[Federal Register Volume 60, Number 130 (Friday, July 7, 1995)]
[Proposed Rules]
[Pages 35353-35361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16476]



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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. 95-16]
RIN 1557-AB48


Real Estate Lending and Appraisals

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) proposes 
to revise its rules governing real estate lending. This proposal is 
another component of the OCC's Regulation Review Program to update and 
streamline OCC regulations and to reduce unnecessary regulatory costs 
and other burdens. The proposal would modernize and clarify the real 
estate lending rules, reduce unnecessary regulatory burdens, and, 
consistent with statutory requirements, impose regulatory requirements 
only where needed to address safety and soundness concerns or 
accomplish other statutory responsibilities of the OCC.

DATES: Comments must be received by September 5, 1995.


[[Page 35354]]

ADDRESSES: Comments should be directed to: Office of the Comptroller of 
the Currency, Communications Division, 250 E Street SW., Washington, DC 
20219, Attention: Docket No. 95-16. Comments will be available for 
public inspection and photocopying at the same location.

FOR FURTHER INFORMATION CONTACT: Mark Tenhundfeld, Senior Attorney, 
Legislative and Regulatory Activities, (202) 874-5090; Laura Goldman, 
Attorney, Bank Activities and Structure, (202) 874-5300; Thomas Watson, 
National Bank Examiner, Credit and Management Policy, (202) 874-5170; 
Frank R. Carbone, National Bank Examiner, Credit and Management Policy, 
(202) 874-5170; or Roland G. Ullrich, National Bank Examiner, Consumer 
and Fiduciary Compliance, (202) 874-4866.

SUPPLEMENTARY INFORMATION:

Background

Summary of Regulation Review Program

    The OCC proposes to revise 12 CFR part 34 as another component of 
its Regulation Review Program (Program). The goal of the Program is to 
review all of the OCC's rules and to eliminate provisions that do not 
contribute significantly to maintaining the safety and soundness of 
national banks or to accomplishing the OCC's other statutory 
responsibilities. Another goal of the Program is to clarify regulations 
so that they more effectively convey the standards the OCC seeks to 
apply.
    The OCC intends for this proposal to reduce regulatory costs and 
other burdens on national banks by eliminating regulatory requirements 
that are neither essential to maintaining the safety and soundness of 
national banks nor needed to accomplish the OCC's statutory 
responsibilities. The proposal also would simplify and clarify the 
OCC's real estate lending regulations.

Discussion

    Part 34 consists of the following five subparts: Subpart A--
General; Subpart B--Adjustable-Rate Mortgages (ARMs); Subpart C--
Appraisals; Subpart D--Real Estate Lending Standards; and Subpart E--
Other Real Estate Owned (OREO). The OCC proposes to amend subparts A, 
B, and E. The OCC is not proposing to amend subpart C or D at this time 
because they recently were adopted on an interagency basis and the OCC 
wishes to gather additional information on their effectiveness before 
deciding whether to recommend an interagency effort to revise those 
subparts. Nevertheless, commenters are welcome to include comments on 
subparts C and D in addition to their comments on this proposal.
    Section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (12 U.S.C. 4803) requires the OCC to conduct a 
review of, among other things, the standards adopted by the OCC for 
real estate lending by national banks. These standards are set forth in 
subpart D of part 34. Pursuant to section 303, the OCC is to ``consider 
the impact that such standards have on the availability of credit for 
small business, residential, and agricultural purposes, and on low- and 
moderate-income communities.'' Id. The OCC welcomes comments on the 
impact that the standards, including the Guidelines for Real Estate 
Lending set forth at appendix A to subpart D, are having on the 
availability of the types of credit and communities noted previously.
    Most of the proposed changes in subparts A, B, and E clarify and 
simplify the current rule. The proposal removes provisions that merely 
repeat statutes or that are otherwise redundant, and reorders or 
renumbers certain other provisions to improve clarity. The proposal 
also adds a new provision to summarize the OCC's general approach to 
questions of Federal preemption of State laws governing real estate. 
(That provision does not expand the scope of State law preemption 
beyond what appears in the current rule.) Finally, the proposal amends 
the provisions governing disposition of leases that are treated as OREO 
to suspend the running of the divestiture period under certain 
circumstances.
    The following discussion identifies and explains material proposed 
changes to part 34. The OCC invites general comments on all aspects of 
the proposed regulation as well as specific comments on the proposed 
changes. The OCC also welcomes any additional comments relevant to this 
proposal.
    A derivation table comparing the sections of proposed part 34 to 
those of current part 34 follows this section of the preamble.

