[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