan
secured by a first lien for the purposes of both determining the
loan-to-value ratio and assigning a risk weight to the transaction.
Furthermore, residential property loans made for the purpose of
construction financing are assigned to the 100% risk category of
section 3(a)(4) of this appendix A; however, these loans may be
included in the 50% risk category of this section 3(a)(3) of this
appendix A if they are subject to a legally binding sales contract
and satisfy the requirements of section 3(a)(3)(iv) of this appendix
A.
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
For the reasons stated in the common preamble, the Board of Governors
of Federal Reserve System amends parts 208 and 225 of Chapter II of
title 12 of the Code of Federal Regulations as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
3. The authority for part 208 continues to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),1833(j),
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882,
2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 U.S.C. 78b,
78I(b), 78l(i),780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801,
and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and
4128.
0
4. In appendix A to part 208, revise Section III. C.3., to read as
follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
* * * * *
III. * * *
C. * * *
3. Category 3: 50 percent. This category includes loans fully
secured by first liens \41\ on 1- to 4-family residential
properties, either owner-occupied or rented, or on multifamily
residential properties,\42\ that meet certain criteria.\43\ Loans
included in this category must have been made in accordance with
prudent underwriting standards; \44\ be performing in accordance
with their original terms; and not be 90 days or more past due or
carried in nonaccrual status. For purposes of this 50 percent risk
weight category, a loan modified on a permanent or trial basis
solely pursuant to the U.S. Department of Treasury's Home Affordable
Mortgage Program will be considered to be performing in accordance
with its original terms. The following additional criteria must also
be applied to a loan secured by a multifamily residential property
that is included in this category: all principal and interest
payments on the loan must have been made on time for at least the
year preceding placement in this category, or in the case where the
existing property owner is refinancing a loan on that property, all
principal and interest payments on the loan being refinanced must
have been made on time for at least the year preceding placement in
this category; amortization of the principal and interest must occur
over a period of not more than 30 years and the minimum original
maturity for repayment of principal must not be less than 7 years;
and the annual net operating income (before debt service) generated
by the property during its most recent fiscal year must not be less
than 120 percent of the loan's current annual debt service (115
percent if the loan is based on a floating interest rate) or, in the
case of a cooperative or other not-for-profit housing project, the
property must generate sufficient cash flow to provide comparable
protection
[[Page 60142]]
to the institution. Also included in this category are privately-
issued mortgage-backed securities provided that:
---------------------------------------------------------------------------
\41\ If a bank holds the first and junior lien(s) on a
residential property and no other party holds an intervening lien,
the transaction is treated as a single loan secured by a first lien
for the purposes of determining the loan-to-value ratio and
assigning a risk weight.
\42\ Loans that qualify as loans secured by 1- to 4-family
residential properties or multifamily residential properties are
listed in the instructions to the commercial bank Call Report. In
addition, for risk-based capital purposes, loans secured by 1- to 4-
family residential properties include loans to builders with
substantial project equity for the construction of 1- to 4-family
residences that have been presold under firm contracts to purchasers
who have obtained firm commitments for permanent qualifying mortgage
loans and have made substantial earnest money deposits. Such loans
to builders will be considered prudently underwritten only if the
bank has obtained sufficient documentation that the buyer of the
home intends to purchase the home (i.e., has a legally binding
written sales contract) and has the ability to obtain a mortgage
loan sufficient to purchase the home (i.e., has a firm written
commitment for permanent financing of the home upon completion).
The instructions to the Call Report also discuss the treatment
of loans, including multifamily housing loans, that are sold subject
to a pro rata loss sharing arrangement. Such an arrangement should
be treated by the selling bank as sold (and excluded from balance
sheet assets) to the extent that the sales agreement provides for
the purchaser of the loan to share in any loss incurred on the loan
on a pro rata basis with the selling bank. In such a transaction,
from the standpoint of the selling bank, the portion of the loan
that is treated as sold is not subject to the risk-based capital
standards. In connection with sales of multifamily housing loans in
which the purchaser of a loan shares in any loss incurred on the
loan with the selling institution on other than a pro rata basis,
these other loss sharing arrangements are taken into account for
purposes of determining the extent to which such loans are treated
by the selling bank as sold (and excluded from balance sheet assets)
under the risk-based capital framework in the same as prescribed for
reporting purposes in the instructions to the Call Report.
\43\ Residential property loans that do not meet all the
specified criteria or that are made for the purpose of speculative
property development are placed in the 100 percent risk category.
