[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1709]


[[Page Unknown]]

[Federal Register: January 27, 1994]


=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AB23

 

Statement of Policy on Risk-Based Capital: Multifamily Housing 
Loans

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule implements section 618(b) of the Resolution 
Trust Corporation Refinancing, Restructuring, and Improvement Act of 
1991 (RTCRRIA) and amends the FDIC's risk-based capital guidelines to 
assign a 50 percent risk weight to loans secured by multifamily 
residential properties (multifamily housing loans) that meet certain 
prudential criteria and to any securities collateralized by such loans. 
At present, such loans are assigned to the 100 percent risk weight 
category. This amendment also satisfies a requirement contained in 
section 305 of the Federal Deposit Insurance Corporation Improvement 
Act of 1991 (FDICIA) concerning the application of the FDIC's risk-
based capital guidelines to multifamily housing loans. The final rule 
also addresses the section 618(b) requirement that the FDIC's risk-
based capital guidelines take into account loss sharing arrangements in 
connection with sales of multifamily housing loans. The final rule is 
intended to facilitate prudent lending for multifamily housing 
purposes.

EFFECTIVE DATE: This final rule is effective January 27, 1994.

FOR FURTHER INFORMATION CONTACT: Robert F. Storch, Chief, Accounting 
Section, Division of Supervision, Federal Deposit Insurance 
Corporation, 550 17th Street NW., Washington, DC 20429, (202) 898-8906.

SUPPLEMENTARY INFORMATION:

I. Background

    On March 14, 1989, the Board of Directors of the FDIC adopted a 
Statement of Policy on Risk-Based Capital (12 CFR part 325, appendix A, 
later redesignated as appendix A to subpart A of part 325) which is 
applicable to all insured state nonmember banks supervised by the FDIC 
(54 FR 11500). The Office of the Comptroller of the Currency (OCC) and 
the Federal Reserve Board (FRB) have also adopted similar risk-based 
capital standards for the banks under their supervision. The three 
agencies based their risk-based capital standards on the report on 
``International Convergence of Capital Measurement and Capital 
Standards'' (the Basle Accord) issued by the Basle Committee on Banking 
Supervision in July 1988. In addition, the Office of Thrift Supervision 
(OTS) has implemented risk-based capital rules for savings 
associations.
    Under the FDIC's risk-based capital framework, a bank's balance 
sheet assets and the credit equivalent amounts of its off-balance sheet 
items are assigned to one of four broad risk categories--0, 20, 50, or 
100 percent--according to the obligor or, if relevant, the guarantor or 
the nature of the collateral. At present, absent qualifying collateral 
or guarantees, claims on private sector obligors (other than depository 
institutions) are generally assigned to the 100 percent risk weight 
category under the risk-based capital guidelines issued by the FDIC, 
the FRB, the OCC, and the OTS (collectively, the federal banking 
agencies). Thus, multifamily (five or more dwelling units) housing 
loans and privately-issued securities collateralized by multifamily 
housing loans are normally accorded a 100 percent risk weight by the 
FDIC.\1\
---------------------------------------------------------------------------

    \1\Multifamily housing loans are also normally accorded a 100 
percent risk weight under the risk-based capital guidelines of the 
FRB and OCC. However, OTS regulations accord a 50 percent risk 
weight to ``qualifying multifamily mortgage loans.'' This type of 
loan is defined as a ``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 has existed for at least one year.''
---------------------------------------------------------------------------

    However, under the Basle Accord, ``loans fully secured by mortgage 
on residential property which is rented or is (or is intended to be) 
occupied by the borrower'' are permitted to be assigned a 50 percent 
risk weight. Nevertheless, the Accord admonishes bank supervisory 
authorities to apply this ``concessionary weight * * * restrictively 
and in accordance with strict prudential criteria. This may mean, for 
example, that in some member countries the 50 per cent. weight * * * 
will only be applied where strict, legally-based, valuation rules 
ensure a substantial margin of additional security over the amount of 
the loan.'' To date, the 50 percent risk weight has been accorded only 
to loans secured by one-to-four family residential properties that meet 
certain prudential criteria.
    Section 618(b)(1) of the RTCRRIA requires the federal banking 
agencies to amend their risk-based capital guidelines to assign 
multifamily housing loans that meet certain criteria and any security 
collateralized by such loans to the 50 percent risk weight category. In 
order for a multifamily housing loan to qualify for this preferential 
capital treatment, the loan must be secured by a first lien on a 
multifamily residential property, the loan-to-value ratio for the 
property must not exceed 80 percent (75 percent if the rate of interest 
on the loan changes over the term of the loan), the ratio of annual net 
operating income generated by the property (before debt service) to 
annual debt service on the loan must not be less than 120 percent (115 
percent if the rate of interest on the loan changes over the term of 
the loan), the amortization period for principal and interest on the 
loan must not exceed 30 years, the loan must have a minimum maturity 
for principal repayment of not less than seven years, and the loan must 
have had timely payment of principal and interest in accordance with 
the loan terms for at least one year. Section 618(b)(1) further 
provides that a multifamily housing loan must meet ``any other 
underwriting characteristics that the appropriate Federal banking 
agency may establish, consistent with the purposes of the minimum 
acceptable capital requirements to maintain the safety and soundness of 
financial institutions.''
    In addition, section 305 of the FDICIA (Pub. L. 102-242, 105 Stat. 
2355 (12 U.S.C. 1828 note)) in part requires the federal banking 
agencies to amend their risk-based capital standards for insured 
depository institutions to ensure that those standards ``reflect the 
actual performance and expected risk of loss of multifamily 
mortgages.''
    Section 618(b)(2) of the RTCRRIA requires the FDIC to amend its 
risk-based capital standards:

