Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance; Capital-Residential Mortgage Loans Modified Pursuant to the Home Affordable Mortgage Program, 60137-60143 [E9-27776]
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Federal Register / Vol. 74, No. 223 / Friday, November 20, 2009 / Rules and Regulations
Otherwise, the Board will mail the
tracking number to the requester’s
physical address, as provided in the
FOIA request.
(b) Status of request. FOIA requesters
may check the status of their FOIA
request(s) by contacting the FOIA
Officer at FOIA@ratb.gov or (202) 254–
7900.
Ivan J. Flores,
Paralegal Specialist, Recovery Accountability
and Transparency Board.
[FR Doc. E9–27877 Filed 11–19–09; 8:45 am]
BILLING CODE 6820–GA–P
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
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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.
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
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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 riskweighted 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
1 See 12 CFR Part 3, Appendix A, section
3(a)(3)(iii) (OCC); 12 CFR parts 208 and 225.
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aggregated, meet the conditions to be a
qualifying mortgage loan. Other juniorlien mortgage loans are risk-weighted at
100 percent.2
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 riskbased 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
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
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).
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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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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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.
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
7 74 FR 31160 (June 30, 2009); 74 FR 34499 (July
16, 2009) (OCC technical correction).
8 Further details about the Program, including
Program terms and borrower eligibility criteria, are
available at https://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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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 firstlien loans to an amount representing no
greater than a 38 percent initial frontend 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
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 firstlien 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
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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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 secondlien 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
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
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 preset formula.
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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borrower during the trial period and no
payments if the borrower does not
successfully complete the trial period.
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-forperformance 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
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
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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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.
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 firstlien 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 riskbased 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
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 https://www.federalreserve.gov/
reportforms/CategoryIndex.cfm?WhichCategory=3
and TFR instructions are available at https://
files.ots.treas.gov/4210058.pdf.
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60139
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 riskbased 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 nonaccrual 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
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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 frontend 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-toincome 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
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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
21 See
22 See
5 U.S.C. 603(a).
13 CFR 121.201.
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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.
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.
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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.
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.
23 See
E:\FR\FM\20NOR1.SGM
Public Law 104–4.
20NOR1
Federal Register / Vol. 74, No. 223 / Friday, November 20, 2009 / Rules and Regulations
Department of the Treasury
Office of the Comptroller of the
Currency
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
12 CFR Chapter I
Authority and Issuance
Authority and Issuance
■
■
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 3—MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
■
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.
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.
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:
3. The authority for part 208
continues to read as follows:
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
*
*
*
*
*
4. In appendix A to part 208, revise
Section III. C.3., to read as follows:
■
Section 3. Risk Categories/Weights for
On-Balance Sheet Assets and OffBalance Sheet Items
dcolon on DSKHWCL6B1PROD with RULES
*
*
*
(a) * * *
(3) * * *
*
Appendix A to Part 208—Capital Adequacy
Guidelines for State Member Banks: RiskBased Measure
*
*
(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.
*
*
*
VerDate Nov<24>2008
*
*
15:06 Nov 19, 2009
Jkt 220001
*
*
*
*
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
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 4family 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
PO 00000
Frm 00015
Fmt 4700
Sfmt 4700
60141
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
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-tovalue 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.
E:\FR\FM\20NOR1.SGM
20NOR1
60142
Federal Register / Vol. 74, No. 223 / Friday, November 20, 2009 / Rules and Regulations
to the institution. Also included in this
category are privately-issued mortgagebacked securities provided that:
(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)
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.
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
dcolon on DSKHWCL6B1PROD with RULES
*
*
*
*
*
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
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.
VerDate Nov<24>2008
15:06 Nov 19, 2009
Jkt 220001
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
49 Loans that qualify as loans secured by 1- to 4family 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 1to 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-tovalue 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.
PO 00000
Frm 00016
Fmt 4700
Sfmt 4700
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 mortgagebacked securities provided that:
(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 privatelyissued 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
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
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).
E:\FR\FM\20NOR1.SGM
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Federal Register / Vol. 74, No. 223 / Friday, November 20, 2009 / Rules and Regulations
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 firstlien residential mortgage loan on a one-tofour 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.
