[Federal Register Volume 59, Number 46 (Wednesday, March 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5385]
[[Page Unknown]]
[Federal Register: March 9, 1994]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 94-03]
RIN 1557-AB14
Risk-Based Capital: Multifamily Housing Loans
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is issuing
this final rule to amend the risk-based capital guidelines to include
in the 50% risk weight category certain loans secured by qualifying
multifamily residential properties, to clarify that privately-issued
mortgage-backed securities (MBS) may qualify for a 50% risk weight,
provided the MBSs are secured by qualifying multifamily residential
property loans, and to provide that the portion of a multifamily
residential property loan that is sold subject to a pro rata loss
sharing arrangement may be treated by the selling bank as sold 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. This final rule does not make any changes with respect to
the capital treatment of multifamily residential property loans sold
subject to forms of recourse other than on a pro rata loss sharing
basis. The OCC believes that the issue of non-pro rata recourse for
multifamily residential property loans is best addressed in a
comprehensive manner by the banking agencies in the Federal Financial
Institutions Examination Council (FFIEC) study on recourse.
The purpose of this final rule is to permit national banks to hold
less capital against certain loans secured by qualifying multifamily
residential property. This final rule implements the Resolution Trust
Corporation Refinancing, Restructuring, and Improvement Act of 1991
(RTCRRIA) and the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA). The OCC also believes that this final regulation will
help developers, including nonprofit developers, to provide low- and
moderate-income multifamily housing.
EFFECTIVE DATE: March 9, 1994.
FOR FURTHER INFORMATION CONTACT: Robert J. Hemming, National Bank
Examiner, Office of the Chief National Bank Examiner, (202) 874-5170;
James Wright, Community Development Specialist, Community Development
Division, (202) 874-4930; Roger Tufts, Senior Economic Advisor, Office
of the Chief National Bank Examiner, (202) 874-5070; Elizabeth Milor,
Financial Economist, Regulatory and Statistical Analysis, (202) 874-
5240; or Ronald Shimabukuro, Senior Attorney, Banking Operations and
Assets Division, (202) 874-4460.
SUPPLEMENTARY INFORMATION:
Background and Purpose
The OCC's risk-based capital guidelines were adopted in 1989
(codified at 12 CFR part 3, appendix A). See 54 FR 4168 (January 27,
1989). The risk-based capital guidelines establish capital requirements
based on the credit risk profiles of the assets and off-balance sheet
activities of a financial institution. The risk-based capital
guidelines implement the Agreement on International Convergence of
Capital Measurement and Capital Standards of July 1988, as reported by
the Basle Committee on Banking Supervision (the Basle Agreement) and
were developed in cooperation with the Federal Deposit Insurance
Corporation (FDIC) and the Federal Reserve Board (FRB).
The risk-based capital guidelines assign all assets to the 100%
risk weight category unless an asset specifically qualifies for some
lower risk weight category. See 12 CFR part 3, appendix A, section
3(a)(4). Under the current risk-based capital guidelines, loans secured
by a first lien on multifamily rental properties are risk weighted at
100%. However, a loan secured by a first mortgage on a one-to-four
family residential property may qualify for a 50% risk weight.1
See 12 CFR part 3, appendix A, section 3(a)(3)(iii).
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\1\Under section 3(a)(3)(iii) of this appendix A residential
property may be either owner occupied or rented; however, the
mortgage cannot be more than 90 days past due, on nonaccrual or
restructured.
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The purpose of this final rule is to implement section 618(b) of
RTCRRIA, Public Law 102-233, 105 Stat. 1761 (December 12, 1991), and
section 305(b)(1)(B) of FDICIA, Public Law 102-242, 105 Stat. 2236
(December 19, 1991), by lowering the risk weight for certain qualifying
multifamily housing loans to 50%. Section 618(b) of RTCRRIA required
regulations to be implemented by April 10, 1992. Because of the nature
of the issues involved and the need to coordinate this final rule with
the FRB, the FDIC and the Office of Thrift Supervision (OTS), this
final rule could not be promulgated by that deadline.
The main purpose of RTCRRIA was to recapitalize the Resolution
Trust Corporation. However, RTCRRIA also contains provisions relating
to the capital treatment of certain single-family and multifamily
residential property loans. Specifically, section 618(b) of RTCRRIA
requires the OCC to promulgate regulations assigning a 50% risk weight,
with certain conditions, to loans secured by multifamily residential
properties.
Under section 618(b)(1)(B) of RTCRRIA, in order for a multifamily
residential property loan to qualify for a 50% risk weight: (1) The
loan must be secured by a first lien on a multifamily residential
property consisting of five or more dwelling units, (2) if the loan has
a rate of interest that does not change over the term of the loan, then
(A) the loan-to-value ratio cannot exceed 80%, and (B) the ratio of
annual net operating income generated by the property (before payment
of any debt service on the loan) to the annual debt service on the loan
cannot be less than 120%, (3) if the loan has a variable rate, then:
(A) The loan-to-value ratio cannot exceed 75%, and (B) the ratio of
annual net operating income generated by the property (before payment
of any debt service on the loan) to the annual debt service on the loan
cannot be less than 115%, (4) the amortization of principal and
interest occurs in not more than 30 years, (5) the loan must have a
minimum original maturity for repayment of principal of not less than
seven years, (6) the loan must have been performing according to its
terms for at least one year, and (7) the loan must satisfy prudent
underwriting standards as established by the appropriate federal
banking agency.