    To provide that any loan fully secured by a first lien on a 
multifamily housing property 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.

    This section then defines the term ``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.''
    Section 618(b)(3) of the RTCRRIA then directs the FDIC to amend its 
risk-based capital framework ``to take into account other loss sharing 
arrangements in connection with the sale'' of multifamily housing loans 
``for purposes of determining the extent to which such loans shall be 
treated as sold.'' An ``other loss sharing arrangement'' is then 
defined as ``an agreement providing that the purchaser of a loan shares 
in any loss incurred on the loan with the selling institution on other 
than a pro rata basis.''

II. Description of Proposed Rule

    On April 1, 1992, the FDIC published a proposed rule designed to 
implement the provisions of section 618(b) of the RTCRRIA (57 FR 
11010). The preamble to the proposed rule further noted that 
implementation of the proposal would also satisfy the provision of 
section 305 of the FDICIA concerning the application of the FDIC's 
risk-based capital guidelines to multifamily housing loans.

Criteria for Multifamily Housing Loans and Securities

    In order to achieve the safety and soundness objective set forth in 
section 618(b)(1), the proposal observed that it is imperative that 
appropriate criteria be established to distinguish between multifamily 
housing loans that are accorded a 100 percent risk weight and those 
that are of sufficiently high quality to warrant a more favorable 50 
percent risk weight. In this regard, the proposal noted that data 
reported in the Consolidated Reports of Condition and Income filed by 
all FDIC-insured commercial banks revealed that net charge-offs of 
multifamily housing loans by such banks for calendar year 1991 were 
2.01 percent of multifamily housing loans outstanding. The percentage 
of multifamily housing loans that were 90 days or more past due or in 
nonaccrual status as of December 31, 1991, for all FDIC-insured 
commercial banks was 5.64 percent of multifamily housing loans 
outstanding. In contrast, for single family housing loans, which the 
FDIC's risk-based capital guidelines assign to the 50 percent risk 
weight category if they meet certain criteria, the net charge-off rate 
for calendar year 1991 was only 0.20 percent of loans outstanding. 
Single family housing loans that were 90 days or more past due or in 
nonaccrual status as of December 31, 1991, for all FDIC-insured 
commercial banks were 1.65 percent.
    Thus, the FDIC's proposed rule lowering the risk weight for certain 
multifamily housing loans incorporated the specific statutory criteria 
described in section I. above and also included four additional safety 
and soundness criteria that multifamily housing loans would have to 
meet in order to receive a reduced risk weight. These four criteria, 
which were developed by the FDIC after consulting with the other 
federal banking agencies, provided that: (1) The loan-to-value ratio 
used to determine the eligibility of a multifamily housing loan for the 
lower risk weight would be the ratio at the time the loan was 
originated; (2) the loan must not be more than 90 days past due or 
carried in nonaccrual status; (3) the average annual occupancy rate of 
the property securing the loan must have been at least 80 percent for 
at least one year; and (4) the loan must have been made in accordance 
with prudent underwriting standards. Taken together, the statutory and 
proposed additional criteria were intended to ensure that only those 
multifamily housing loans whose future repayment prospects are such 
that they expose an institution to relatively low levels of credit risk 
would receive the more favorable 50 percent risk weight. These criteria 
were also intended to ensure that such loans have risk characteristics 
that are consistent with the Basle Accord's provisions regarding the 
assignment of a preferential risk weight.
    As for securities collateralized by multifamily housing loans, the 
FDIC observed in the preamble to the proposed rule that its risk-based 
capital guidelines presently accord a 50 percent risk weight to 
privately-issued mortgage-backed securities that are ``backed by a pool 
of conventional mortgages,'' each of which meets the criteria ``for 
inclusion in the 50 percent risk weight category at the time the pool 
is originated.'' Such securities must also meet a number of safety and 
soundness criteria that are specified in the guidelines. Therefore, by 
operation of the existing language on privately-issued mortgage-backed 
securities in the FDIC's risk-based capital guidelines, the proposal 
stated that the explicit addition of multifamily housing loans to the 
50 percent risk weight category would have the effect of lowering to 50 
percent the risk weight for privately-issued mortgage-backed securities 
collateralized by such loans, provided the multifamily housing loans 
that back these securities qualify for a 50 percent risk weight at the 
time the securities are originated.\2\
---------------------------------------------------------------------------

