[Federal Register Volume 59, Number 53 (Friday, March 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5452]


[[Page Unknown]]

[Federal Register: March 18, 1994]


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

DEPARTMENT OF TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 93-198]
RIN 1550-AA58

 

Risk-Based Capital: Multifamily Housing Loans; Interest Rate Risk 
Component Delay of Effective Date

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule; delay of effective date.

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

SUMMARY: The Office of Thrift Supervision (OTS) is adopting a final 
rule that amends its risk-based capital regulation to give a 50 percent 
risk weight to qualifying multifamily mortgage loans and securities 
backed by such loans (mortgage-backed securities or MBS). The OTS is 
adopting this rule as part of an interagency initiative to implement 
the provisions of section 618(b) of the Resolution Trust Corporation 
Refinancing, Restructuring, and Improvement Act of 1991 and section 
305(b)(1)(B) of the Federal Deposit Insurance Corporation Improvement 
Act of 1991.
    Multifamily mortgage loans that on the effective date of this rule 
qualified for the 50 percent risk-weight category under criteria in the 
OTS's previous capital rule and continue to satisfy those criteria will 
continue to be risk-weighted at 50 percent.
    The OTS is also further delaying the effective date of a portion of 
its Interest Rate Risk final rule adopted on August 31, 1993 and making 
a conforming amendment to the rule.

EFFECTIVE DATES: This final rule is effective March 18, 1994, except 
that the first amendment to Sec. 567.6(a)(1)(iii)(C) is effective on 
March 18, 1994 through September 29, 1994, and the second amendment to 
Sec. 567.6(a)(1)(iii)(C) is effective September 30, 1994. The 
amendments to Sec. 567.6 published at 58 FR 45813 (August 31, 1993) are 
delayed from July 1, 1994 to September 30, 1994.

FOR FURTHER INFORMATION CONTACT: John Connolly, Program Manager for 
Capital Policy, (202) 906-6465; Dorene Rosenthal, Senior Attorney, 
(202) 906-7268; John Flannery, Attorney, (202) 906-7293, Regulations, 
Legislation and Opinions Division; Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background Information

A. Statutory Authority and Regulatory Background

    The OTS today is issuing a final rule amending its risk-based 
capital treatment of multifamily mortgage loans. This rule conforms 
with the requirements of both section 618(b) of the Resolution Trust 
Corporation Refinancing, Restructuring, and Improvement Act of 1991 
(RTCRRIA)\1\ and section 305(b)(1)(B) of Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA).\2\
---------------------------------------------------------------------------

    \1\Pub. L. 102-233, 105 Stat. 1761 (1991).
    \2\Pub. L. 102-242, 105 Stat. 2236 (1991).
---------------------------------------------------------------------------