Section 618(b)(1) or RTCRRIA also provides that any security
collateralized by a qualifying multifamily residential property loan
shall be considered as a loan or security within the 50% risk weight
category. In addition, section 618(b)(2) of RTCRRIA requires that the
portion of any loan fully secured by a first lien on a multifamily
housing property that is sold by a bank subject to a pro rata loss
sharing arrangement shall be treated as a sale to the extent that loss
is incurred by the purchaser of the loan. Furthermore, section
618(b)(3) of RTCRRIA directs the OCC to amend its risk-based capital
guidelines to take into account other loss sharing arrangements to
determine the extent to which such loans should be treated as sold. In
addition to the requirements in RTCRRIA, section 305(b)(1)(B) of
FDICIA, among other things, requires the OCC to revise the risk-based
capital guidelines to reflect the actual performance and expected risk
of loss of multifamily mortgages.
The OCC published a notice of proposed rulemaking (NPRM) on
September 17, 1992. Consistent with sections 618(b) of RTCRRIA and
305(b)(1)(B) of FDICIA, the NPRM proposed to include in the 50% risk
weight category certain loans secured by qualifying multifamily
residential properties. In addition, the NPRM proposed that MBSs also
qualify for a 50% risk weight provided the MBSs are secured by
qualifying multifamily residential property loans. Consistent with the
current OCC policy on recourse arrangements, the NPRM also proposed
that the portion of multifamily residential property loans that is sold
subject to a pro rata loss sharing arrangement may be treated by the
selling bank as sold 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. As for multifamily
residential property loans subject to recourse other than on a pro rata
loss sharing arrangements, the NPRM did not propose to adopt any
special non-pro rata recourse rule specifically for multifamily
residential property loans at that time.
Discussion
In the NPRM, the OCC requested comments on several specific issues
related to the implementation of section 618(b) of RTCRRIA. The OCC
received nine comments in response to the NPRM. Comments were received
from trade associations representing both the banking and housing
industries, as well as from financial institutions. One commenter
opposed the NPRM, while the eight other commenters generally indicated
support. After careful consideration of all the comments, the OCC
adopts this final rule to amend the risk-based capital guidelines to
include in the 50% risk weight category certain loans secured by
qualifying multifamily residential properties. This final rule is
substantially similar to the rule as proposed in the NPRM. Any
significant changes from the proposed rule are discussed below.
A. 50% Risk Weight for Multifamily Housing Loans
This final rule amends the risk-based capital guidelines to include
in the 50% risk weight category certain loans fully secured by a first
lien on multifamily residential properties. Specifically, loans secured
by multifamily residential properties may qualify for a 50% risk weight
subject to the following conditions:
(1) The loan must be secured by a first mortgage on a multifamily
residential property consisting of five or more dwelling units;
(2) The original amortization of principal and interest must not
exceed 30 years;
(3) The original minimum maturity for repayment of principal must
not be less than seven years;
(4) All principal and interest payments must have been made on a
timely basis in accordance with the terms of the loan for at least one
year immediately preceding the risk weighting of the loan in the 50%
risk weight category;
(5) The loan cannot be otherwise 90 days or more past due, or
carried in nonaccrual status;
(6) The loan must be in accordance with applicable lending limit
requirements and prudent underwriting standards; and
(7) If the rate of interest does not change over the term of the
loan, then the current loan amount must not exceed 80% of the current
value of the property, as measured by either the value of the property
at origination of the loan (which is the lower of the purchase price or
the value as determined by the initial appraisal, or if appropriate,
the initial evaluation) or the most current appraisal, or if
appropriate, the most current evaluation, and in the most recent fiscal
year, the ratio of annual net operating income generated by the
property (before payment of any debt service on the loan) to annual
debt service on the loan must not be less than 120%; or
(8) If the rate of interest changes over the term of the loan, then
the current loan amount must not exceed 75% of the current value of the
property, as measured by either the value of the property at
origination of the loan (which is the lower of the purchase price or
the value as determined by the initial appraisal, or if appropriate,
the initial evaluation) or the most current appraisal, or if
appropriate, the most current evaluation, and in the most recent fiscal
year, the ratio of annual net operating income generated by the
property (before payment of any debt service on the loan) to annual
debt service on the loan must not be less than 115%.
As indicated above, most of the commenters indicated general
support for the NPRM; however, two commenters questioned whether
multifamily housing loans should be permitted to qualify for the 50%
risk weight category considering the greater delinquency rates on
multifamily residential properties compared to single-family owner-
occupied residential properties. The OCC shares this concern. However,
the 50% risk weight is mandated by section 618(b) of RTCRRIA, and as
discussed in the NPRM, the OCC believes that subject to the conditions
imposed by this final rule, a 50% risk weight for multifamily housing
loans can be justified.
1. Definition of Multifamily Residential Property
In the NPRM, the term ``multifamily residential property'' was
defined as residential property2 consisting of five or more
dwelling units. The NPRM did not place any upper limit on the number of
units that could be in a multifamily residential property. However, in
view of the OTS risk-based capital rules, which limit qualifying
multifamily residential property to 5 to 36 units, see 12 CFR 567.1(v)
and 567.6(a)(1)(iii)(B), the OCC requested specific comments on whether
a similar limit on the number of units should be adopted.
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\2\12 CFR part 3, appendix A, section 1(c)(21) defines
residential property to mean houses, condominiums, cooperative
units, and manufactured homes but does not include boats or motor
homes, even if used as a primary residence.