    \2\In addition, in general, the FDIC's risk-based capital 
guidelines currently assign a 20 percent risk weight to mortgage-
backed securities collateralized by multifamily housing loans that 
have been issued or guaranteed by a U.S. Government-sponsored 
agency. The final rule does not change the treatment of these 
mortgage-backed securities.
---------------------------------------------------------------------------

Loss Sharing Arrangements

    The FDIC's existing risk-based capital guidelines do not 
specifically address how asset sales involving various forms of loss 
sharing arrangements are to be handled by a selling bank. This is 
because, for purposes of applying the risk-based capital standards, a 
bank's balance sheet assets are determined in accordance with the 
instructions for the preparation of the Consolidated Reports of 
Condition and Income (Call Report). Thus, the instructions for 
preparation of Consolidated Reports of Condition and Income are the 
source for guidance on determining the extent to which assets such as 
multifamily housing loans are treated as sold when there is a loss 
sharing arrangement covering the assets. The proposed rule therefore 
sought to implement the section 618(b) requirement that the FDIC's 
risk-based capital guidelines take into account loss sharing 
arrangements on sales of multifamily housing loans by referencing the 
relevant Call Report instructions.
    With respect to sales subject to pro rata loss sharing 
arrangements, the Call Report instructions direct banks to report these 
transactions in a manner that is consistent with the language of 
section 618(b)(2) quoted in section I above. These instructions state 
that:

    If the risk retained by the seller is limited to some fixed 
percentage of any losses 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.

    Thus, the FDIC proposed to amend its risk-based capital guidelines 
to provide in a footnote an explanation of this treatment for sellers 
of multifamily housing loans subject to pro rata loss sharing 
arrangements.
    For Call Report purposes, in general, other transfers of 
multifamily housing loans are to be reported as sales of the 
transferred assets only if the selling institution ``(1) retains no 
risk of loss from the assets transferred resulting from any cause and 
(2) has no obligation to any party for the payment of principal or 
interest on the assets transferred'' resulting from any cause. The 
FDIC's risk-based capital framework has taken other loss sharing 
arrangements into account in this manner when determining the extent to 
which assets such as multifamily housing loans are treated as sold and 
excluded from the balance sheet assets that must be risk weighted. In 
order to implement section 618(b)(3), the FDIC proposed to amend its 
risk-based capital guidelines to explicitly disclose this treatment of 
other loss sharing arrangements in a footnote.

III. Comment Summary

    The FDIC received 21 comment letters addressing various aspects of 
its proposed rule. Letters were submitted by 12 depository institutions 
or holding companies, four trade associations representing depository 
institutions, three trade associations representing housing and home 
building interests, and one secondary mortgage market maker. One 
comment document was filed by a group of individuals.
    Of the 21 letters received, six respondents agreed with the 
proposal to lower the risk weight for multifamily housing loans and 
offered no suggestions for changes to it. Another 12 commenters 
generally found the FDIC's proposal acceptable, but recommended certain 
changes in the eligibility criteria or the treatment of loss sharing 
arrangements. Three respondents objected to the proposal to lower the 
risk weight for multifamily housing loans, although two of these 
commenters made suggestions for improving the eligibility criteria. 
Three commenters, two of whom supported the proposal and one who 
opposed it, expressed concern that Congress had mandated that the 
regulatory agencies lower the risk weight for a specific loan category.