    Section 618(b)(1) of RTCRRIA requires the Federal Reserve Board, 
the Federal Deposit Insurance Corporation, the Office of Comptroller of 
the Currency, and the OTS (collectively, ``the federal banking 
agencies'') to accord a 50 percent risk weight to multifamily mortgage 
loans and related MBS meeting certain specified criteria and gives the 
agencies discretion to add other prudential safeguards. Section 
305(b)(1)(B) of FDICIA requires the federal banking agencies to revise 
their risk-based capital standards to ensure that those standards 
reflect the actual performance and expected risk of loss of multifamily 
mortgage loans.
    Under the OTS's existing risk-based capital regulation, multifamily 
mortgage loans are assigned to the 50 percent risk-weight category if: 
They are secured by multifamily residential properties consisting of 5-
to-36 dwelling units; they have an initial loan-to-value (LTV) ratio of 
not more than 80 percent; and an average annual occupancy rate of 80 
percent or more of total units has existed for at least one year. While 
the criteria prescribed by RTCRRIA for qualifying multifamily mortgage 
loans overlap with OTS's existing criteria for these loans, they are 
not identical.
    Section 618(b)(2) of RTCRRIA requires that any loan fully secured 
by a first lien on a multifamily residential property that is sold by a 
financial institution subject to a pro rata loss sharing arrangement be 
treated as a sale and not a recourse transaction, to the extent that 
the purchaser and not the seller is exposed to loss on that loan 
portion. In addition, section 618(b)(3) of RTCRRIA provides that the 
federal banking agencies must take into account loss sharing 
arrangements, other than pro rata arrangements, under their risk-based 
capital regulations. The statute requires the agencies to consider the 
extent to which loans fully secured by a first lien on a multifamily 
residential property subject to other than pro rata loss sharing 
arrangements should be treated as sold, but it does not require the 
agencies to afford such arrangements sales treatment.
    The OTS's regulations already satisfy the requirements of sections 
618(b)(2) and (3) of RTCRRIA. The OTS requires that savings 
associations follow generally accepted accounting principles (GAAP). 
Sales with recourse are recorded in accordance with Statement of 
Financial Accounting Standards (SFAS) No. 77 ``Reporting by Transferors 
for Transfers of Receivables with Recourse.''
    Under the OTS's capital rule, in computing risk-based capital, the 
sale of a loan fully secured by a first lien on a multifamily 
residential property would be accorded sales treatment if each 
participant is responsible solely for its pro rata share of the risk, 
there is no recourse to the originating association on the portion of 
the loan for which the buyer is liable, and the transaction meets the 
requirements of SFAS No. 77.
    In addition, the OTS's current risk-based capital regulation 
provides that savings associations must include in risk-weighted assets 
100 percent of ``the values of assets sold with recourse * * * except 
where the amount of recourse liability retained by the savings 
association is less than the capital requirement for credit-risk 
exposure.'' 12 CFR 567.6(a)(2)(i)(C). Thus, the capital charge of a 
selling institution on loans sold with recourse on either a pro rata or 
other than pro rata basis is limited to the institution's maximum 
contractual liability for losses on the loans sold, where the 
contractual liability is less than the capital requirement for the 
asset.

B. Description of the Proposal

    On September 2, 1992, the OTS published a notice of proposed 
rulemaking containing an amendment to the definition of ``qualifying 
multifamily mortgage loan'' in its risk-based capital regulation. The 
proposed definition incorporated the criteria set forth in section 
618(b)(1) of RTCRRIA and added other, prudent underwriting standards. 
57 FR 40143 (September 2, 1992). The public comment period on the 
proposal closed on October 2, 1992.
    Under the proposal, multifamily mortgage loans would qualify for 
the 50 percent risk-weight category if they satisfied the following 
statutory criteria: (1) The loan must be secured by a first lien on a 
residence consisting of 5 or more dwelling units; (2) the loan must 
amortize principal and interest over a period of not less than seven 
years and not more than 30 years; (3) all payments of principal and 
interest must have been made on a timely basis in accordance with the 
terms of the loan for at least one year; and (4) if the rate of 
interest does not change over the term of the loan, then: (a) The LTV 
ratio at origination cannot exceed 80 percent, and (b) the ratio of 
annual net operating income generated by the property (before payment 
of any debt service on the loan) to annual debt service on the loan 
cannot be less than 120 percent; or (5) if the loan has a variable 
rate, then: (a) The LTV ratio at origination cannot exceed 75 percent, 
and (b) the ratio of annual net operating income generated by the 
property (before payment of any debt service on the loan) to annual 
debt service on the loan cannot be less than 115 percent.
    The proposal also provided that multifamily mortgage loans must 
satisfy the following additional prudential criteria to qualify for the 
50 percent risk-weight category: (1) The loan must be performing and 
not more than 90 days past due; (2) the loan must comply with 
applicable lending limit requirements and other prudent underwriting 
standards; and (3) the multifamily residential property securing the 
loan must have had an average annual occupancy rate of 80 percent or 
more total units for at least one year.
    The final rule follows the approach set forth in the proposal with 
three modifications:3 the occupancy rate requirement has been 
removed; LTV ratios will be calculated based on the ratio of the 
current loan balance to the value of the property; and multifamily 
loans that on the effective date of this rule qualified for a lower 
risk-weight category under the OTS's previous regulations but do not 
qualify under the amended rule will be grandfathered.
---------------------------------------------------------------------------