Subpart A--General

Purpose and Scope (Section 34.1)
    A national bank may make real estate loans under the authority 
provided in 12 U.S.C. 371 and 12 U.S.C. 24(Seventh). Part 34 currently 
identifies (in Sec. 34.3) loans that are not considered ``real estate 
loans'' for purposes of 12 U.S.C. 371 but which national banks 
nevertheless may make pursuant to 12 U.S.C. 24(Seventh). The proposal 
removes the list in Sec. 34.3 because it is unnecessary (see discussion 
of ``Loans not constituting real estate loans,'' infra). The proposal 
also eliminates cross-references in Sec. 34.1 to that list. However, 
since current paragraphs (f) and (g) of Sec. 34.3 contain an exception 
to the regulation's scope, the proposal incorporates the substance of 
those provisions into the proposed ``Scope'' section of the revised 
regulation.
    The proposal also relocates the text that currently appears in 
Sec. 34.1(a), authorizing national banks to engage in real estate-
related transactions, to proposed Sec. 34.3. This conforms the order of 
subpart A of part 34 to that of other OCC rules. Finally, the proposal 
sets forth a statement of the purpose of part 34.
Definitions (Proposed Section 34.2)
    The proposal places definitions used in subpart A in one location. 
The definition of ``due-on-sale clause'' is moved from current 
Sec. 34.4 to proposed Sec. 34.2 without any change to the definition's 
substance. The proposal adds definitions of ``State'' and ``State law 
limitations'' to avoid restating of the full scope of preemption in 
every section that refers to preemption. These definitions effect no 
substantive changes.
General Rule (Proposed Section 34.3)
    Current Sec. 34.1(a) sets forth the general rule authorizing 
national banks to engage in real estate lending and related 
transactions. The proposal relocates this general rule to a new section 
to conform the order of subpart A of part 34 to that followed in other 
OCC regulations.
Loans Not Constituting Real Estate Loans (Current Sec. 34.3--Removed)
    Current Sec. 34.3 lists several types of loans that are not 
considered real estate loans for purposes of part 34, but are 
permissible for national banks under 12 U.S.C. 24(Seventh). The current 
provision is confusing and unnecessary. Therefore, the proposal removes 
Sec. 34.3 in its entirety.
    After 12 U.S.C. 371 was amended in 1982, the OCC added the list in 
question to part 34 (48 FR 40701 (September 9, 1983)) to insure that 
any restrictions resulting from further amendment of 12 U.S.C. 371 
would not apply to the types of loans identified as permissible 
pursuant to 12 U.S.C. 24(Seventh). If Congress amends 12 U.S.C. 371 
again, the OCC will consider whether it is necessary to amend part 34 
to identify types of loans that are deemed by the OCC not to be real 
estate loans for purposes of that section. 

[[Page 35355]]

Applicability of Law (Proposed Sec. 34.4)
    The current rule states specific areas where Federal law preempts 
State law governing real estate lending by national banks. The proposal 
retains this statement of preemption in order to provide continued 
guidance about specific areas where Federal law preempts State law. 
However, the proposal removes the unnecessary reminder, found at 
current Sec. 34.2(b), that national banks must comply with applicable 
laws.
    Proposed Sec. 34.4(b) adds a general statement of the OCC's 
position with respect to preemption to clarify that the list of areas 
where State law is preempted, carried over from the current rule, is 
not exhaustive. The proposed rule clarifies that the OCC will apply 
traditional principles of Federal preemption when determining whether a 
State law affecting real estate lending is preempted. Under these 
principles, State laws apply to national banks unless the State law 
expressly or impliedly conflicts with Federal law, the State law stands 
as an obstacle to the accomplishment of the full purposes and 
objectives of the Federal law, or Federal law is so comprehensive as to 
evidence a Congressional intent to occupy a given field.1