\44\ Prudent underwriting standards include a conservative ratio
of the current loan balance to the value of the property. In the
case of a loan secured by multifamily residential property, the
loan-to-value ratio is not conservative if it exceeds 80 percent (75
percent if the loan is based on a floating interest rate). Prudent
underwriting standards also dictate that a loan-to-value ratio used
in the case of originating a loan to acquire a property would not be
deemed conservative unless the value is based on the lower of the
acquisition cost of the property or appraised (or if appropriate,
evaluated) value. Otherwise, the loan-to-value ratio generally would
be based upon the value of the property as determined by the most
current appraisal, or if appropriate, the most current evaluation.
All appraisals must be made in a manner consistent with the Federal
banking agencies' real estate appraisal regulations and guidelines
and with the bank's own appraisal guidelines.
---------------------------------------------------------------------------
(1) The structure of the security meets the criteria described
in section III(B)(3) above;
(2) If the security is backed by a pool of conventional
mortgages, on 1- to 4-family residential or multifamily residential
properties each underlying mortgage meets the criteria described
above in this section for eligibility for the 50 percent risk
category at the time the pool is originated;
(3) If the security is backed by privately issued mortgage-
backed securities, each underlying security qualifies for the 50
percent risk category; and
(4) If the security is backed by a pool of multifamily
residential mortgages, principal and interest payments on the
security are not 30 days or more past due.
Privately-issued mortgage-backed securities that do not meet
these criteria or that do not qualify for a lower risk weight are
generally assigned to the 100 percent risk category.
Also assigned to this category are revenue (non-general
obligation) bonds or similar obligations, including loans and
leases, that are obligations of states or other political
subdivisions of the U.S. (for example, municipal revenue bonds) or
other countries of the OECD-based group, but for which the
government entity is committed to repay the debt with revenues from
the specific projects financed, rather than from general tax funds.
Credit equivalent amounts of derivative contracts involving
standard risk obligors (that is, obligors whose loans or debt
securities would be assigned to the 100 percent risk category) are
included in the 50 percent category, unless they are backed by
collateral or guarantees that allow them to be placed in a lower
risk category.
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
5. The authority for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907,
and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
6. In Appendix A to part 225, revise section III.C.3., to read as
follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
* * * * *
III. * * *
C. * * *
3. Category 3: 50 percent. This category includes loans fully
secured by first liens \48\ on 1- to 4-family residential
properties, either owner-occupied or rented, or on multifamily
residential properties,\49\ that meet certain criteria.\50\ Loans
included in this category must have been made in accordance with
prudent underwriting standards; \51\ be performing in accordance
with their original terms; and not be 90 days or more past due or
carried in nonaccrual status. For purposes of this 50 percent risk
weight category, a loan modified on a permanent or trial basis
solely pursuant to the U.S. Department of Treasury's Home Affordable
Mortgage Program will be considered to be performing in accordance
with its original terms. The following additional criteria must also
be applied to a loan secured by a multifamily residential property
that is included in this category: all principal and interest
payments on the loan must have been made on time for at least the
year preceding placement in this category, or in the case where the
existing property owner is refinancing a loan on that property, all
principal and interest payments on the loan being refinanced must
have been made on time for at least the year preceding placement in
this category; amortization of the principal and interest must occur
over a period of not more than 30 years and the minimum original
maturity for repayment of principal must not be less than 7 years;
and the annual net operating income (before debt service) generated
by the property during its most recent fiscal year must not be less
than 120 percent of the loan's current annual debt service (115
percent if the loan is based on a floating interest rate) or, in the
case of a cooperative or other not-for-profit housing project, the
property must generate sufficient cash flow to provide comparable
protection to the institution. Also included in this category are
privately-issued mortgage-backed securities provided that:
---------------------------------------------------------------------------
\48\ If a banking organization holds the first and junior
lien(s) on a residential property and no other party holds an
intervening lien, the transaction is treated as a single loan
secured by a first lien for the purposes of determining the loan-to-
value ratio and assigning a risk weight.
\49\ Loans that qualify as loans secured by 1- to 4-family
residential properties or multifamily residential properties are
listed in the instructions to the FR Y-9C Report. In addition, for
risk-based capital purposes, loans secured by 1- to 4-family
residential properties include loans to builders with substantial
project equity for the construction of 1-to 4-family residences that
have been presold under firm contracts to purchasers who have
obtained firm commitments for permanent qualifying mortgage loans
and have made substantial earnest money deposits. Such loans to
builders will be considered prudently underwritten only if the bank
holding company has obtained sufficient documentation that the buyer
of the home intends to purchase the home (i.e., has a legally
binding written sales contract) and has the ability to obtain a
mortgage loan sufficient to purchase the home (i.e., has a firm
written commitment for permanent financing of the home upon
completion).
\50\ Residential property loans that do not meet all the
specified criteria or that are made for the purpose of speculative
property development are placed in the 100 percent risk category.