    \3\Since the proposal was published, the OTS also has consulted 
with the other federal banking agencies about the issues raised in 
the comment letters received in response to their proposed rules. 
The OTS is today adopting a final rule that is consistent with the 
approaches agreed upon by staff of the other federal banking 
agencies.
---------------------------------------------------------------------------

II. Summary of Comments and OTS Response

    The OTS solicited public comment on all aspects of its proposed 
amendments to its risk-based capital regulation concerning multifamily 
mortgage loans and MBS secured by or representing an interest in such 
loans. The OTS received a total of 31 comment letters. Those who 
submitted comments included 20 savings associations, 9 thrift and 
housing trade groups, and 2 governmental-related entities. The 
discussion that follows identifies the principal issues raised in this 
rulemaking and summarizes the OTS's response to these issues.

A. Appropriate Risk-Weight Category

    All of the commenters supported the proposal to amend the risk-
based capital regulation, although several commenters suggested 
revisions. Generally, commenters believed it was appropriate to risk 
weight multifamily loans at 50 percent because of the lower risk 
presented by these loans as compared with other real estate and 
commercial loans. Commenters also indicated that this regulation would 
aid credit availability and cause more rental housing to become 
available because lenders would have greater incentives to originate 
multifamily mortgage loans due to the lower capital charge on such 
loans meeting the prudential criteria set forth in this rule.
    As required by section 305 of FDICIA, the OTS has analyzed the loss 
data on multifamily mortgage loans for savings associations to 
determine the appropriate risk weight for such loans. The average 
annualized ratio of net charge-offs to the amount of outstanding 
permanent multifamily mortgage loans was 0.59 percent for the thirteen 
quarters beginning March 1990 and ending March 31, 1993, as reported on 
the quarterly Thrift Financial Reports. In contrast, the average 
annualized net charge-off rate over the same period was 0.11 percent 
for permanent 1-4 family residential mortgage loans, 1.17 percent for 
permanent nonresidential property loans, 1.19 percent for permanent 
commercial loans, 1.41 percent for multifamily construction loans, and 
2.19 percent for commercial construction loans. The average annualized 
net charge-off rate over this period for all assets in the 100 percent 
risk-weight category was 0.83 percent.
    The average net charge-off rates for these assets for the four 
quarters of 1992 were the following: 0.74 percent for permanent 
multifamily mortgage loans, 0.22 percent for permanent 1-4 family 
residential mortgage loans, 1.29 percent for nonresidential property 
loans, 1.37 percent for permanent commercial loans, 2.43 percent for 
multifamily construction loans, and 2.32 percent for commercial 
construction loans.
    Although the net charge-off rate for permanent multifamily mortgage 
loans exceeded that for permanent 1-4 family residential loans, it was 
substantially below the net charge-off rates for the other types of 
loans specified above during the entire period reviewed. Permanent 
multifamily mortgage loans also had a net charge-off rate well below 
the average annualized aggregate net charge-off rate for 100 percent 
risk-weight assets for the twelve-month period.
    Accordingly, the OTS believes that it is appropriate to accord a 50 
percent risk weight to multifamily mortgage loans satisfying the 
conservative underwriting and performance standards set forth in 
section 618(b) of RTCRRIA and two of the three additional prudential 
criteria proposed by the federal banking agencies. The additional 
prudential criteria retained in the final rule are: (1) The loan must 
be performing and not 90 days or more past due; and (2) the loan must 
comply with prudent underwriting standards.
    This final rule appropriately affords a reduced risk weight to 
loans whose future repayment prospects are such that they expose 
institutions to relatively low levels of credit risk. Multifamily 
mortgage loans not meeting the standards set forth in this rule may 
pose higher risk of loss and should be placed in the 100 percent risk-
weight category. This final rule also satisfies the requirement of 
section 305 of FDICIA to ensure that multifamily mortgage loans are 
placed in an appropriate risk-weight category based on actual 
performance and potential risk of loss.