Loan-to-Value Ratios

    Although the proposal called for the loan-to-value ratio 
requirement to be met at the origination of a multifamily housing loan, 
the FDIC specifically requested comment on whether, in light of the 
other criteria that a multifamily housing loan must also meet, (1) a 
loan that does not satisfy the loan-to-value ratio requirement at 
origination should be permitted to do so later during the life of the 
loan and, if so, under what circumstances, and (2) a loan that 
satisfies this requirement at origination but fails to do so at a later 
date should thereafter be ineligible for a 50 percent risk weight.
    These issues were addressed by five respondents. Two respondents 
suggested that the loan-to-value ratios of ``large'' multifamily 
properties be recalculated every two years to determine whether the 
required ratio continues to be met. The other three respondents stated 
that multifamily housing loans not meeting the loan-to-value ratio 
requirement at origination should be eligible for the 50 percent risk 
weight if the ratio later decreases as a result of either principal 
payments or increased property values. However, only one of these three 
also recommended that multifamily housing loans should have their risk 
weights increased from 50 to 100 percent if their loan-to-value ratios 
rise above the levels set forth in the proposal subsequent to their 
origination. In contrast, another of these three commenters stated that 
a multifamily housing loan whose loan-to-value ratio increases after 
origination should be eligible to retain its 50 percent risk weight as 
long as the remaining eligibility criteria continued to be met. 
Finally, one of these commenters expressed concern about the cost of 
obtaining appraisals if the final rule were to require frequent 
reappraisals to ensure that the loan-to-value ratio requirement 
continues to be satisfied over time.
    After considering these comments and consulting with the other 
agencies, the FDIC has decided that the loan-to-value ratio requirement 
in the final rule should not be a one-time only test at origination. 
Rather, a multifamily housing loan that does not satisfy the loan-to-
value ratio requirement at origination, but does so at a later date, 
should then receive the benefit of a more favorable risk weight 
(assuming the other eligibility criteria are also met). A multifamily 
housing loan whose loan-to-value ratio no longer meets the specified 
ratio requirement has a reduced margin of collateral protection and its 
relative risk has increased to a level that no longer justifies the 
loan's continued eligibility for a 50 percent risk weight.
    Thus, the final rule makes the loan-to-value ratio requirement an 
ongoing eligibility criterion by stating that the ratio should be 
determined on the basis of the most current appraisal or evaluation of 
the property, whichever may be appropriate.\3\ This approach is also 
intended to be consistent with the FDIC's regulations and guidelines 
for real estate lending and appraisals. Under these regulations and 
guidelines, a bank's written real estate lending policies must 
establish prudent underwriting standards, including loan-to-value 
limits. In addition, a bank's real estate appraisal and evaluation 
programs should include general criteria that identify when it is in 
the bank's interests to reappraise or reevaluate real estate 
collateral. Thus, the final rule does not mandate a specific frequency 
with which reappraisals and reevaluations of multifamily properties 
must be made, but relies instead on a bank's own policies and 
procedures in this area.
---------------------------------------------------------------------------

    \3\At the origination of a loan to purchase an existing 
multifamily property, the lesser of the actual acquisition cost or 
value estimate would be used in the loan-to-value ratio.
---------------------------------------------------------------------------

    The specific loan-to-value ratios required by the proposed rule, 
i.e., 80 percent for fixed rate loans and 75 percent for adjustable 
rate loans, were addressed by two commenters. Each suggested that the 
same ratio should apply regardless of whether a loan has a fixed or 
adjustable rate. However, one of these commenters preferred using an 80 
percent ratio for all multifamily housing loans while the other 
preferred a 75 percent ratio. The final rule retains the separate 
ratios for fixed and adjustable rate loans that were contained in the 
proposal. These ratios are taken directly from the statute.
    In addition, two commenters indicated that multifamily housing 
loans that do not meet the loan-to-value ratio requirement but have 
additional collateral or credit enhancements such as mortgage insurance 
should be eligible for the 50 percent risk weight. The FDIC's risk-
based capital standards formally recognize only certain forms of 
collateral and guarantees for purposes of risk-weighting assets and 
credit equivalent amounts of off-balance sheet items. The FDIC does not 
believe it would be appropriate to recognize additional forms of 
collateral and guarantees solely for multifamily housing loans.

Annual Occupancy Rate

    Comments were received from three respondents on the proposed 
requirement, not mandated by the statute, that the average annual 
occupancy rate of the property securing the loan must have been at 
least 80 percent for at least one year. These commenters pointed out 
that the ongoing loan-to-value ratio and debt service coverage ratio 
requirements set forth in the statute should be sufficient to ensure 
that only high quality multifamily housing loans would qualify for the 
50 percent risk weight. It was also indicated that information on 
occupancy rates is not regularly being obtained as part of the 
financial data that borrowers supply on the properties securing 
multifamily housing loans. Thus, the inclusion of an occupancy rate 
requirement in the final rule would impose an additional burden on both 
borrowers and lenders. The FDIC agrees with these commenters and has 
eliminated the proposed occupancy rate requirement from the final rule.