\51\ Prudent underwriting standards include a conservative ratio
of the current loan balance to the value of the property. In the
case of a loan secured by multifamily residential property, the
loan-to-value ratio is not conservative if it exceeds 80 percent (75
percent if the loan is based on a floating interest rate). Prudent
underwriting standards also dictate that a loan-to-value ratio used
in the case of originating a loan to acquire a property would not be
deemed conservative unless the value is based on the lower of the
acquisition cost of the property or appraised (or if appropriate,
evaluated) value. Otherwise, the loan-to-value ratio generally would
be based upon the value of the property as determined by the most
current appraisal, or if appropriate, the most current evaluation.
All appraisals must be made in a manner consistent with the Federal
banking agencies' real estate appraisal regulations and guidelines
and with the banking organization's own appraisal guidelines.
---------------------------------------------------------------------------
(1) The structure of the security meets the criteria described
in section III(B)(3) above;
(2) if the security is backed by a pool of conventional
mortgages, on 1- to 4-family residential or multifamily residential
properties, each underlying mortgage meets the criteria described
above in this section for eligibility for the 50 percent risk
category at the time the pool is originated;
(3) If the security is backed by privately-issued mortgage-
backed securities, each underlying security qualifies for the 50
percent risk category; and
(4) If the security is backed by a pool of multifamily
residential mortgages, principal and interest payments on the
security are not 30 days or more past due. Privately-issued
mortgage-backed securities that do not meet these criteria or that
do not qualify for a lower risk weight are generally assigned to the
100 percent risk category.
Also assigned to this category are revenue (non-general
obligation) bonds or similar obligations, including loans and
leases, that are obligations of states or other political
subdivisions of the U.S. (for example, municipal revenue bonds) or
other countries of the OECD-based group, but for which the
government entity is committed to repay the debt with revenues from
the specific projects financed, rather than from general tax funds.
Credit equivalent amounts of derivative contracts involving
standard risk obligors (that is, obligors whose loans or debt
securities would be assigned to the 100 percent risk category) are
included in the 50 percent category, unless they are backed by
collateral or guarantees that allow them to be placed in a lower
risk category.
* * * * *
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority for Issuance
0
For the reasons stated in the common preamble, the Federal Deposit
Insurance Corporation amends Part 325 of Chapter III of Title 12, Code
of the Federal Regulations as follows:
PART 325--CAPITAL MAINTENANCE
0
7. The authority citation for part 325 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Public Law 102-233, 105
Stat. 1761, 1789, 1790, (12 U.S.C. 1831n note); Public Law 102-242,
105 Stat. 2236, as amended by Public Law 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Public Law 102-242, 105 Stat. 2236,
2386, as amended by Public Law 102-550, 106 Stat. 3672, 4089 (12
U.S.C. 1828 note).
[[Page 60143]]
0
8. Amend Appendix A to part 325 by revising footnote 39 to read as
follows:
Appendix A to Part 325--Statement of Policy on Risk-Based Capital
* * * * *
II * * *
C.* * *
* * * * *
\39\ This category would also include a first-lien residential
mortgage loan on a one-to-four family property that was
appropriately assigned a 50 percent risk weight pursuant to this
section immediately prior to modification (on a permanent or trial
basis) under the Home Affordable Mortgage Program established by the
U.S. Department of Treasury, so long as the loan, as modified, is
not 90 days or more past due or in nonaccrual status and meets other
applicable criteria for a 50 percent risk weight. In addition, real
estate loans that do not meet all of the specified criteria or that
are made for the purpose of property development are placed in the
100 percent risk category.
* * * * *
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
0
For reasons set forth in the common preamble, the Office of Thrift
Supervision amends part 567 of Chapter V of title 12 of the Code of
Federal Regulations as follows:
PART 567--CAPITAL
0
9. The authority for citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 (note)
PART 567--CAPITAL
0
10. Section 576.1 is amended in the definition Qualifying mortgage loan
by revising paragraph (4) to read as follows
Sec. 567.1 Definitions.
* * * * *
Qualifying mortgage loan
* * * * *
(4) A loan that meets the requirements of this section prior to
modification on a permanent or trial basis under the U.S. Department of
Treasury's Home Affordable Mortgage Program may be included as a
qualifying mortgage loan, so long as the loan is not 90 days or more
past due.
* * * * *
Dated: November 10, 2009.
John C. Dugan,
Comptroller of Currency.
By order of the Board of Governors of the Federal Reserve
System, November 12, 2009.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington DC, this 12th day of November 2009.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
Dated: October 29, 2009.
By the Office of the Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. E9-27776 Filed 11-19-09; 8:45 am]
BILLING CODE 6714-01-P