B. Criteria for Eligibility in the 50 Percent Risk-Weight Category

1. Number-Of-Units Restriction
    The OTS's current risk-based capital regulation limits qualifying 
multifamily mortgage loans to properties with five to 36 units. The OTS 
requested comments on whether to retain this restriction. The majority 
of commenters urged the OTS not to impose a number-of-units restriction 
on the size of properties securing qualifying multifamily mortgage 
loans. Two commenters advocated retaining the number-of-units 
restriction, claiming that loans on smaller multifamily properties pose 
a lower risk of loss than larger projects. The OTS has considered these 
comments in light of the OTS's general experience with its current rule 
providing reduced risk weighting for multifamily mortgage loans on 
relatively small properties and believes they have some merit. 
Nevertheless, based on its data on the overall loss experience for 
multifamily mortgage loans regardless of size, and to conform with the 
uniform position adopted by the federal banking agencies, the OTS is 
not including a number-of-units restriction.
    A few commenters advocated removing a number-of-units restriction 
in order to allow mortgage loans secured by manufactured housing 
properties to qualify for the 50 percent risk-weight category. The OTS 
wishes to clarify that its capital rules generally, and this provision 
in particular, apply the same standards and principles to manufactured 
housing as to other residential properties in determining the 
appropriate risk weight.
2. LTV Ratio
    While a few commenters advocated calculating the LTV ratio at 
origination only, most commenters favored the agency's suggestions that 
the LTV ratio could be computed when there has been a loan paydown or a 
more recent appraisal. Several commenters cautioned the agency to 
control the frequency of new appraisals.
    Upon review, the OTS has determined to calculate LTV ratios as a 
continuing criterion based on current loan balance to the value of the 
property. Prudent underwriting standards dictate that at origination of 
a loan to purchase a multifamily property, the value of the property is 
the lower of acquisition cost of the property or the initial appraised 
value, or, if appropriate, the value of the property as determined by 
the initial evaluation.4 The OTS recognizes that the value of 
property can change over time based on factors such as changes in 
market conditions or material development of the property. Nothing in 
this rule prohibits the recomputation of the LTV ratio based on such 
changes and developments.
---------------------------------------------------------------------------

    \4\For an explanation of the distinction between an appraisal 
and an evaluation of real estate and for a description of the 
circumstances under which each is required under the OTS's current 
rules, see 12 CFR Part 564. As part of an interagency initiative, 
however, the OTS is in the process of amending these appraisal 
regulations. See 58 FR 31878 (June 4, 1993) (proposed rule).
---------------------------------------------------------------------------