Properties Owned by Cooperatives and Nonprofit Organizations

    Four commenters questioned the applicability of the eligibility 
criteria to properties owned by cooperative housing corporations and 
nonprofit organizations. In particular, the ``operating income'' 
concept included in the debt service coverage requirement was 
considered inappropriate because these types of properties, since they 
are not owned by investors seeking a return on their investments, are 
not operated to produce income. Accordingly, these commenters suggested 
that, for multifamily properties with a nonprofit form of ownership, a 
more flexible approach to meeting the debt service coverage ratio 
requirements set forth in the statute would be justified. The FDIC 
recognizes that the cash flow to service a loan secured by a 
multifamily property can come from ``operating income'' as well as from 
other sources. Therefore, the debt service coverage criterion in the 
final rule indicates that properties owned by cooperative housing 
corporations or nonprofit organizations must generate sufficient cash 
flow to provide protection to the bank comparable to that afforded by 
the debt service coverage levels set forth in the statute that are 
based on annual net operating income.

Repayment Performance

    Two commenters stated that the FDIC's proposal to add a requirement 
that a multifamily housing loan must not be more than 90 days past due 
or carried in nonaccrual status in order to qualify for the 50 percent 
risk weight was unnecessary because of the statutory requirement that 
all principal and interest payments be made on a timely basis in 
accordance with the terms of the loan for at least one year. One of 
these commenters indicated that a loan on which timely payments have 
been made for at least one year ``will not be more than 90 days past 
due and is unlikely to be in nonaccrual status'' while the other 
suggested that the loan would be ``in reasonably good shape, even it is 
technically ninety (90) days past due.''
    Although it may not have been clear from the proposal, the 
requirement that a loan not be 90 days or more past due or in 
nonaccrual status was intended to be an ongoing test that would have to 
be met at the time a multifamily housing loan was placed in the 50 
percent risk weight category and thereafter. The FDIC's risk-based 
capital guidelines currently contain the same ongoing requirement for 
one-to-four family residential mortgages to qualify for the 50 percent 
risk weight. In contrast, the statutory requirement that timely 
contractual principal and interest payments must have occurred for at 
least one year before a multifamily housing loan can qualify for a 50 
percent risk weight is a one-time requirement. To eliminate confusion, 
the final rule separately lists these two eligibility criteria and 
clarifies that timely payments must have been made for at least one 
year before a multifamily housing loan is placed in the 50 percent risk 
weight category.

Prudent Underwriting Standards

    The proposal's final eligibility criterion required the multifamily 
housing loan to have been made ``in accordance with applicable lending 
limits and other prudent underwriting standards.'' Two commenters asked 
what was meant by ``prudent underwriting standards.'' Guidance for 
prudent real estate loan underwriting standards is outlined in appendix 
A to part 365 of the FDIC's rules and regulations, ``Interagency 
Guidelines for Real Estate Lending Policies'' (12 CFR part 365, 
appendix A), which was adopted by the FDIC in October 1992 (57 FR 
62896, December 31, 1992).
    A third commenter suggested that this criterion was unnecessary and 
that it should go without saying that a bank should comply with 
applicable lending limits. This commenter also questioned why lending 
limits were singled out in this criterion when compliance with many 
other statutory and regulatory requirements is expected during the 
underwriting of a loan. The FDIC has deleted the specific reference to 
lending limits in the final rule.

Optional Nature of Lower Risk Weight

    One commenter who supported the proposal nonetheless requested that 
the FDIC ensure that banks are aware that, under the final rule, they 
have the option of assigning multifamily housing loans that meet the 
criteria specified in the rule to the 50 percent risk weight or 
continuing to treat such loans as 100 percent risk weight assets. One 
of the commenters who opposed the proposal did so because the cost 
associated with substantiating that a multifamily housing loan was 
eligible to be placed in the 50 percent risk weight category would 
exceed the benefit of the lower risk weight.
    The FDIC has no intention of imposing this cost on banks that would 
prefer not to incur it. Thus, the FDIC wishes to reiterate that, at 
each bank's option, assets, including multifamily housing loans, and 
credit equivalent amounts of off-balance sheet items that are eligible 
to be assigned to a risk weight category lower than 100 percent may be 
included in a higher risk weight category (e.g., the 100 percent risk 
weight category) than the category to which the assets or credit 
equivalent amounts are otherwise eligible to be assigned.

