[Federal Register Volume 59, Number 53 (Friday, March 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5452]
[[Page Unknown]]
[Federal Register: March 18, 1994]
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DEPARTMENT OF TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 93-198]
RIN 1550-AA58
Risk-Based Capital: Multifamily Housing Loans; Interest Rate Risk
Component Delay of Effective Date
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule; delay of effective date.
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SUMMARY: The Office of Thrift Supervision (OTS) is adopting a final
rule that amends its risk-based capital regulation to give a 50 percent
risk weight to qualifying multifamily mortgage loans and securities
backed by such loans (mortgage-backed securities or MBS). The OTS is
adopting this rule as part of an interagency initiative to implement
the provisions of section 618(b) of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 and section
305(b)(1)(B) of the Federal Deposit Insurance Corporation Improvement
Act of 1991.
Multifamily mortgage loans that on the effective date of this rule
qualified for the 50 percent risk-weight category under criteria in the
OTS's previous capital rule and continue to satisfy those criteria will
continue to be risk-weighted at 50 percent.
The OTS is also further delaying the effective date of a portion of
its Interest Rate Risk final rule adopted on August 31, 1993 and making
a conforming amendment to the rule.
EFFECTIVE DATES: This final rule is effective March 18, 1994, except
that the first amendment to Sec. 567.6(a)(1)(iii)(C) is effective on
March 18, 1994 through September 29, 1994, and the second amendment to
Sec. 567.6(a)(1)(iii)(C) is effective September 30, 1994. The
amendments to Sec. 567.6 published at 58 FR 45813 (August 31, 1993) are
delayed from July 1, 1994 to September 30, 1994.
FOR FURTHER INFORMATION CONTACT: John Connolly, Program Manager for
Capital Policy, (202) 906-6465; Dorene Rosenthal, Senior Attorney,
(202) 906-7268; John Flannery, Attorney, (202) 906-7293, Regulations,
Legislation and Opinions Division; Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background Information
A. Statutory Authority and Regulatory Background
The OTS today is issuing a final rule amending its risk-based
capital treatment of multifamily mortgage loans. This rule conforms
with the requirements of both section 618(b) of the Resolution Trust
Corporation Refinancing, Restructuring, and Improvement Act of 1991
(RTCRRIA)\1\ and section 305(b)(1)(B) of Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA).\2\
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\1\Pub. L. 102-233, 105 Stat. 1761 (1991).
\2\Pub. L. 102-242, 105 Stat. 2236 (1991).
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Section 618(b)(1) of RTCRRIA requires the Federal Reserve Board,
the Federal Deposit Insurance Corporation, the Office of Comptroller of
the Currency, and the OTS (collectively, ``the federal banking
agencies'') to accord a 50 percent risk weight to multifamily mortgage
loans and related MBS meeting certain specified criteria and gives the
agencies discretion to add other prudential safeguards. Section
305(b)(1)(B) of FDICIA requires the federal banking agencies to revise
their risk-based capital standards to ensure that those standards
reflect the actual performance and expected risk of loss of multifamily
mortgage loans.
Under the OTS's existing risk-based capital regulation, multifamily
mortgage loans are assigned to the 50 percent risk-weight category if:
They are secured by multifamily residential properties consisting of 5-
to-36 dwelling units; they have an initial loan-to-value (LTV) ratio of
not more than 80 percent; and an average annual occupancy rate of 80
percent or more of total units has existed for at least one year. While
the criteria prescribed by RTCRRIA for qualifying multifamily mortgage
loans overlap with OTS's existing criteria for these loans, they are
not identical.
Section 618(b)(2) of RTCRRIA requires that any loan fully secured
by a first lien on a multifamily residential property that is sold by a
financial institution subject to a pro rata loss sharing arrangement be
treated as a sale and not a recourse transaction, to the extent that
the purchaser and not the seller is exposed to loss on that loan
portion. In addition, section 618(b)(3) of RTCRRIA provides that the
federal banking agencies must take into account loss sharing
arrangements, other than pro rata arrangements, under their risk-based
capital regulations. The statute requires the agencies to consider the
extent to which loans fully secured by a first lien on a multifamily
residential property subject to other than pro rata loss sharing
arrangements should be treated as sold, but it does not require the
agencies to afford such arrangements sales treatment.