    In cases not involving purchase of a multifamily property, the 
value of the property generally would be determined by the most current 
appraisal, or, if appropriate, the most current evaluation. All 
appraisals and evaluations must be made in a manner consistent with the 
OTS's real estate appraisal regulations, guidelines, and policies and 
with the institution's own appraisal policies. Loans that exceed the 
LTV ratios set forth in the regulation at origination will be permitted 
to qualify for the 50 percent risk weight when the loans are paid down 
below an 80 percent LTV ratio for fixed rate loans and a 75 percent LTV 
ratio for variable rate loans, if the other criteria set forth in this 
regulation are satisfied.
3. 80 Percent Occupancy Rate
    The majority of commenters advocated removing the 80 percent 
occupancy-rate requirement. These commenters suggested that the 
requirement was unnecessary in light of the debt service, LTV ratio, 
and timely payments requirements. A few commenters also noted that 
occupancy rate may not accurately measure the income generated by a 
property. The OTS concludes that the debt service requirement is a more 
accurate measure of the income-producing capacity of the property than 
the occupancy-rate requirement and is eliminating the occupancy-rate 
requirement from the final rule.
4. Timely Payments Requirement
    The proposal includes the requirement that loans receive timely 
payment of principal and interest for the year preceding its placement 
in the 50 percent risk-weight category. The OTS received many comments 
on the effect of the timely payments requirement on the willingness of 
institutions to make multifamily mortgage loans. Several commenters 
urged that, for other than new construction loans, lenders be permitted 
to look at the property's prior operating history to determine 
compliance with the timely payments requirement. This would allow loans 
on properties with a history of timely payments to qualify for the 50 
percent risk-weight category at origination.
    To clarify some misunderstanding of this criterion, the 
determination whether the timely payments requirement is met is made 
only once, at the time when the institution decides to place the 
multifamily mortgage loan in the 50 percent risk-weight category. 
``Timely payments'' will generally be considered those payments not 30 
days or more past due. The criteria that the loan be performing and not 
90 days or more past due will be used to monitor the payment stream of 
the loan on an ongoing basis.
    Upon review, the OTS has decided that, when a borrower refinances a 
loan on an existing property, as an alternative, the timely payments 
requirement may be satisfied if: (1) All principal and interest 
payments on the loan being refinanced have been made on a timely basis 
in accordance with the terms of that loan for the preceding year and 
(2) the net income on the property for the preceding year would support 
timely principal and interest payments on the new loan in accordance 
with the applicable debt service requirement.
    5. Cooperative and Not-For-Profit Multifamily Mortgage Loans
    Five commenters asked that a cooperative housing loan where the 
master mortgage is a joint obligation of the shareholders in the 
cooperative be treated as a qualifying multifamily mortgage loan under 
the rule. Certain cooperative and other not-for-profit multifamily 
housing properties, however, may not be able to generate sufficient 
income to satisfy the debt service ratio required by the rule. 
Therefore, the OTS will permit cooperatives and other not-for-profit 
multifamily properties to meet the debt service ratio requirement by 
generating sufficient cash flows to provide comparable protection to 
the institution. Debt service coverage providing comparable protection 
to the institution may take a number of different forms that include, 
but are not limited to, special operating reserves accounts or special 
operating subsidies provided by federal, state, local, or private 
sources.
6. Treatment of MBS
    Some commenters agreed with the requirement in the proposal that, 
in order to qualify for a 50 percent risk weight, MBS must be secured 
by or represent an interest in qualifying multifamily mortgage loans at 
the time of securitization. Several commenters suggested that the final 
rule allow multifamily mortgage loans to be securitized immediately, 
and the MBS backed by such loans to qualify for the lower risk-weight 
category after the underlying mortgage loans have satisfied the timely 
payments requirement.
    Upon review of this issue and consultation with the other federal 
banking agencies, the OTS has decided that it will generally expect MBS 
secured by or representing an interest in multifamily mortgage loans to 
qualify for the 50 percent risk-weight category at original 
securitization. Thus, all of the underlying multifamily mortgage loans 
must satisfy the qualifying criteria, including the timely payments 
requirement, at the time the MBS is securitized.
    The MBS will remain in the 50 percent risk-weight category provided 
the investing institution receives timely payments (generally those 
payments not 30 days or more past due) of principal and interest in 
accordance with the terms of the MBS. However, institutions holding the 
multifamily MBS, or servicers or trustees on their behalf, will not be 
required to track the continuing qualification of the underlying 
mortgage loans.
    Several commenters misunderstood the interaction of this provision 
regarding certain MBS with other provisions concerning MBS in the OTS's 
risk-based capital regulation. Today's rule only addresses privately 
issued, non-high-quality MBS backed by qualifying multifamily mortgage 
loans. MBS backed by multifamily mortgage loans that are issued or 
guaranteed by a U.S. government sponsored enterprise; that are 
privately issued and rated in one of the two highest rating categories 
by at least one nationally recognized statistical rating service; and 
those with residual characteristics would be treated the same as MBS 
with the same characteristics backed by 1-4 family residential mortgage 
loans.