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The OCC received five comments on this issue. All five commenters
opposed any restriction on the number of units for qualifying
multifamily residential property. Several commenters noted the absence
of any evidence suggesting that multifamily residential properties with
a large number of units pose an inherently greater risk than those with
fewer units.
The OCC agrees with these commenters. At this time there is no
evidence to justify any limitation on the total number of units for
qualifying multifamily residential properties. Consequently, the OCC
adopts the definition of multifamily residential properties without any
restriction on the maximum number of units. As for regulatory
uniformity with the OTS, the OCC notes that the OTS is presently
considering deletion of the 36 unit restriction on qualifying
multifamily residential property for savings and loan associations. See
57 FR 40143 (September 2, 1992).
In addition, this final rule further clarifies the definition of
multifamily residential property by adding a separate definition for
multifamily residential property. In the NPRM, multifamily residential
property was not separately defined, but instead the NPRM made
reference to the current definition of residential property. The new
definition in this final rule is not intended to change the meaning of
multifamily residential property. The purpose of the new definition is
to make clear that while multifamily residential property would include
apartment buildings, condominiums, cooperatives, and other similar
structures primarily for residential use, it would not include such
facilities as nursing homes and hospitals. Because multifamily
residential property is defined as property primarily for residential
use, this definition also clarifies that some limited commercial use
would be permitted. Therefore, a commercial establishment, such as a
convenience store located in an apartment building, would not
automatically disqualify the apartment building as a multifamily
residential property.
2. 80% Occupancy Rate
In the NPRM, the OCC proposed an additional 80% occupancy rate
requirement, which would have required that the multifamily residential
property securing the loan have a sustained average annual occupancy
rate of at least 80% of the total units. The OCC received 3 comments on
this issue. All of the commenters generally believe that the 80%
occupancy rate requirement was unnecessary because of the annual net
income requirement which requires timely payment of all principal and
interest for one year and the loan-to-value requirements. As one
commenter explained, any decrease in income resulting from declining
occupancy would be reflected in the annual cash flows and would be
captured by the annual net income requirement. In addition, the
commenter also indicated that the 80% occupancy requirement only
relates to the degree of physical space leased and is not dispositive
of the ability to service the debt.
The OCC has considered these comments and agrees with the
commenters. Therefore, the 80% occupancy requirement has been removed
from this final rule. The OCC agrees that a high occupancy rate, in
itself, does not guarantee sufficient cash flow to service the debt.
The OCC believes that the annual net income requirement in conjunction
with the loan-to-value requirements and the 90-day past due requirement
should provide sufficient prudential safeguards. In addition, the OCC
believes that removing the 80% occupancy requirement will also benefit
developers renovating older buildings for low- and moderate-income
occupants. These developers frequently encounter difficulty in
achieving 80% occupancy during project startup. Removal of the
requirement will enable more loans for these types of projects to
qualify for the 50% risk weight.
3. One-Year Timely Payment Requirement
As required by section 618(b)(1)(B)(iii)(III) of RTCRRIA, the NPRM
required that all principal and interest payments have been made on a
timely basis in accordance with the terms of the loan for at least one
year before the multifamily residential property loan can qualify for
the 50% risk weight. In addition, for prudential reasons, the OCC
proposed to require that the multifamily residential property loan
could not be more than 90 days past due or on nonaccrual status.
This final rule adopts both the one-year timely payment requirement
and the 90-day past due requirement. With respect to the one-year
timely payment requirement, this final rule clarifies that the one-year
timely payment requirement must be satisfied in the year immediately
preceding the risk weighting of the loan in the 50% risk weight
category. It also should be noted that the one-year timely payment
requirement is a one-time only requirement. Once the multifamily
residential property loan has performed in accordance with its terms
for at least one year immediately preceding the risk weighting of the
loan in the 50% risk weight category, the loan may continue to qualify
for the 50% risk weight without any further regard to that requirement.
Unlike the one-year timely payment requirement, the 90-day past due
requirement is an ongoing requirement. As such, the OCC does not
believe that it is necessary to apply the one-year timely payment
requirement on a continuous basis.
It also should be noted that this final rule slightly changes the
wording of the 90-day past due requirement. In the NPRM this
requirement was stated as a loan ``not more than 90 days past due.''
This final rule revises the wording of the 90-day past due requirement
to a loan ``not otherwise 90 days or more past due.'' Under this
revised language, a loan would be considered past due on the ninetieth
day, instead of the ninety-first day. Adoption of this language will
make the 90-day past due requirement in the risk-based capital
guidelines more consistent with the Instructions to the Reports of
Condition and Income (Call Report).
4. Loan-to-Value Requirements
In the NPRM, the OCC expressed concern that sections
618(b)(1)(B)(ii) (I) and (II) of RTCRRIA are unclear as to when the
specified loan-to-value ratios for qualifying multifamily residential
property loans would have to be satisfied. The OCC requested comment on
the application of these loan-to-value requirements. Specifically, the
OCC requested comment on: (1) Whether a multifamily residential
property loan that does not satisfy the loan-to-value requirements at
the time of origination should be permitted to do so at some later
time, and (2) whether a multifamily residential property loan that
satisfies the loan-to-value requirements at the time of origination,
but subsequently does not, thereafter should be ineligible for a 50%
risk weight.