Loss Sharing Arrangements

    Comment letters from two respondents addressed the treatment of 
loss sharing arrangements in connection with the sale of multifamily 
housing loans that was contained in the proposed rule. Both commenters 
agreed with the proposal's approach for handling a pro rata loss 
sharing arrangement (i.e., for the selling bank to treat the transfer 
as a sale to the extent that the purchaser shares with the seller on 
pro rata basis in any loss incurred), but took exception to the 
proposed treatment of other loss sharing arrangements. Under the 
proposal, other loss sharing arrangements were to be taken into account 
for purposes of determining the extent to which multifamily housing 
loans are treated by the selling bank as sold (and excluded from 
balance sheet assets) under the risk-based capital framework in the 
same manner as prescribed for reporting purposes in the Call Report 
instructions. Hence, multifamily housing loans sold subject to loss 
sharing arrangements on other than a pro rata basis would treat such 
loans as sold for risk-based capital purposes only if the selling bank 
retains no risk of loss from the loans transferred resulting from any 
cause and has no obligation to any party for the payment of principal 
or interest on the loans transferred resulting from any cause.
    One commenter indicated that, in lieu of the proposed treatment for 
other loss sharing arrangements, the selling institution ``should 
retain capital in proportion to the risk retained but not for the whole 
loan.'' The other commenter who addressed loss sharing arrangements 
stated that the proposed treatment of other loss sharing arrangements 
does not ``provide an accurate measure of risk exposure or 
appropriately tailored incentives,'' ``may discourage lenders from 
limiting their recourse obligation,'' and is ``inconsistent with the 
statutory requirement.'' This commenter recommended that the FDIC 
``adopt rules that distinguish different loss risks for non-pro rata 
arrangements, rather than the existing rule in the Call Reports'' and 
offered suggested approaches for doing so. This commenter also 
acknowledged that the regulatory capital treatment of asset sales 
subject to loss sharing arrangements is an issue that goes beyond 
multifamily housing loans and requires a comprehensive solution.
    The FDIC recognizes that the proposed rule on other loss sharing 
arrangements essentially treats all such arrangements in an identical 
manner regardless of the terms of the arrangement and, as a 
consequence, may not encourage banks that sell multifamily housing 
loans with recourse to limit their exposure to risk. However, these 
concerns extend to asset sales with recourse in general because of the 
broad scope of the Call Report instructions in this area and their 
relationship to the risk-based capital framework. The FDIC and the 
other banking agencies, under the auspices of the Federal Financial 
Institutions Examination Council, have been pursuing a more 
comprehensive resolution of the capital issues surrounding asset sales 
with recourse and other forms of credit enhancement. This interagency 
effort is seeking to develop revisions to the agencies' risk-based 
capital standards that will better distinguish between the degrees of 
risk in loss sharing arrangements involving asset sales in general, not 
just those involving multifamily housing loans. The FDIC expects that 
these revisions would be more likely to fully satisfy the intent of 
section 618(b)(3) with respect to other loss sharing arrangements than 
the approach taken in the proposed rule. Nevertheless, the FDIC does 
not wish to further delay the issuance of a final rule that lowers the 
risk weight for certain multifamily housing loans and provides guidance 
on the risk-based capital treatment of pro rata loss sharing 
arrangements while the interagency effort to address recourse issues is 
proceeding. Therefore, as an interim measure, the FDIC is adopting the 
treatment of other loss sharing arrangements as originally proposed.

Other Issues

    Several commenters suggested changes to the proposed rule that 
would conflict with the requirements set forth in the statute. These 
suggestions included a lower debt service coverage ratio requirement, a 
shorter minimum maturity requirement, and a 75 percent rather than 50 
percent risk weight for multifamily housing loans. These suggestions 
have not been adopted.