The OTS's regulations already satisfy the requirements of sections
618(b)(2) and (3) of RTCRRIA. The OTS requires that savings
associations follow generally accepted accounting principles (GAAP).
Sales with recourse are recorded in accordance with Statement of
Financial Accounting Standards (SFAS) No. 77 ``Reporting by Transferors
for Transfers of Receivables with Recourse.''
Under the OTS's capital rule, in computing risk-based capital, the
sale of a loan fully secured by a first lien on a multifamily
residential property would be accorded sales treatment if each
participant is responsible solely for its pro rata share of the risk,
there is no recourse to the originating association on the portion of
the loan for which the buyer is liable, and the transaction meets the
requirements of SFAS No. 77.
In addition, the OTS's current risk-based capital regulation
provides that savings associations must include in risk-weighted assets
100 percent of ``the values of assets sold with recourse * * * except
where the amount of recourse liability retained by the savings
association is less than the capital requirement for credit-risk
exposure.'' 12 CFR 567.6(a)(2)(i)(C). Thus, the capital charge of a
selling institution on loans sold with recourse on either a pro rata or
other than pro rata basis is limited to the institution's maximum
contractual liability for losses on the loans sold, where the
contractual liability is less than the capital requirement for the
asset.
B. Description of the Proposal
On September 2, 1992, the OTS published a notice of proposed
rulemaking containing an amendment to the definition of ``qualifying
multifamily mortgage loan'' in its risk-based capital regulation. The
proposed definition incorporated the criteria set forth in section
618(b)(1) of RTCRRIA and added other, prudent underwriting standards.
57 FR 40143 (September 2, 1992). The public comment period on the
proposal closed on October 2, 1992.
Under the proposal, multifamily mortgage loans would qualify for
the 50 percent risk-weight category if they satisfied the following
statutory criteria: (1) The loan must be secured by a first lien on a
residence consisting of 5 or more dwelling units; (2) the loan must
amortize principal and interest over a period of not less than seven
years and not more than 30 years; (3) all payments of principal and
interest must have been made on a timely basis in accordance with the
terms of the loan for at least one year; and (4) if the rate of
interest does not change over the term of the loan, then: (a) The LTV
ratio at origination cannot exceed 80 percent, and (b) 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
cannot be less than 120 percent; or (5) if the loan has a variable
rate, then: (a) The LTV ratio at origination cannot exceed 75 percent,
and (b) 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 cannot be less than 115 percent.
The proposal also provided that multifamily mortgage loans must
satisfy the following additional prudential criteria to qualify for the
50 percent risk-weight category: (1) The loan must be performing and
not more than 90 days past due; (2) the loan must comply with
applicable lending limit requirements and other prudent underwriting
standards; and (3) the multifamily residential property securing the
loan must have had an average annual occupancy rate of 80 percent or
more total units for at least one year.
The final rule follows the approach set forth in the proposal with
three modifications:3 the occupancy rate requirement has been
removed; LTV ratios will be calculated based on the ratio of the
current loan balance to the value of the property; and multifamily
loans that on the effective date of this rule qualified for a lower
risk-weight category under the OTS's previous regulations but do not
qualify under the amended rule will be grandfathered.
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\3\Since the proposal was published, the OTS also has consulted
with the other federal banking agencies about the issues raised in
the comment letters received in response to their proposed rules.
The OTS is today adopting a final rule that is consistent with the
approaches agreed upon by staff of the other federal banking
agencies.
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II. Summary of Comments and OTS Response
The OTS solicited public comment on all aspects of its proposed
amendments to its risk-based capital regulation concerning multifamily
mortgage loans and MBS secured by or representing an interest in such
loans. The OTS received a total of 31 comment letters. Those who
submitted comments included 20 savings associations, 9 thrift and
housing trade groups, and 2 governmental-related entities. The
discussion that follows identifies the principal issues raised in this
rulemaking and summarizes the OTS's response to these issues.
A. Appropriate Risk-Weight Category
All of the commenters supported the proposal to amend the risk-
based capital regulation, although several commenters suggested
revisions. Generally, commenters believed it was appropriate to risk
weight multifamily loans at 50 percent because of the lower risk
presented by these loans as compared with other real estate and
commercial loans. Commenters also indicated that this regulation would
aid credit availability and cause more rental housing to become
available because lenders would have greater incentives to originate
multifamily mortgage loans due to the lower capital charge on such
loans meeting the prudential criteria set forth in this rule.