The OCC received four comments on this issue. Three commenters
supported the reclassification of multifamily residential property
loans into the 50% risk weight category if the loans subsequently
satisfy the loan-to-value requirements. However, these commenters did
not believe that multifamily residential property loans that already
qualify for the 50% risk weight category should be reclassified in the
100% risk weight category even if the loans subsequently failed to
satisfy the loan-to-value requirements. The commenters generally
believed that once a multifamily residential property loan qualifies
for the 50% risk weight category, any deterioration in the loan-to-
value ratio should be addressed through the loan loss reserve and not
through reclassification of the loan to the 100% risk weight category.
One commenter specifically expressed caution against establishing a
regulatory requirement for the periodic reappraisal of multifamily
residential property that would determine if the loan can continue to
qualify for the 50% risk weight category.
The OCC agrees that a multifamily residential property loan that
does not satisfy the loan-to-value requirements at the time of the
origination of the loan should be permitted to do so at some later
time. Therefore, this final rule has been changed to make clear that
multifamily residential property loans that do not satisfy the
appropriate loan-to-value ratio at origination, may still qualify for
the 50% risk weight category if the loan-to-value requirements are
satisfied subsequently. However, the OCC does not believe that once a
multifamily residential property loan qualifies for the 50% risk weight
category the loan should never be reclassified into the 100% risk
weight category if the loan subsequently fails to satisfy the loan-to-
value requirements or any other relevant requirement. Such treatment
would be inconsistent with the general principles and application of
the risk-based capital guidelines.
Under the risk-based capital guidelines, an asset may qualify for a
lower risk weight only if all requirements imposed for that risk weight
have been satisfied. The requirements generally must be met
continuously and not only on a one time basis. Failure to satisfy the
requirements for a lower risk weight could be indicative of an increase
in risk for that asset. Therefore, the risk-based capital guidelines
would properly require more capital to be held against that asset. For
these reasons, the OCC believes that a multifamily residential property
loan, like any other asset under the risk-based capital guidelines, may
be reclassified into the 100% risk weight category if the loan
subsequently fails to satisfy the requirements established by this
final rule.
The OCC agrees that any deterioration in a multifamily residential
property loan also should be managed through the loan loss reserve.
However, this does not mean that multifamily residential property loans
that no longer satisfy the loan-to-value ratio requirements should
continue to have the benefit of a preferential risk weight. While the
loan loss reserve and the capital requirements strive to achieve
similar results, the purpose of the two are distinct. The loan loss
reserve recognizes estimated inherent losses, whereas the risk-based
capital guidelines recognize relative risk in the portfolio.
In the NPRM the loan-to-value ratio calculation was based on the
ratio of the loan amount at origination to the appraised value of the
multifamily residential property. Limiting the calculation of the loan-
to-value ratio requirement to the loan amount at origination suggested
that the loan-to-value ratio was a static requirement. However, the
loan-to-value ratio requirement is intended to be an ongoing
requirement, which must be satisfied on a continuous basis in order for
a multifamily residential property loan to qualify for the 50% risk
weight. Therefore, this final rule makes clear that the calculation of
the loan-to-value ratio requirement is not limited to the loan amount
at origination and the initial appraised value of the property, but
instead is based on both the current loan amount outstanding and the
current value of the property. In determining the current value of a
multifamily residential property, the final rule specifies that current
value may be measured by either the value of the property at
origination of the loan (which is the lower of the purchase price or
the value as determined by the initial appraisal, or if appropriate,
the initial evaluation) or the most current appraisal, or if
appropriate, the most current evaluation.
Two points should be emphasized. First, while appraisals serve an
important role in the determination of the loan-to-value ratio, this is
not to imply that periodic appraisals are required. Rather, the OCC
believes that with prudent management of the loan portfolio, a bank
would be aware of changes in market conditions which could negatively
impact the loan-to-value ratio. Second, in some instances a less formal
evaluation of the multifamily residential property may be more
appropriate than a full appraisal.
In addition to the loan-to-value requirements, sections
618(b)(1)(B)(ii) I and II of RTCRRIA also specified certain net
operating income-to-debt service coverage ratios that must be
satisfied. The OCC recognizes that certain multifamily residential
properties developed as low- to moderate-income multifamily housing may
not be able to generate sufficient income to satisfy the net operating
income-to-debt service requirements. The OCC believes that
organizations that develop low- to moderate-income multifamily
residential properties may meet the net operating income-to-debt
service requirements by generating sufficient cash flows to provide
comparable protection to the institution. Therefore, this final rule
permits other forms of debt service coverage that generate sufficient
cash flows to provide comparable protection to the institution to be
considered for multifamily residential property loans, if the purpose
of the loan is for the development or purchase of residential property
primarily intended to provide low- to moderate-income housing. Forms of
comparable debt service coverage that may be considered include, but
are not limited to, special operating reserve accounts or special
operating subsidies provided by federal, state, local or private
sources. However, the OCC does reserve the right to review, on a case-
by-case basis, the adequacy of any other form of comparable debt
service coverage relied on by the bank.
5. Other Legal Requirements and Prudent Underwriting Standards
In addition to the requirements specified by section 618(b) of
RTCRRIA, the NPRM also proposed that a multifamily residential property
loan must be in accordance with applicable lending limit requirements
and prudential underwriting standards. This final rule does not contain
any reference to the legal lending limit. As explained in the NPRM, the
reference to the legal lending limit was intended to impose an
additional prudential requirement by using the legal lending limit as a
proxy for a general concentration limitation.