*
*
*
*
*
12 CFR Chapter V
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
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
10. Section 576.1 is amended in the
definition Qualifying mortgage loan by
revising paragraph (4) to read as follows
■
Definitions.
dcolon on DSKHWCL6B1PROD with RULES
*
*
*
*
*
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.
*
*
*
*
*
15:06 Nov 19, 2009
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; 6210–01–P; 4810–33–P;
6720–01–P
FEDERAL RESERVE SYSTEM
12 CFR Part 226
Truth in Lending
Office of Thrift Supervision
VerDate Nov<24>2008
By order of the Board of Governors of the
Federal Reserve System, November 12, 2009.
Jennifer J. Johnson,
Secretary of the Board.
[Regulation Z; Docket No. R–1378]
Department of the Treasury
§ 567.1
Dated: November 10, 2009.
John C. Dugan,
Comptroller of Currency.
Jkt 220001
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Interim final rule; request for
public comment.
SUMMARY: The Board is publishing for
public comment an interim final rule
amending Regulation Z (Truth in
Lending). The interim rule implements
Section 131(g) of the Truth in Lending
Act (TILA), which was enacted on May
20, 2009, as Section 404(a) of the
Helping Families Save Their Homes
Act. TILA Section 131(g) became
effective immediately upon enactment
and established a new requirement for
notifying consumers of the sale or
transfer of their mortgage loans. The
purchaser or assignee that acquires the
loan must provide the required
disclosures in writing no later than 30
days after the date on which the loan is
sold or otherwise transferred or
assigned. The Board is issuing this
interim rule, effective immediately upon
publication, so that parties subject to the
statutory requirement have guidance on
how to comply. However, to allow time
for any necessary operational changes,
compliance with the interim final rule
is optional for 60 days from the date of
publication; during this period, covered
persons would continue to be subject to
the statute’s requirements. The Board
seeks comment on all aspects of the
interim rule.
DATES: This interim final rule is
effective November 20, 2009; however,
to allow time for any necessary
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
60143
operational changes, compliance with
this interim final rule is optional until
January 19, 2010. Comments must be
received on or before January 19, 2010.
ADDRESSES: You may submit comments,
identified by Docket No. R– 1378, by
any of the following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Address to Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments will be made
available on the Board’s Web site at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information. Public
comments may also be viewed
electronically or in paper in Room MP–
500 of the Board’s Martin Building (20th
and C Streets, NW.,) between 9 a.m. and
5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Paul
Mondor, Senior Attorney, or Stephen
Shin, Attorney; Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, Washington, DC 20551, at (202)
452–2412 or (202) 452–3667. For users
of Telecommunications Device for the
Deaf (TDD) only, contact (202) 263–
4869.
SUPPLEMENTARY INFORMATION:
I. Background
The Truth in Lending Act (TILA), 15
U.S.C. 1601 et seq., seeks to promote the
informed use of consumer credit by
requiring disclosures about its costs and
terms. TILA requires additional
disclosures for loans secured by
consumers’ homes and permits
consumers to rescind certain
transactions that involve their principal
dwelling. TILA directs the Board to
prescribe regulations to carry out its
purposes and specifically authorizes the
Board, among other things, to issue
regulations that contain such
classifications, differentiations, or other
provisions, or that provide for such
E:\FR\FM\20NOR1.SGM
20NOR1
]]>Agencies
[Federal Register Volume 74, Number 223 (Friday, November 20, 2009)]
[Rules and Regulations]
[Pages 60137-60143]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-27776]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\7\ 74 FR 31160 (June 30, 2009); 74 FR 34499 (July 16, 2009)
(OCC technical correction).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\8\ Further details about the Program, including Program terms
and borrower eligibility criteria, are available at https://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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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 https://www.federalreserve.gov/reportforms/CategoryIndex.cfm?WhichCategory=3
and TFR instructions are available at https://files.ots.treas.gov/4210058.pdf.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\21\ See 5 U.S.C. 603(a).
\22\ See 13 CFR 121.201.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\23\ See Public Law 104-4.
---------------------------------------------------------------------------
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:
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\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.
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(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:
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\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; 6210-01-P; 4810-33-P; 6720-01-P