As required by section 305 of FDICIA, the OTS has analyzed the loss
data on multifamily mortgage loans for savings associations to
determine the appropriate risk weight for such loans. The average
annualized ratio of net charge-offs to the amount of outstanding
permanent multifamily mortgage loans was 0.59 percent for the thirteen
quarters beginning March 1990 and ending March 31, 1993, as reported on
the quarterly Thrift Financial Reports. In contrast, the average
annualized net charge-off rate over the same period was 0.11 percent
for permanent 1-4 family residential mortgage loans, 1.17 percent for
permanent nonresidential property loans, 1.19 percent for permanent
commercial loans, 1.41 percent for multifamily construction loans, and
2.19 percent for commercial construction loans. The average annualized
net charge-off rate over this period for all assets in the 100 percent
risk-weight category was 0.83 percent.
The average net charge-off rates for these assets for the four
quarters of 1992 were the following: 0.74 percent for permanent
multifamily mortgage loans, 0.22 percent for permanent 1-4 family
residential mortgage loans, 1.29 percent for nonresidential property
loans, 1.37 percent for permanent commercial loans, 2.43 percent for
multifamily construction loans, and 2.32 percent for commercial
construction loans.
Although the net charge-off rate for permanent multifamily mortgage
loans exceeded that for permanent 1-4 family residential loans, it was
substantially below the net charge-off rates for the other types of
loans specified above during the entire period reviewed. Permanent
multifamily mortgage loans also had a net charge-off rate well below
the average annualized aggregate net charge-off rate for 100 percent
risk-weight assets for the twelve-month period.
Accordingly, the OTS believes that it is appropriate to accord a 50
percent risk weight to multifamily mortgage loans satisfying the
conservative underwriting and performance standards set forth in
section 618(b) of RTCRRIA and two of the three additional prudential
criteria proposed by the federal banking agencies. The additional
prudential criteria retained in the final rule are: (1) The loan must
be performing and not 90 days or more past due; and (2) the loan must
comply with prudent underwriting standards.
This final rule appropriately affords a reduced risk weight to
loans whose future repayment prospects are such that they expose
institutions to relatively low levels of credit risk. Multifamily
mortgage loans not meeting the standards set forth in this rule may
pose higher risk of loss and should be placed in the 100 percent risk-
weight category. This final rule also satisfies the requirement of
section 305 of FDICIA to ensure that multifamily mortgage loans are
placed in an appropriate risk-weight category based on actual
performance and potential risk of loss.
B. Criteria for Eligibility in the 50 Percent Risk-Weight Category
1. Number-Of-Units Restriction
The OTS's current risk-based capital regulation limits qualifying
multifamily mortgage loans to properties with five to 36 units. The OTS
requested comments on whether to retain this restriction. The majority
of commenters urged the OTS not to impose a number-of-units restriction
on the size of properties securing qualifying multifamily mortgage
loans. Two commenters advocated retaining the number-of-units
restriction, claiming that loans on smaller multifamily properties pose
a lower risk of loss than larger projects. The OTS has considered these
comments in light of the OTS's general experience with its current rule
providing reduced risk weighting for multifamily mortgage loans on
relatively small properties and believes they have some merit.
Nevertheless, based on its data on the overall loss experience for
multifamily mortgage loans regardless of size, and to conform with the
uniform position adopted by the federal banking agencies, the OTS is
not including a number-of-units restriction.
A few commenters advocated removing a number-of-units restriction
in order to allow mortgage loans secured by manufactured housing
properties to qualify for the 50 percent risk-weight category. The OTS
wishes to clarify that its capital rules generally, and this provision
in particular, apply the same standards and principles to manufactured
housing as to other residential properties in determining the
appropriate risk weight.
2. LTV Ratio
While a few commenters advocated calculating the LTV ratio at
origination only, most commenters favored the agency's suggestions that
the LTV ratio could be computed when there has been a loan paydown or a
more recent appraisal. Several commenters cautioned the agency to
control the frequency of new appraisals.