    \1\ The Supreme Court's most recent discussion of the principles 
of Federal preemption may be found in Gade v. National Solid Wastes 
Management Ass'n, 120 L. Ed. 2d 73 (1992), in which the Court 
stated:
    As both the majority and dissent acknowledge, we have identified 
three circumstances in which a federal statute pre-empts state law: 
First, Congress can adopt express language defining the existence 
and scope of pre-emption. Second, state law is pre-empted where 
Congress creates a scheme of federal regulation so pervasive as to 
leave no room for supplementary state regulation. And third, ``state 
law is pre-empted to the extent that it actually conflicts with 
federal law.'' This third form of pre-emption, so-called actual 
conflict pre-emption, occurs either ``where it is impossible for a 
private party to comply with both state and federal requirements . . 
. or where state law 'stands as an obstacle to the accomplishment 
and execution of the full purposes and objectives of Congress.' '' 
120 L. Ed. 2d at 91 (Kennedy, J., concurring; citations omitted). 
The plurality and dissenting opinions in Gade contain essentially 
the same formulation. See id. at 84 and 95, respectively.
Due-On-Sale Clauses (Proposed Section 34.5)
    Current Sec. 34.4 authorizes a national bank to make or acquire a 
loan secured by a lien on real property that includes a due-on-sale 
clause, and preempts State law to the contrary. The rule also states 
that due-on-sale clauses in transfers described in 12 U.S.C. 1701j-3(d) 
are not enforceable.
    The OCC proposes to modify this section to improve clarity and to 
remove unnecessary restatements of statutory provisions. The proposed 
descriptions of the terms ``real property'' and ``lender'' remove 
provisions that merely restate the statute. However, the proposal 
intends no change in the substance of those descriptions.

Subpart B--ARMs

    The proposal renumbers current sections in subpart B, beginning 
with proposed Sec. 34.20, in order to permit future additions to 
subpart A with minimum disruption.
Definitions (proposed Section 34.20)
    Current Sec. 34.5 contains definitions of ``adjustable-rate 
mortgage loan'' (ARM loan) and ``consumer credit.'' Proposed Sec. 34.20 
amends the definition of ``ARM loan'' by deleting the provisions, found 
in current Sec. 34.5(a)(2), that exempt fixed-rate extensions of credit 
that are payable either on demand or without any interim amortization. 
Earlier OCC definitions of ``ARM loan'' included certain fixed-rate 
loan transactions, unless a lender gave the disclosures required to 
exempt the transaction from the regulation's coverage. (See, e.g., 48 
FR 9506 (March 7, 1983).) The OCC amended its rule in 1988 (53 FR 7885 
(March 11, 1988)) to remove those disclosure requirements, and 
clarified that the fixed-rate extensions in question would not be 
considered to be ARM loans. While the express exemptions were helpful 
when the disclosure requirement was removed in 1988, such exemptions no 
longer are necessary.
    The OCC seeks comment on whether it remains necessary or 
appropriate to exempt from the definition of ``ARM loan'' fixed-rate 
loans that are payable at the end of a term that, when added to all 
terms for which the bank has promised to refinance the loan, is shorter 
than the term of the amortization schedule. This exemption is similar, 
but not identical, to the treatment of variable-rate transactions in 
Regulation Z (Reg. Z, 12 CFR part 226) of the Board of Governors of the 
Federal Reserve System (the Federal Reserve). For instance, a loan that 
a bank has guaranteed to renew for a total period that is shorter than 
the life of the mortgage is not an ARM loan under part 34. (See 12 CFR 
34.5(a)(2)(ii).) It is, however, a variable-rate transaction under Reg. 
Z. (See Commentary to Sec. 226.17(c)(1), Comment 11, first bullet.) 
This distinction requires lenders to understand and apply two different 
standards, depending on the purpose being served.
    The practical effect of this distinction is that national banks 
making balloon notes that are renewable for a total period shorter than 
the amortization schedule do not have to use an independent index in 
adjusting the interest rate on such loans. The distinction also raises 
the issue of whether banks find it unnecessarily burdensome to comply 
with the different rules.
    Whatever burden that is created by the current difference could be 
eliminated by deleting all current exemptions from the OCC's definition 
of ARM loan and clarifying that a balloon note that a bank guarantees 
to renew will be treated as an ARM loan if the bank may adjust the 
interest rate upon renewal. This would result, however, in more loans 
being considered to be ARM loans, thereby increasing the number of 
loans for which a bank would have to use an index beyond the bank's 
control.
    The OCC seeks comment on (1) whether the current difference between 
part 34 and Reg. Z poses an unnecessary burden, and (2) whether banks 
favor amending part 34 to eliminate the difference, notwithstanding 
that such approach would result in more loans being subject to the 
requirement that a bank use an index beyond its control.
    In addition to the changes noted, the proposal makes stylistic 
changes to the definition of ``ARM loan.'' The proposal also deletes 
the definition of ``consumer credit,'' because other changes make the 
definition unnecessary (see discussion of ``Rate changes (current 
Sec. 34.8)'' and ``Disclosure (current Sec. 34.10)''). In order to 
consolidate all definitions used in subpart B, the proposal relocates 
to proposed Sec. 34.20 the definitions of ``affiliate'' and 
``subsidiary'' currently found in Sec. 34.6(b). Finally, the proposal 
uses the term ``renewal'' instead of ``refinance'' as that term is used 
in current Sec. 34.5(a)(2) in order to avoid creating the impression 
that the OCC rule applies to refinancings as that term is narrowly 
defined in Reg. Z.
General Rule (Proposed Section 34.21)
    Current Sec. 34.6 provides that national banks and their 
subsidiaries may make, sell, purchase, participate, or otherwise deal 
in ARM loans, notwithstanding any State law to the contrary. National 
banks may purchase or participate in ARM loans that were not made in 
accordance with the OCC's regulations, except that loans purchased from 
an affiliate or subsidiary must comply with part 34. The proposal makes 
only minor changes to simplify the general rule.
Index (Proposed Section 34.22)
    Current Sec. 34.7 requires ARM loans that are subject to 12 CFR 
226.19(b) to specify an index to which changes in the interest rate 
shall be linked. The 