IV. Final Rule

    After considering the comments received and consulting with the 
other agencies, the FDIC is adopting a final rule to implement section 
618(b) of the RTCRRIA. The final rule will also satisfy that portion of 
section 305 of the FDICIA relating to the application of the FDIC's 
risk-based capital guidelines to multifamily housing loans.
    The final rule adds a new paragraph on multifamily housing loans to 
the discussion of the types of assets accorded a 50 percent risk weight 
in the section of the FDIC's risk-based capital guidelines on risk 
weights for balance sheet assets (section II.C.). The new paragraph 
enumerates the criteria that a multifamily housing loan must satisfy in 
order to be eligible for this favorable risk weight. A conforming 
change has been made to the summary of risk weights and risk categories 
in table II of the guidelines.
    The eligibility criteria contained in the final rule include those 
set forth in section 618(b) and two added by the FDIC based on the 
authority granted in the statute. These criteria are that the loan must 
be secured by a first lien on a multifamily residential property, the 
loan-to-value ratio for the property must not exceed 80 percent (75 
percent if the rate of interest on the loan changes over the term of 
the loan), the ratio of annual net operating income generated by the 
property (before debt service) to annual debt service on the loan must 
not be less than 120 percent (115 percent if the rate of interest on 
the loan changes over the term of the loan), the amortization period 
for principal and interest on the loan must not exceed 30 years, the 
loan must have a minimum original maturity for principal repayment of 
not less than seven years, the loan must have had timely payment of 
principal and interest in accordance with the loan terms for at least 
one year before the loan is placed in the 50 percent risk weight 
category, the loan must not be 90 days or more past due or carried in 
nonaccrual status, and the loan must have been made in accordance with 
prudent underwriting standards.
    For purposes of satisfying the one year's timely repayment 
performance criterion in the case where the existing owner of a 
multifamily residential property refinances a loan on that property, 
the final rule provides that all principal and interest payments on the 
loan being refinanced must have been made on a timely basis in 
accordance with the terms of the loan for at least the preceding year. 
In this situation, all of the other eligibility criteria must also be 
met in order for the new loan to qualify for the 50 percent risk 
weight. For example, the annual debt service required on the new loan 
would be used when determining whether the debt service coverage 
requirement has been satisfied.
    Under the final rule, the loan-to-value ratio requirement must be 
met based on the most current appraisal or evaluation of the property, 
whichever may be appropriate, and, at the origination of loans to 
purchase an existing property, the term ``value'' means the lesser of 
the actual acquisition cost or the estimate of value for the property. 
In addition, the final rule explains that, to satisfy the debt service 
coverage requirement, a property owned by a cooperative housing 
corporation or nonprofit organization must generate sufficient cash 
flow to provide protection to the bank comparable to that specified in 
the statute.
    The final rule also revises the existing paragraph addressing 
privately-issued mortgage-backed securities in the discussion of the 
types of assets assigned to the 50 percent risk weight category. The 
amendment clarifies that in order for a security backed by a pool of 
conventional mortgages on multifamily residential properties to be 
accorded a 50 percent risk weight, each underlying mortgage must meet 
the eligibility criteria described above at the time the pool is 
originated. A bank that purchases such a security will not be required 
to monitor the eligibility of each underlying mortgage on an ongoing 
basis to ensure that a 50 percent risk weight remains appropriate for 
the security. Instead, the security may remain in the 50 percent risk 
weight category as long as principal or interest payments on the 
security are not 30 days or more past due.
    Finally, the final rule amends the FDIC's risk-based capital 
guidelines by stating in a footnote that a multifamily housing loan 
that is sold subject to a pro rata loss sharing arrangement is to be 
treated by the selling bank as sold (and excluded from balance sheet 
assets) to the extent that the sales agreement provides for the 
purchaser of the loan to share in any loss incurred on the loan on a 
pro rata basis with the selling bank. This means that, in such a 
transaction, the portion of the loan that is treated as sold by the 
selling bank is not subject to the risk-based capital standards. This 
footnote also provides explicit guidance on the risk-based capital 
treatment of sales of multifamily housing loans in which the purchaser 
of a loan shares in any loss incurred on the loan with the selling 
institution on other than a pro rata basis. It states that these other 
loss sharing arrangements are taken into account for purposes of 
determining the extent to which such loans are treated by the selling 
bank as sold (and excluded from balance sheet assets) under the risk-
based capital framework in the same manner as prescribed for reporting 
purposes in the instructions for preparation of the Consolidated 
Reports of Condition and Income. The instructions applicable to such 
transactions are contained in the Glossary entry for ``sales of 
assets.''
    This final rule is effective January 27, 1994. The FDIC has 
determined that good cause exists to waive the customary 30-day delayed 
effective date since the rule relieves a restriction on insured state 
nonmember banks 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. In 
addition, insured state nonmember banks may choose to utilize this 
lower risk weight in their Consolidated Reports of Condition and Income 
for December 31, 1993.

V. Regulatory Flexibility Act Analysis

    The FDIC certifies that the adoption of this amendment to its risk-
based capital guidelines will not have a significant economic impact on 
a substantial number of small business entities within the meaning of 
the Regulatory Flexibility Act (5 U.S.C. 601 et seq). Accordingly, a 
regulatory flexibility analysis is not required.
    The amendment will benefit insured state nonmember banks by 
reducing the minimum amount of capital that they are required to 
maintain for certain multifamily housing loans and securities 
collateralized by such loans. The proposal would apply equally to all 
insured state nonmember banks, regardless of size, and should not 
disproportionately affect a substantial number of small banks.

List of Subjects in 12 CFR Part 325

    Bank deposit insurance, Banks, banking, Capital adequacy, Reporting 
and recordkeeping requirements, State nonmember banks.
    For the reasons set forth in the preamble, the Board of Directors 
of the Federal Deposit Insurance Corporation amends 12 CFR part 325 as 
follows:

PART 325--CAPITAL MAINTENANCE

    1. The authority citation for part 325 is revised to read as 
follows:


    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 3907, 3909; Pub. L. 102-233, 105 Stat. 1761, 1789, 
1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, 
2386 (12 U.S.C. 1828 note).