Upon review, the OTS has determined to calculate LTV ratios as a
continuing criterion based on current loan balance to the value of the
property. Prudent underwriting standards dictate that at origination of
a loan to purchase a multifamily property, the value of the property is
the lower of acquisition cost of the property or the initial appraised
value, or, if appropriate, the value of the property as determined by
the initial evaluation.4 The OTS recognizes that the value of
property can change over time based on factors such as changes in
market conditions or material development of the property. Nothing in
this rule prohibits the recomputation of the LTV ratio based on such
changes and developments.
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\4\For an explanation of the distinction between an appraisal
and an evaluation of real estate and for a description of the
circumstances under which each is required under the OTS's current
rules, see 12 CFR Part 564. As part of an interagency initiative,
however, the OTS is in the process of amending these appraisal
regulations. See 58 FR 31878 (June 4, 1993) (proposed rule).
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In cases not involving purchase of a multifamily property, the
value of the property generally would be determined by the most current
appraisal, or, if appropriate, the most current evaluation. All
appraisals and evaluations must be made in a manner consistent with the
OTS's real estate appraisal regulations, guidelines, and policies and
with the institution's own appraisal policies. Loans that exceed the
LTV ratios set forth in the regulation at origination will be permitted
to qualify for the 50 percent risk weight when the loans are paid down
below an 80 percent LTV ratio for fixed rate loans and a 75 percent LTV
ratio for variable rate loans, if the other criteria set forth in this
regulation are satisfied.
3. 80 Percent Occupancy Rate
The majority of commenters advocated removing the 80 percent
occupancy-rate requirement. These commenters suggested that the
requirement was unnecessary in light of the debt service, LTV ratio,
and timely payments requirements. A few commenters also noted that
occupancy rate may not accurately measure the income generated by a
property. The OTS concludes that the debt service requirement is a more
accurate measure of the income-producing capacity of the property than
the occupancy-rate requirement and is eliminating the occupancy-rate
requirement from the final rule.
4. Timely Payments Requirement
The proposal includes the requirement that loans receive timely
payment of principal and interest for the year preceding its placement
in the 50 percent risk-weight category. The OTS received many comments
on the effect of the timely payments requirement on the willingness of
institutions to make multifamily mortgage loans. Several commenters
urged that, for other than new construction loans, lenders be permitted
to look at the property's prior operating history to determine
compliance with the timely payments requirement. This would allow loans
on properties with a history of timely payments to qualify for the 50
percent risk-weight category at origination.
To clarify some misunderstanding of this criterion, the
determination whether the timely payments requirement is met is made
only once, at the time when the institution decides to place the
multifamily mortgage loan in the 50 percent risk-weight category.
``Timely payments'' will generally be considered those payments not 30
days or more past due. The criteria that the loan be performing and not
90 days or more past due will be used to monitor the payment stream of
the loan on an ongoing basis.
Upon review, the OTS has decided that, when a borrower refinances a
loan on an existing property, as an alternative, the timely payments
requirement may be satisfied if: (1) All principal and interest
payments on the loan being refinanced have been made on a timely basis
in accordance with the terms of that loan for the preceding year and
(2) the net income on the property for the preceding year would support
timely principal and interest payments on the new loan in accordance
with the applicable debt service requirement.
5. Cooperative and Not-For-Profit Multifamily Mortgage Loans
Five commenters asked that a cooperative housing loan where the
master mortgage is a joint obligation of the shareholders in the
cooperative be treated as a qualifying multifamily mortgage loan under
the rule. Certain cooperative and other not-for-profit multifamily
housing properties, however, may not be able to generate sufficient
income to satisfy the debt service ratio required by the rule.
Therefore, the OTS will permit cooperatives and other not-for-profit
multifamily properties to meet the debt service ratio requirement by
generating sufficient cash flows to provide comparable protection to
the institution. Debt service coverage providing comparable protection
to the institution may take a number of different forms that include,
but are not limited to, special operating reserves accounts or special
operating subsidies provided by federal, state, local, or private
sources.
6. Treatment of MBS
Some commenters agreed with the requirement in the proposal that,
in order to qualify for a 50 percent risk weight, MBS must be secured
by or represent an interest in qualifying multifamily mortgage loans at
the time of securitization. Several commenters suggested that the final
rule allow multifamily mortgage loans to be securitized immediately,
and the MBS backed by such loans to qualify for the lower risk-weight
category after the underlying mortgage loans have satisfied the timely
payments requirement.