C. Grandfathering of Loans Currently Qualifying for the 50 Percent 
Risk-Weight Category

    The majority of commenters favored the OTS's proposal to 
``grandfather'' the risk-weighting of existing multifamily mortgage 
loans qualifying for the 50 percent risk-weight category under the 
OTS's prior regulation, but not qualifying under the new criteria. The 
other federal banking agencies are not presented with this issue since 
their existing capital rules do not provide a 50 percent risk-weight 
for any multifamily mortgage loans.
    OTS's supervisory experience with multifamily mortgage loans 
qualifying for the 50 percent risk-weight category under its prior rule 
shows no reason to increase the capital charge on these loans to 100 
percent. Associations that originated and administered these loans in 
accordance with the prudent criteria established by the OTS's prior 
rule should retain the benefit of the reduced capital charge. 
Therefore, the OTS has decided to ``grandfather'' any multifamily 
mortgage loans that, on the effective date of this rule, qualified for 
the 50 percent risk-weight category under the OTS's previous rule and 
that continue to meet those criteria. Any ``grandfathered'' multifamily 
mortgage loan that does not remain in compliance with the requirements 
of the prior rule may requalify for the 50 percent risk-weight category 
only by satisfying the criteria under today's rule.
    Several commenters urged the OTS to retain its existing criteria or 
to adopt less stringent criteria for loans on multifamily properties 
with less than 36 units because such loans present less risk than loans 
on larger properties. The OTS has given serious consideration to this 
suggestion, but in the interest of interagency uniformity has 
determined not to provide a reduced risk weight to new loans qualifying 
under the prior OTS rule.

D. Recourse

    One commenter suggested that the OTS clarify and amend the recourse 
provisions of its capital rule to recognize more subtle distinctions in 
risk. Upon consideration, the OTS has decided not to amend its recourse 
provisions as part of this rulemaking because the OTS and the other 
federal banking agencies are considering the treatment of loss sharing 
arrangements and related recourse issues as part of their comprehensive 
interagency review of recourse, initiated by the Federal Financial 
Institutions Examination Counsel (FFIEC). Under the FFIEC's initiative, 
the agencies are considering revisions to their risk-based capital 
standards to distinguish among loss sharing arrangements involving 
asset sales based on the degree of risk involved in the transaction.

III. Description of the Final Rule

    Under today's final rule, multifamily mortgage loans qualify for 
the 50 percent risk-weight category if they satisfy the following 
criteria: (1) The loan must be secured by a first lien on a multifamily 
residential property consisting of 5 or more dwelling units; (2) the 
loan must amortize principal and interest over a period at origination 
of not less than seven years and not more than 30 years; (3) when the 
loan is considered for a lower risk-weight category, all principal and 
interest payments have been made on a timely basis in accordance with 
its terms for the preceding year; (4) the loan is performing and not 90 
days or more past due; (5) the loan is made by the savings association 
in accordance with prudent underwriting standards; and (6) if the 
interest rate on the loan does not change over the term of the loan, 
then: (a) The current loan balance amount does not exceed 80 percent of 
the value of the property securing the loan; and (b) for the property's 
most recent fiscal year, the ratio of annual net operating income 
generated by the property (before payment of any debt service on the 
loan) to annual debt service on the loan is not less than 120 percent, 
or in the case of cooperative or other not-for-profit housing projects, 
the property generates equivalent debt service coverage; or (7) if the 
loan has a variable rate, then: (a) The current loan balance amount 
does not exceed 75 percent of the value of the property securing the 
loan; and (b) for the property's most recent fiscal year, the ratio of 
net operating income generated by the property (before payment of any 
debt service on the loan) to annual debt service on the loan is not 
less than 115 percent, or in the case of cooperative or other not-for-
profit housing projects, the property generates equivalent debt service 
coverage.
    In addition, the final rule extends ``grandfathered'' treatment to 
those multifamily mortgage loans that on the effective date of this 
rule qualified for the 50 percent risk-weight category under the 
definition of ``qualifying multifamily mortgage loan'' in the OTS's 
previous capital rule and continue to satisfy the criteria of that 
definition, but do not satisfy all the criteria for inclusion in the 50 
percent risk-weight category under today's rule. Any ``grandfathered'' 
multifamily mortgage loan that does not remain in compliance with the 
requirements of the prior rule may requalify for the 50 percent risk-
weight category only by satisfying the criteria set forth in today's 
rule.
    Under today's rule, a multifamily mortgage loan5 must continue 
to meet the requisite criteria on an ongoing basis, unless otherwise 
specified, for the loan to remain in the 50 percent risk-weight 
category. A multifamily mortgage loan that does not remain in 
compliance with the requirements set forth in today's rule must be 
reassigned to the appropriate risk-weight category. The OTS notes that 
institutions may make multifamily mortgage loans that do not meet the 
criteria set forth in this rule so long as such loans conform with 
prudent underwriting standards. Such loans must be placed in the 
appropriate risk-weight category.
---------------------------------------------------------------------------