The OCC still believes that any particular multifamily residential
property loan must be within the legal lending limit and that the
overall concentration of multifamily residential property loans by any
bank should be reasonable and not excessive. However, after further
consideration of this issue, the OCC believes that a specific reference
in the risk-based capital guidelines to the legal lending limit is
unnecessary. The legal lending limit already would apply to all loans,
including multifamily residential property loans provided for in this
final rule.
6. Treatment of Refinanced Loans
This final rule amends the risk-based capital guidelines to clarify
the treatment of multifamily residential property loans that have been
refinanced by the borrower. This final rule clarifies that the prior
payment history of a refinanced loan and previous net operating income
of the multifamily residential property are considered in determining
whether the one-year timely payment requirement and the annual debt
service requirement have been satisfied. Specifically, this final rule
provides that if the loan was refinanced by the borrower then: (1) All
principal and interest payments on the loan being refinanced, which
were made in the preceding year prior to refinancing, shall apply in
determining the one-year timely payment requirement, and (2) the net
operating income generated by the property in the preceding year prior
to refinancing shall apply in determining the applicable annual debt
service ratio requirements.
The OCC believes that a multifamily residential property loan that
otherwise would qualify for the lower 50% risk weight category under
this final rule should not be disqualified simply because the loan has
been refinanced by the borrower. The OCC generally believes that a
multifamily residential property loan that has been refinanced by the
same borrower typically would not result in any increase in risk with
respect to either the one-year timely payment requirement or the
applicable annual debt service ratio requirement. Therefore, under this
final rule, if a borrower refinances a multifamily residential property
loan that previously qualified for the 50% risk weight category, the
refinanced loan generally should not be disqualified by virtue of the
one-year timely payment requirement or the applicable annual debt
service ratio requirement.
7. Optional Capital Treatment
One commenter expressed concern that the final rule should be
amended to make clear that the lower 50% risk weight category, with its
attendant requirements for multifamily residential property loans, is
optional and not mandatory. The OCC agrees, and reiterates that a bank
can always decide to risk weight any asset in a higher risk weight
category. As explained by the commenter, this could be particularly
relevant to a multifamily residential property loan where a bank might
determine that it would be more prudent to keep the loan in the 100%
risk weight category than having to justify a 50% risk weight at some
later date.
8. Credit Enhancements
One commenter suggested that credit enhancements, such as letters
of credit, certificates of deposit, and other enhancements provided by
the borrower, should be considered in determining whether a multifamily
residential property loan qualifies for the lower 50% risk weight. As
an example, the commenter cited the situation where a borrower may
offer some credit enhancement to cover an income shortfall. The OCC
agrees that in some instances credit enhancements should be considered
in determining the proper risk weight of multifamily residential
property loans. Under the current risk-based capital guidelines, claims
that otherwise would be required to be in a higher risk weight category
may qualify for a 20% risk weight if supported by a credit enhancement
such as a financial guarantee-type letter of credit from an OECD
financial institution. Therefore, to a degree, credit enhancements
issued by OECD financial institutions are already considered. However,
as with other types of credit enhancements generally issued by private
sector entities, the OCC does not believe that a lower risk weight for
multifamily residential property loans supported by credit enhancements
issued by non-OECD financial institutions is warranted at this time.
See 54 FR 4168, 4172 (January 27, 1989).
9. Cooperative Housing
One commenter raised the issue of whether the 50% risk weight for
multifamily residential property loans would include a cooperative
housing loan in which the master mortgage is a joint obligation of the
shareholders in the cooperative. The OCC believes that the final rule,
as adopted, would include loans to cooperatives.
As discussed above, this final rule provides a separate definition
of multifamily residential housing which includes both condominiums and
cooperatives. Therefore, a loan consisting of a master mortgage on a
cooperative would be included within the definition of a multifamily
residential property loan and would qualify for the 50% risk weight
category, if the loan otherwise satisfies the requirements of this
final rule. It should be noted, however, that with respect to the debt
service requirement, this final rule would also permit other forms of
debt service coverage to be considered, if the other form of debt
service coverage generates sufficient cash flows to provide comparable
protection to the institution.
As explained by one commenter, the unique structure of financing
for cooperative housing would normally make it impossible for the
cooperative borrower to satisfy the debt service requirements in the
conventional sense. The OCC does not believe that a cooperative housing
loan should be automatically disqualified from the 50% risk weight
category for this reason alone. Therefore, this final rule would also
permit comparable debt service coverage to be considered for
cooperative housing loans as well as loans for the development or
purchase of multifamily residential property housing intended to
provide low- to moderate-income housing.
B. Mortgage-Backed Securities
This final rule amends the risk-based capital guidelines to clarify
that privately-issued mortgage-backed securities (MBS) may qualify for
a 50% risk weight, if at the time of origination of the MBSs, the MBSs
are secured by or otherwise represent a sufficiently secure interest in
qualifying multifamily residential property loans. Absent this change
in the risk-based capital guidelines, MBSs secured by multifamily
residential property loans generally could never have qualified for a
50% risk weight.
As explained in the NPRM, section 3(a)(3)(iv) of RTCRRIA of the
current risk-based capital guidelines would assign a risk weight to
privately issued MBSs based on the risk weight of the underlying
mortgage loans at the time of origination of those loans. Under this
final rule all loans secured by a multifamily residential property are
assigned to the 100% risk weight at origination, and may be reassigned
to the 50% risk weight only after one year, if the loans satisfy the
one-year timely payment requirement and are not otherwise 90 days or
more past due or on nonaccurual status. Thus, MBSs secured by
multifamily residential loans would all be assigned to the 100% risk
weight category absent any change to the risk-based capital guidelines.