Upon review of this issue and consultation with the other federal
banking agencies, the OTS has decided that it will generally expect MBS
secured by or representing an interest in multifamily mortgage loans to
qualify for the 50 percent risk-weight category at original
securitization. Thus, all of the underlying multifamily mortgage loans
must satisfy the qualifying criteria, including the timely payments
requirement, at the time the MBS is securitized.
The MBS will remain in the 50 percent risk-weight category provided
the investing institution receives timely payments (generally those
payments not 30 days or more past due) of principal and interest in
accordance with the terms of the MBS. However, institutions holding the
multifamily MBS, or servicers or trustees on their behalf, will not be
required to track the continuing qualification of the underlying
mortgage loans.
Several commenters misunderstood the interaction of this provision
regarding certain MBS with other provisions concerning MBS in the OTS's
risk-based capital regulation. Today's rule only addresses privately
issued, non-high-quality MBS backed by qualifying multifamily mortgage
loans. MBS backed by multifamily mortgage loans that are issued or
guaranteed by a U.S. government sponsored enterprise; that are
privately issued and rated in one of the two highest rating categories
by at least one nationally recognized statistical rating service; and
those with residual characteristics would be treated the same as MBS
with the same characteristics backed by 1-4 family residential mortgage
loans.
C. Grandfathering of Loans Currently Qualifying for the 50 Percent
Risk-Weight Category
The majority of commenters favored the OTS's proposal to
``grandfather'' the risk-weighting of existing multifamily mortgage
loans qualifying for the 50 percent risk-weight category under the
OTS's prior regulation, but not qualifying under the new criteria. The
other federal banking agencies are not presented with this issue since
their existing capital rules do not provide a 50 percent risk-weight
for any multifamily mortgage loans.
OTS's supervisory experience with multifamily mortgage loans
qualifying for the 50 percent risk-weight category under its prior rule
shows no reason to increase the capital charge on these loans to 100
percent. Associations that originated and administered these loans in
accordance with the prudent criteria established by the OTS's prior
rule should retain the benefit of the reduced capital charge.
Therefore, the OTS has decided to ``grandfather'' any multifamily
mortgage loans that, on the effective date of this rule, qualified for
the 50 percent risk-weight category under the OTS's previous rule and
that continue to meet those criteria. Any ``grandfathered'' multifamily
mortgage loan that does not remain in compliance with the requirements
of the prior rule may requalify for the 50 percent risk-weight category
only by satisfying the criteria under today's rule.
Several commenters urged the OTS to retain its existing criteria or
to adopt less stringent criteria for loans on multifamily properties
with less than 36 units because such loans present less risk than loans
on larger properties. The OTS has given serious consideration to this
suggestion, but in the interest of interagency uniformity has
determined not to provide a reduced risk weight to new loans qualifying
under the prior OTS rule.
D. Recourse
One commenter suggested that the OTS clarify and amend the recourse
provisions of its capital rule to recognize more subtle distinctions in
risk. Upon consideration, the OTS has decided not to amend its recourse
provisions as part of this rulemaking because the OTS and the other
federal banking agencies are considering the treatment of loss sharing
arrangements and related recourse issues as part of their comprehensive
interagency review of recourse, initiated by the Federal Financial
Institutions Examination Counsel (FFIEC). Under the FFIEC's initiative,
the agencies are considering revisions to their risk-based capital
standards to distinguish among loss sharing arrangements involving
asset sales based on the degree of risk involved in the transaction.
III. Description of the Final Rule
Under today's final rule, multifamily mortgage loans qualify for
the 50 percent risk-weight category if they satisfy the following
criteria: (1) The loan must be secured by a first lien on a multifamily
residential property consisting of 5 or more dwelling units; (2) the
loan must amortize principal and interest over a period at origination
of not less than seven years and not more than 30 years; (3) when the
loan is considered for a lower risk-weight category, all principal and
interest payments have been made on a timely basis in accordance with
its terms for the preceding year; (4) the loan is performing and not 90
days or more past due; (5) the loan is made by the savings association
in accordance with prudent underwriting standards; and (6) if the
interest rate on the loan does not change over the term of the loan,
then: (a) The current loan balance amount does not exceed 80 percent of
the value of the property securing the loan; and (b) for the property's
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 percent,
or in the case of cooperative or other not-for-profit housing projects,
the property generates equivalent debt service coverage; or (7) if the
loan has a variable rate, then: (a) The current loan balance amount
does not exceed 75 percent of the value of the property securing the
loan; and (b) for the property's most recent fiscal year, the ratio of
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 percent, or in the case of cooperative or other not-for-
profit housing projects, the property generates equivalent debt service
coverage.