    2. In appendix A to subpart A of part 325, footnotes 29 through 37 
are redesignated as footnotes 32 through 40, respectively; a new 
paragraph is added between the first and second paragraphs of section 
II.C. category 3 and the existing second paragraph is revised; 
paragraphs (2) through (4) of table II. category 3 are redesignated as 
paragraphs (3) through (5), respectively; and a new paragraph (2) is 
added to table II. category 3 to read as follows:

Appendix A to Subpart A of part 325--Statement of Policy on Risk-
Based Capital

* * * * *
    II. * * *
    C. * * *
    Category 3 * * *


    This category also includes loans fully secured by first liens 
on multifamily residential properties,29 provided that:
---------------------------------------------------------------------------

    \2\9The types of loans that qualify as loans secured by 
multifamily residential properties are listed in the instructions 
for preparation of the Consolidated Reports of Condition and Income. 
In addition, as provided in those instructions, a multifamily 
residential property loan that is sold subject to a pro rata loss 
sharing arrangement is treated by the selling bank as sold (and 
excluded from balance sheet assets) to the extent that the sales 
agreement provides for the purchaser of the loan to share in any 
loss incurred on the loan on a pro rata basis with the selling bank. 
In such a transaction, from the standpoint of the selling bank, the 
portion of the loan that is treated as sold is not subject to the 
risk-based capital standards. In connection with sales of 
multifamily residential property loans in which the purchaser of a 
loan shares in any loss incurred on the loan with the selling 
institution on other than a pro rata basis, these other loss sharing 
arrangements are taken into account for purposes of determining the 
extent to which such loans are treated by the selling bank as sold 
(and excluded from balance sheet assets) under the risk-based 
capital framework in the same manner as prescribed for reporting 
purposes in the instructions for preparation of the Consolidated 
Reports of Condition and Income.
---------------------------------------------------------------------------

    (1) The loan amount does not exceed 80 percent of the 
value30 of the property securing the loan as determined by the 
most current appraisal or evaluation, whichever may be appropriate 
(75 percent if the interest rate on the loan changes over the term 
of the loan);
---------------------------------------------------------------------------

    \3\0At the origination of a loan to purchase an existing 
property, the term ``value'' means the lesser of the actual 
acquisition cost or the estimate of value set forth in an appraisal 
or evaluation, whichever may be appropriate.
---------------------------------------------------------------------------

    (2) 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 (115 percent if the interest 
rate on the loan changes over the term of the loan) or, in the case 
of a property owned by a cooperative housing corporation or 
nonprofit organization, the property generates sufficient cash flow 
to provide comparable protection to the bank;
    (3) Amortization of principal and interest on the loan occurs 
over a period of not more than 30 years;
    (4) The minimum original maturity for repayment of principal on 
the loan is not less than seven years;
    (5) 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 loan is placed in this category;31
---------------------------------------------------------------------------

    \3\1In the case where the existing owner of a multifamily 
residential property refinances a loan on that property, all 
principal and interest payments on the loan being refinanced must 
have been made on a timely basis in accordance with the terms of 
that loan for at least the preceding year. The new loan must meet 
all of the other eligibility criteria in order to qualify for a 50 
percent risk weight.
---------------------------------------------------------------------------

    (6) The loan is not 90 days or more past due or carried in 
nonaccrual status; and
    (7) The loan has been made in accordance with prudent 
underwriting standards.
    Also included in this category are privately-issued mortgage-
backed securities provided that: (1) The structure of the security 
meets the criteria described above for ``Mortgage-Backed 
Securities;'' (2) if the security is backed by a pool of 
conventional mortgages on one-to-four family residential or 
multifamily residential properties, each underlying mortgage meets 
the criteria described in this section for inclusion in the 50 
percent risk weight category at the time the pool is originated; (3) 
if the security is backed by privately-issued mortgage-backed 
securities, each underlying security qualifies for inclusion in the 
50 percent risk category; and (4) if the security is backed by a 
pool of multifamily residential mortgages, principal or interest 
payments on the security are not 30 days or more past due.32
---------------------------------------------------------------------------

    \3\2 Privately-issued mortgage-backed securities that do not 
meet these criteria or that do not qualify for a lower risk weight 
generally are assigned to the 100 percent risk weight category.
---------------------------------------------------------------------------

* * * * *

Table II.--Summary of Risk Weights and Risk Categories

* * * * *
    Category 3 * * *
    (2) Loans fully secured by first liens on multifamily 
residential properties that have been prudently underwritten and 
meet specified requirements with respect to loan-to-value ratio, 
level of annual net operating income to required debt service, 
maximum amortization period, minimum original maturity, and 
demonstrated timely repayment performance.
* * * * *
    By order of the Board of Directors.

    Dated at Washington, DC, this 14th day of December, 1993.

Federal Deposit Insurance Corporation.
Patti C. Fox,
Acting Deputy Executive Secretary.
[FR Doc. 94-1709 Filed 1-26-94; 8:45 am]
BILLING CODE 6714-01-P