In the NPRM the OCC requested specific comment on the proper
treatment for MBSs secured by qualifying multifamily residential
property loans. The OCC received two comments on this issue. Both of
the commenters supported the proposed change.
As required by section 618(b) and for prudential reasons, the OCC
believes that multifamily residential property loans should be required
to perform in accordance with the terms of the loans for at least one
year before qualifying for the lower 50% risk weight. However, the OCC
does not believe that this requirement should prohibit MBSs secured by
multifamily residential property loans from ever qualifying for the 50%
risk weight. Consequently, the OCC adopts this final rule to amend
section 3(a)(3)(iv) of this appendix A to permit MBSs to qualify for a
50% risk weight if fully secured by or otherwise represent a
sufficiently secure interest in qualifying multifamily residential
property loans that have performed in accordance with their terms for
at least one year and the loan is not otherwise 90 days or more past
due, or on nonaccrual status.3 The OCC believes that permitting
MBSs to qualify for the 50% risk weight will benefit low- to moderate-
income housing projects. The lower 50% risk weight will enhance the
attractiveness of these MBSs. As a result, this should assist in the
expansion of the secondary market for the sale of loans on low- to
moderate-income multifamily properties.
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\3\Generally, once a MBS qualifies for a lower risk weight, the
MBS would not have to be reclassified to the 100% risk weight
category unless it subsequently fails to perform as provided for in
the agreement. Similarly, MBSs secured by multifamily residential
property loans that qualify for the 50% risk weight category would
not have to be reclassified to the 100% risk weight category even if
the underlying multifamily residential property loans subsequently
fail to satisfy the requirements for the 50% risk weight, provided
that the MBSs themselves continue to perform as agreed and are not
otherwise 30 days or more past due.
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C. Recourse Arrangements
This final rule amends the risk-based capital guidelines to permit
the portion of multifamily residential property loans that is sold
subject to a pro rata loss sharing arrangement to be treated by the
selling bank as sold 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. This amendment is required
by section 618(b)(2) of RTCRRIA, which provides that any loan fully
secured by a first lien on a multifamily housing project that is sold
subject to a pro rata loss sharing arrangement shall be treated as sold
to the extent that loss is incurred by the purchaser of the loan.4
In addition, the OCC notes that while sales treatment is required by
section 618(b)(2) of RTCRRIA for that portion of multifamily
residential property loans sold on a pro rata loss sharing basis, this
amendment is consistent with, and merely restates the current OCC
policy on assets sold with recourse on a pro rata basis as applied to
multifamily residential property loans. Under the risk-based capital
guidelines, the definition of the sale of assets with recourse is
adopted from the definition contained in the Instructions to the Call
Report. See 12 CFR part 3, appendix A, section 3(b)(1)(iii) (footnote
14). Specifically, the Instructions to the Call Report state:
\4\Section 618(b)(2) of RTCRRIA further defines pro rata loss
sharing arrangement as an agreement providing that the purchaser of
a loan shares in any loss incurred on the loan with the selling
institution on a pro rata basis.
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[I]f the risk retained by the seller is limited to some fixed
percentage of any loss that might be incurred and there are no other
provisions, resulting in retention of risk, either directly or
indirectly, by the seller, the maximum amount of possible loss for
which the selling bank is at risk (the stated percentage times the
sale proceeds) shall be reported as a borrowing and the remaining
amount of the assets transferred reported as a sale.
See Call Report, Glossary--Sale of Assets: Interpretation and
illustrations of the general rule 2, A-50 (5-89). Therefore, the sale
of a loan fully secured by a first lien on a multifamily residential
property is accorded sales treatment and is not treated as recourse to
the extent that loss is shared proportionately by the purchaser of the
loan.
Section 618(b)(3) of RTCRRIA also requires the OCC to take into
account other loss sharing arrangements (besides pro rata loss sharing
arrangements) for the purpose of determining the extent to which
multifamily residential property loans shall be treated as sold.
As for other recourse arrangements (not on a pro rata basis), the
OCC has decided not to adopt any rule for other loss sharing
arrangements specifically relating to the sale of multifamily
residential property loans at this time. As explained in the NPRM, the
OCC, as part of the Federal Financial Institutions Examination Council
(FFIEC), is currently studying the overall treatment of asset sales
with recourse. See 55 FR 26766 (June 29, 1990). In this context, the
OCC will also be considering the possible adoption of other recourse
arrangements for the sale of multifamily residential property loans.
Until the FFIEC study is complete, the OCC believes that any adoption
of other recourse arrangements specifically for the sale of multifamily
residential property loans would be premature.
In the NPRM, the OCC requested specific comment on this issue. The
OCC received two comments. Both commenters generally supported the
proposed rule on recourse based on a pro rata loss sharing arrangement.
However, with respect to other loss sharing arrangements, one commenter
believed that the proposed rule did not fully satisfy the requirement
in section 618(b) of RTCRRIA to take into account other risk sharing
arrangements.