In addition, the final rule extends ``grandfathered'' treatment to
those multifamily mortgage loans that on the effective date of this
rule qualified for the 50 percent risk-weight category under the
definition of ``qualifying multifamily mortgage loan'' in the OTS's
previous capital rule and continue to satisfy the criteria of that
definition, but do not satisfy all the criteria for inclusion in the 50
percent risk-weight category under today's rule. Any ``grandfathered''
multifamily mortgage loan that does not remain in compliance with the
requirements of the prior rule may requalify for the 50 percent risk-
weight category only by satisfying the criteria set forth in today's
rule.
Under today's rule, a multifamily mortgage loan5 must continue
to meet the requisite criteria on an ongoing basis, unless otherwise
specified, for the loan to remain in the 50 percent risk-weight
category. A multifamily mortgage loan that does not remain in
compliance with the requirements set forth in today's rule must be
reassigned to the appropriate risk-weight category. The OTS notes that
institutions may make multifamily mortgage loans that do not meet the
criteria set forth in this rule so long as such loans conform with
prudent underwriting standards. Such loans must be placed in the
appropriate risk-weight category.
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\5\ Multifamily mortgage loans include loans secured by property
that is used for some commercial purposes so long as the property is
primarily a multifamily residence.
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Furthermore, purchasers of multifamily mortgage loans may look to
the borrower's payment history with the selling institution and the
characteristics of the purchased loans to determine compliance with the
timely payments requirement and other qualifying criteria under this
rule. Likewise, institutions with multifamily mortgage loans in their
portfolio that did not qualify for a lower risk-weight under the OTS's
previous risk-based capital rule may review the borrower's prior
payment history to determine compliance with this rule's criteria.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, it is
certified that this rule will not have a significant economic impact on
a substantial number of small entities. Loans on multifamily properties
with a small number of units are already covered under the existing
risk-based capital regulation and will continue to be covered under
either the grandfathering provision or the new rule.
V. Executive Order 12866
The OTS has determined that this final rule does not constitute a
``significant regulatory action.''
VI. Effective Date
This final multifamily rule is effective upon publication in the
Federal Register without the 30-day delay of effective date provided
for in the Administrative Procedure Act, 5 U.S.C. 553. The delayed
effective date requirement may be waived for ``good cause.'' The OTS
has determined that good cause exists to waive the delayed effective
date requirement since the rule relieves a restriction on savings
associations by permitting them to utilize a lower risk weight for
eligible multifamily housing loans and securities collateralized by
such loans in calculations of their risk-based capital ratios. This
effective date will enable savings associations to use the reduced risk
weight for multifamily housing loans in their Thrift Financial Report
for the quarter ending March 31, 1994.
One of today's amendments affects a credit risk-weight category at
section 567.6(a)(1)(iii)(C), a section also amended by Interest Rate
Risk. 58 FR 45813 (August 31, 1993). The Interest Rate Risk amendments
to 567.6 were originally to become effective on July 1, 1994, when a
savings association would first have been required to deduct an
interest rate risk component in calculating its risk-based capital
requirement. To simplify reporting requirements, the agency is changing
the effective date of those amendments to September 30, 1994. OTS is
therefore publishing on an interim basis section 567.6(a)(1)(iii)(C) as
it will be in effect from March 18, 1994 through September 29, 1994.
This reflects today's multifamily amendment to this section, but not
the change that the interest rate risk amendments will make to that
section. Section 567.6(a)(1)(iii)(C) as it will be in effect on and
after September 30, 1994 follows.
Finally, a conforming amendment is being made to section 567.7(a)
to change the date the deduction of an institution's interest rate risk
component becomes effective.
List of Subjects in 12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings
associations.