    \5\ Multifamily mortgage loans include loans secured by property 
that is used for some commercial purposes so long as the property is 
primarily a multifamily residence.
---------------------------------------------------------------------------

    Furthermore, purchasers of multifamily mortgage loans may look to 
the borrower's payment history with the selling institution and the 
characteristics of the purchased loans to determine compliance with the 
timely payments requirement and other qualifying criteria under this 
rule. Likewise, institutions with multifamily mortgage loans in their 
portfolio that did not qualify for a lower risk-weight under the OTS's 
previous risk-based capital rule may review the borrower's prior 
payment history to determine compliance with this rule's criteria.

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, it is 
certified that this rule will not have a significant economic impact on 
a substantial number of small entities. Loans on multifamily properties 
with a small number of units are already covered under the existing 
risk-based capital regulation and will continue to be covered under 
either the grandfathering provision or the new rule.

V. Executive Order 12866

    The OTS has determined that this final rule does not constitute a 
``significant regulatory action.''

VI. Effective Date

    This final multifamily rule is effective upon publication in the 
Federal Register without the 30-day delay of effective date provided 
for in the Administrative Procedure Act, 5 U.S.C. 553. The delayed 
effective date requirement may be waived for ``good cause.'' The OTS 
has determined that good cause exists to waive the delayed effective 
date requirement since the rule relieves a restriction on savings 
associations by permitting them to utilize a lower risk weight for 
eligible multifamily housing loans and securities collateralized by 
such loans in calculations of their risk-based capital ratios. This 
effective date will enable savings associations to use the reduced risk 
weight for multifamily housing loans in their Thrift Financial Report 
for the quarter ending March 31, 1994.
    One of today's amendments affects a credit risk-weight category at 
section 567.6(a)(1)(iii)(C), a section also amended by Interest Rate 
Risk. 58 FR 45813 (August 31, 1993). The Interest Rate Risk amendments 
to 567.6 were originally to become effective on July 1, 1994, when a 
savings association would first have been required to deduct an 
interest rate risk component in calculating its risk-based capital 
requirement. To simplify reporting requirements, the agency is changing 
the effective date of those amendments to September 30, 1994. OTS is 
therefore publishing on an interim basis section 567.6(a)(1)(iii)(C) as 
it will be in effect from March 18, 1994 through September 29, 1994. 
This reflects today's multifamily amendment to this section, but not 
the change that the interest rate risk amendments will make to that 
section. Section 567.6(a)(1)(iii)(C) as it will be in effect on and 
after September 30, 1994 follows.
    Finally, a conforming amendment is being made to section 567.7(a) 
to change the date the deduction of an institution's interest rate risk 
component becomes effective.

List of Subjects in 12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

    Accordingly, the Office of Thrift Supervision hereby amends part 
567, subchapter D, chapter V, title 12, Code of Federal Regulations as 
set forth below:

SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS

PART 567--CAPITAL

    1. The authority citation for part 567 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 
(note).

    2. Section 567.1 is amended by revising paragraph (v) to read as 
follows:


Sec. 567.1   Definitions.