The OCC has reviewed the statutory requirement in section 618(b) of
RTCRRIA and believes that the OCC has discretion with respect to the
adoption of other loss sharing arrangements. In pertinent part, section
618(b) provides that the OCC shall amend the regulations to take into
account other loss sharing arrangements for the purposes of determining
the extent to which such loans shall be treated as sold. The OCC
believes that section 618(b) of RTCRRIA only requires that the OCC
determine the extent to which multifamily residential property loans
sold on a non-pro rata recourse basis should be afforded sales
treatment but that section 618(b) of RTCRRIA does not automatically
require sales treatment for such loans. In this regard, the OCC
believes that the capital treatment of multifamily residential property
loans sold on a non-pro rata basis should be considered in a
comprehensive manner by the banking agencies in the broad context of
the FFIEC recourse study.
D. Section 305(b)(1)(B) of FDICIA
Section 305(b)(1)(B) of FDICIA, among other things, requires the
OCC to revise the risk-based capital guidelines to reflect the actual
performance and expected risk of loss of multifamily mortgages. This
final rule satisfies the requirement of section 305(b)(1)(B) of FDICIA.
As indicated by the table published in the NPRM, the overall credit
risk for multifamily residential property loans is significantly
greater than the credit risk for qualifying single-family residential
property loans. While multifamily residential property loans generally
may have more credit risk than single-family residential property
loans, the OCC believes that multifamily residential property loans
merit a 50% risk weight if they are well-secured, demonstrate
consistent good performance, conform with prudent underwriting
standards and otherwise satisfy the requirements imposed by this final
rule.
E. Impact on Low- and Moderate-Income Multifamily Housing
In implementing this final rule, the OCC is particularly concerned
with the impact of this amendment on low- and moderate-income
multifamily housing. In the NPRM, the OCC requested comment on whether
the proposed rule would assist organizations in their ability to
provide low and moderate-income multifamily housing (rehabilitated or
new construction). The OCC received five comments on this issue. Three
of the commenters believed that the proposed rule would provide a
needed stimulus to the housing sector and the economy. However, one
commenter expressed concerns about credit allocation through bank
capital requirements. Another commenter indicated support for sound
minority and low- and moderate-income mortgage lending but cautioned
against using the capital rule as the only means to accomplish those
goals.
The OCC has carefully considered these comments and basically
agrees with the commenters. The OCC believes that this final rule
strikes a balance between the support for affordable housing and
prudent lending.
F. Technical and Conforming Amendments
In addition to the substantive changes, this final rule makes two
technical and conforming amendments to the risk-based capital
guidelines. First, the cross-references to section 3(a)(3)(iv) in the
introductory text and footnote 10 of section 3 are revised to cross-
reference section 3(a)(3)(vi). This amendment is necessary to correct
an error created when a new paragraph was added to section 3(a)(3)
relating to residential construction loans secured by presold homes.
See 57 FR 40302 (September 3, 1992). These cross-references should
refer to the paragraph on privately issued mortgage-backed securities
and not to the paragraph on residential construction loans.
Second, the wording of the 90-day past due requirement is changed
to conform to the language adopted elsewhere in this final rule.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, it is
hereby certified that this final rule will not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis is not required.
This final rule reduces the amount of capital required to be
maintained by national banks for qualifying multifamily residential
property loans. While the exact overall impact of this final rule will
depend on the amount of qualifying multifamily residential property
loans that are held by any particular bank, the OCC does not believe
that lowering the capital requirements for these types of loans should
significantly impact national banks, regardless of size. In addition,
while this final rule would apply to all national banks, this final
rule should not have a disproportionate effect on small banks.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action. This final rule will reduce the amount of capital
required to be maintained by national banks for qualifying multifamily
residential property loans. Although the exact overall impact of this
final rule will depend on the amount of qualifying multifamily
residential property loans held by any particular bank, the OCC does
not believe that lowering the capital requirements for these types of
loans should significantly impact national banks. Additionally, the OCC
believes that this final rule will generally benefit banks and the
housing industry by reducing somewhat the cost of bank operations and
by encouraging multifamily housing lending.
Immediate Effective Date
Section 4(c) of the Federal Administrative Procedure Act (12 U.S.C.
553(d)) requires a final rule to be published 30 days prior to its
effective date unless the agency provides otherwise for good cause
found and published with the rule. This amendment to the capital
adequacy rule is needed immediately to foster lending for the
reconstruction of multifamily housing in areas of the country recently
devastated by natural disaster. For this reason, the OCC finds good
cause to waive the usual 30-day delay in effectiveness of a final rule.
Accordingly, this final rule is effective immediately upon publication
in the Federal Register.
List of Subjects in 12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
Authority and Issuance
For the reasons set forth in the preamble, appendix A of part 3 of
chapter I of title 12 of the Code of Federal Regulations is amended as
set forth below.
PART 3--AMENDED
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1831n note, 3907,
and 3909.
2. In appendix A, section 1, paragraphs (c)(14) through (c)(28) are
redesignated as paragraphs (c)(15) through (c)(29), respectively, and a
new paragraph (c)(14) is added to read as follows:
Appendix A--Risk-Based Capital Guidelines
* * * * *
Section 1 Purpose, Applicability of Guidelines, and Definitions
* * * * *
(c) * * *
(14) Multifamily residential property means any residential
property consisting of five or more dwelling units including
apartment buildings, condominiums, cooperatives, and other similar
structures primarily for residential use, but not including
hospitals, nursing homes, or other similar facilities.