Accordingly, the Office of Thrift Supervision hereby amends part
567, subchapter D, chapter V, title 12, Code of Federal Regulations as
set forth below:
SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS
PART 567--CAPITAL
1. The authority citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
2. Section 567.1 is amended by revising paragraph (v) to read as
follows:
Sec. 567.1 Definitions.
* * * * *
(v) Qualifying multifamily mortgage loan. (1) The term qualifying
multifamily mortgage loan means a loan secured by a first lien on
multifamily residential properties consisting of 5 or more dwelling
units, provided that:
(i) The amortization of principal and interest occurs over a period
of not more than 30 years;
(ii) The original minimum maturity for repayment of principal on
the loan is not less than seven years;
(iii) When considering the loan for placement in a lower risk-
weight category, all principal and interest payments have been made on
a timely basis in accordance with its terms for the preceding year;
(iv) The loan is performing and not 90 days or more past due;
(v) The loan is made by the savings association in accordance with
prudent underwriting standards; and
(vi) If the interest rate on the loan does not change over the term
of the loan:
(A) The current loan balance amount does not exceed 80 percent of
the value of the property securing the loan; and
(B) For the property's 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 percent, or in the case of cooperative or other not-for-
profit housing projects, the property generates sufficient cash flows
to provide comparable protection to the institution; or
(vii) If the interest rate on the loan changes over the term of the
loan:
(A) The current loan balance amount does not exceed 75 percent of
the value of the property securing the loan; and
(B) For the property's 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 percent, or in the case of cooperative or other not-for-
profit housing projects, the property generates sufficient cash flows
to provide comparable protection to the institution.
(2) The term qualifying multifamily mortgage loan also includes a
multifamily mortgage loan that on March 18, 1994 was a first mortgage
loan on an existing property consisting of 5-36 dwelling units with an
initial loan-to-value ratio of not more than 80% where an average
annual occupancy rate of 80% or more of total units had existed for at
least one year, and continues to meet these criteria.
(3) For purposes of paragraphs (v)(1) (vi) to (vii) of this
section, the term value of the property means, at origination of a loan
to purchase a multifamily property: the lower of the purchase price or
the amount of the initial appraisal, or if appropriate, the initial
evaluation. In cases not involving purchase of a multifamily loan, the
value of the property is determined by the most current appraisal, or
if appropriate, the most current evaluation.
(4) In cases where a borrower refinances a loan on an existing
property, as an alternative to paragraphs (v)(1) (iii) and (vi) to
(vii) of this section:
(i) All principal and interest payments on the loan being
refinanced have been made on a timely basis in accordance with the
terms of that loan for the preceding year; and
(ii) The net income on the property for the preceding year would
support timely principal and interest payments on the new loan in
accordance with the applicable debt service requirement.
* * * * *
3. Section 567.6 is amended by revising paragraph (a)(1)(iii)(C)
effective on March 18, 1994 through September 29, 1994, to read as
follows:
Sec. 567.6 Risk-based capital credit risk-weight categories.
(a) * * *
(1) * * *
(iii) * * *
(C) Non-high-quality mortgage-related securities secured by or
representing an interest in qualifying mortgage loans and qualifying
multifamily mortgage loans, except for those with residual
characteristics or stripped mortgage-related securities. If the
security is backed by qualifying multifamily mortgage loans, the
institution must receive timely payments of principal and interest in
accordance with the terms of the security. Payments will generally be
considered timely if they are not 30 days or more past due.
* * * * *
4. Section 567.6 is amended by revising paragraph (a)(1)(iii)(C)
effective September 30, 1994 to read as follows:
Sec. 567.6 Risk-based capital credit risk-weight categories.
(a) * * *
(1) * * *
(iii) * * *
(C) Non-high-quality mortgage-related securities secured by or
representing an interest in qualifying mortgage loans and qualifying
multifamily mortgage loans, except for collateralized mortgage
obligation residual classes. If the security is backed by qualifying
multifamily mortgage loans, the institution must receive timely
payments of principal and interest in accordance with the terms of the
security. Payments will generally be considered timely if they are not
30 days or more past due.
* * * * *
Sec. 567.7 [Amended]
5. Section 567.7 is amended by removing the word ``first'' in the
fourth sentence of paragraph (a) and by adding in lieu thereof the word
``last''.
Dated: October 15, 1993.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-5452 Filed 3-17-94; 8:45 am]
BILLING CODE 6720-01-P