* * * * *
    (v) Qualifying multifamily mortgage loan. (1) The term qualifying 
multifamily mortgage loan means a loan secured by a first lien on 
multifamily residential properties consisting of 5 or more dwelling 
units, provided that:
    (i) The amortization of principal and interest occurs over a period 
of not more than 30 years;
    (ii) The original minimum maturity for repayment of principal on 
the loan is not less than seven years;
    (iii) When considering the loan for placement in a lower risk-
weight category, all principal and interest payments have been made on 
a timely basis in accordance with its terms for the preceding year;
    (iv) The loan is performing and not 90 days or more past due;
    (v) The loan is made by the savings association in accordance with 
prudent underwriting standards; and
    (vi) If the interest rate on the loan does not change over the term 
of the loan:
    (A) The current loan balance amount does not exceed 80 percent of 
the value of the property securing the loan; and
    (B) For the property's most recent fiscal year, the ratio of annual 
net operating income generated by the property (before payment of any 
debt service on the loan) to annual debt service on the loan is not 
less than 120 percent, or in the case of cooperative or other not-for-
profit housing projects, the property generates sufficient cash flows 
to provide comparable protection to the institution; or
    (vii) If the interest rate on the loan changes over the term of the 
loan:
    (A) The current loan balance amount does not exceed 75 percent of 
the value of the property securing the loan; and
    (B) For the property's most recent fiscal year, the ratio of annual 
net operating income generated by the property (before payment of any 
debt service on the loan) to annual debt service on the loan is not 
less than 115 percent, or in the case of cooperative or other not-for-
profit housing projects, the property generates sufficient cash flows 
to provide comparable protection to the institution.
    (2) The term qualifying multifamily mortgage loan also includes a 
multifamily mortgage loan that on March 18, 1994 was a first mortgage 
loan on an existing property consisting of 5-36 dwelling units with an 
initial loan-to-value ratio of not more than 80% where an average 
annual occupancy rate of 80% or more of total units had existed for at 
least one year, and continues to meet these criteria.
    (3) For purposes of paragraphs (v)(1) (vi) to (vii) of this 
section, the term value of the property means, at origination of a loan 
to purchase a multifamily property: the lower of the purchase price or 
the amount of the initial appraisal, or if appropriate, the initial 
evaluation. In cases not involving purchase of a multifamily loan, the 
value of the property is determined by the most current appraisal, or 
if appropriate, the most current evaluation.
    (4) In cases where a borrower refinances a loan on an existing 
property, as an alternative to paragraphs (v)(1) (iii) and (vi) to 
(vii) of this section:
    (i) All principal and interest payments on the loan being 
refinanced have been made on a timely basis in accordance with the 
terms of that loan for the preceding year; and
    (ii) The net income on the property for the preceding year would 
support timely principal and interest payments on the new loan in 
accordance with the applicable debt service requirement.
* * * * *
    3. Section 567.6 is amended by revising paragraph (a)(1)(iii)(C) 
effective on March 18, 1994 through September 29, 1994, to read as 
follows:


Sec. 567.6   Risk-based capital credit risk-weight categories.

    (a) * * *
    (1) * * *
    (iii) * * *
    (C) Non-high-quality mortgage-related securities secured by or 
representing an interest in qualifying mortgage loans and qualifying 
multifamily mortgage loans, except for those with residual 
characteristics or stripped mortgage-related securities. If the 
security is backed by qualifying multifamily mortgage loans, the 
institution must receive timely payments of principal and interest in 
accordance with the terms of the security. Payments will generally be 
considered timely if they are not 30 days or more past due.
* * * * *
    4. Section 567.6 is amended by revising paragraph (a)(1)(iii)(C) 
effective September 30, 1994 to read as follows:


Sec. 567.6   Risk-based capital credit risk-weight categories.

    (a) * * *
    (1) * * *
    (iii) * * *
    (C) Non-high-quality mortgage-related securities secured by or 
representing an interest in qualifying mortgage loans and qualifying 
multifamily mortgage loans, except for collateralized mortgage 
obligation residual classes. If the security is backed by qualifying 
multifamily mortgage loans, the institution must receive timely 
payments of principal and interest in accordance with the terms of the 
security. Payments will generally be considered timely if they are not 
30 days or more past due.
* * * * *


Sec. 567.7   [Amended]

    5. Section 567.7 is amended by removing the word ``first'' in the 
fourth sentence of paragraph (a) and by adding in lieu thereof the word 
``last''.

    Dated: October 15, 1993.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-5452 Filed 3-17-94; 8:45 am]
BILLING CODE 6720-01-P