* * * * *
Appendix A--[Amended]
3. In Appendix A, section 3, paragraph (a)(3)(v) is redesignated as
paragraph (a)(3)(vi), the introductory text of newly designated
paragraph (a)(3)(vi) is revised, a new paragraph (a)(3)(v), including
new footnotes 11a and 11b, is added, the last sentence in the second
paragraph of the introductory text of section 3 and the last sentence
in footnote 10 in paragraph (a)(2)(vii) are amended by replacing the
phrase ``section 3(a)(3)(iv) of this appendix A'' with the phrase
``section 3(a)(3)(vi) of this appendix A'', and the first sentence in
paragraph (a)(3)(iii) is amended by replacing the phrase ``not more
than 90 days past due,'' with the phrase ``not otherwise 90 days or
more past due,'', to read as follows:
* * * * *
Section 3 Risk Categories/Weights for On-Balance Sheet Assets and
Off-Balance Sheet Items
* * * * *
(a) * * *
(3) * * *
(v) Loans secured by a first mortgage on multifamily residential
properties :11a
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\1\1aThe portion of multifamily residential property loans that
is sold subject to a pro rata loss sharing arrangement may be
treated by the selling bank as sold 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.
The portion of multifamily residential property loans sold subject
to any loss sharing arrangement other than pro rata sharing of the
loss shall be accorded the same treatment as any other asset sold
under an agreement to repurchase or sold with recourse under section
3(b)(1)(iii) (footnote 14) of this appendix A.
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(A) The amortization of principal and interest occurs in not
more than 30 years;
(B) The minimum original maturity for repayment of principal is
not less than 7 years;
(C) All principal and interest payments have been made on a
timely basis in accordance with the terms of the loan for at least
one year immediately preceding the risk weighting of the loan in the
50% risk weight category, and the loan is not otherwise 90 days or
more past due, or on nonaccrual status;
(D) The loan is made in accordance with all applicable
requirements and prudent underwriting standards;
(E) If the rate of interest does not change over the term of the
loan:
(I) The current loan amount outstanding does not exceed 80% of
the current value of the property, as measured by either the value
of the property at origination of the loan (which is the lower of
the purchase price or the value as determined by the initial
appraisal, or if appropriate, the initial evaluation) or the most
current appraisal, or if appropriate, the most current evaluation;
and
(II) In the most recent fiscal year, the ratio of annual net
operating income generated by the property (before payment of any
debt service on the loan) to annual debt service on the loan is not
less than 120%;11b
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\1\1bFor the purposes of the debt service requirements in
sections 3(a)(3)(v)(E)(II) and 3(a)(3)(v)(F)(II) of this appendix A,
other forms of debt service coverage that generate sufficient cash
flows to provide comparable protection to the institution may be
considered for (a) a loan secured by cooperative housing or (b) a
multifamily residential property loan if the purpose of the loan is
for the development or purchase of multifamily residential property
primarily intended to provide low- to moderate-income housing,
including special operating reserve accounts or special operating
subsidies provided by federal, state, local or private sources.
However, the OCC reserves the right, on a case-by-case basis, to
review the adequacy of any other forms of comparable debt service
coverage relied on by the bank.
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(F) If the rate of interest changes over the term of the loan:
(I) The current loan amount outstanding does not exceed 75% of
the current value of the property, as measured by either the value
of the property at origination of the loan (which is the lower of
the purchase price or the value as determined by the initial
appraisal, or if appropriate, the initial evaluation) or the most
current appraisal, or if appropriate, the most current evaluation;
and
(II) In the most recent fiscal year, the ratio of annual net
operating income generated by the property (before payment of any
debt service on the loan) to annual debt service on the loan is not
less than 115%; and
(G) If the loan was refinanced by the borrower:
(I) All principal and interest payments on the loan being
refinanced which were made in the preceding year prior to
refinancing shall apply in determining the one-year timely payment
requirement under paragraph (a)(3)(v)(C) of this section; and
(II) The net operating income generated by the property in the
preceding year prior to refinancing shall apply in determining the
applicable debt service requirements under paragraphs (a)(3)(v)(E)
and (a)(3)(v)(F) of this section.
(vi) Privately-issued mortgage-backed securities, i.e. those
that do not carry the guarantee of a government or government-
sponsored agency, if the privately-issued mortgage-backed securities
are at the time the mortgage-backed securities are originated fully
secured by or otherwise represent a sufficiently secure interest in
mortgages that qualify for the 50% risk weight under paragraphs
(a)(3) (iii), (iv) and (v) of this section,12 provided that
they meet the following criteria:
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\1\2If all of the underlying mortgages in the pool do not
qualify for the 50% risk weight, the bank should generally assign
the entire value of the security to the 100% risk category of
section 3(a)(4) of this appendix A; however, on a case-by-case
basis, the OCC may allow the bank to assign only the portion of the
security which represents an interest in, and the cash flows of,
nonqualifying mortgages to the 100% risk category, with the
remainder being assigned a risk weight of 50%. Before the OCC will
consider a request to risk weight a mortgage-backed security on a
proportionate basis, the bank must have current information for the
reporting date that details the composition and cash flows of the
underlying pool of mortgages.
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* * * * *
4. In appendix A, table 1 is amended by adding paragraph 5 to
Category 3 to read as follows:
* * * * *
TABLE 1--SUMMARY OF RISK WEIGHTS AND RISK CATEGORIES
* * * * *
Category 3: 50 Percent
* * * * *
5. Assets secured by a first mortgage on multifamily residential
properties.
* * * * *
Dated: January 14, 1994.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-5385 Filed 3-8-94; 8:45 am]
BILLING CODE 4810-33-P