[[Page 35356]]
index is to be readily available to, and verifiable by, the borrower. 
It also must be beyond the control of the lending bank. Proposed 
Sec. 34.22 makes no changes to the substance of current Sec. 34.7.
Rate changes (Current Section 34.8)
    Current Sec. 34.8 sets forth the limitation found in section 1204 
of the Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86, 
100 Stat. 552 (12 U.S.C. 3806(a)), which requires a consumer credit ARM 
loan to include a limitation on the maximum rate of interest that may 
apply during the term of the loan. The proposal removes Sec. 34.8 
because it is an unnecessary restatement of the statute. Moreover, CEBA 
vests rulemaking authority with the Federal Reserve, which has 
implemented section 1204 of CEBA at 12 CFR 226.30.
Prepayment Fees (Proposed Section 34.23)
    Current Sec. 34.9 provides that national banks may impose fees for 
prepayments of ARM loans, notwithstanding any State law to the 
contrary. The proposal makes no substantive change to this section.
Disclosure (Current Section 34.10)
    This section requires a national bank that offers consumer ARM 
loans to provide the disclosures required by the Truth-in-Lending Act 
(15 U.S.C. 1601, et seq.), as implemented by the Federal Reserve in 
Reg. Z.
    Earlier versions of the OCC rule regarding disclosure requirements 
made this statement appropriate at one time. Previously, the OCC's rule 
required specific ARM loan disclosures that were similar to that now 
required by Reg. Z. See, e.g., 48 FR 9506 (March 7, 1983); 46 FR 18943 
(March 27, 1981). In 1987, the OCC proposed to amend its rule to 
eliminate those disclosure requirements since they were redundant in 
light of Reg. Z, but also proposed to include a reminder to national 
banks that documents evidencing ARM loans, as that term was defined in 
the proposal, still were to contain the Reg. Z disclosures. 52 FR 36958 
(October 2, 1987). Ultimately, this proposal was adopted (53 FR 7885 
(March 11, 1988)), thereby eliminating overlap between the two 
regulations.
    The proposed rule that was promulgated in 1987 defined ``ARM loan'' 
in a way that made it appropriate to clarify that only ARM loans to 
consumers needed to comply with the disclosure requirements set forth 
in Reg. Z. The 1987 proposal defined ``ARM loan'' as applying to an 
``extension of consumer credit,'' which raised questions concerning the 
permissibility under part 34 of making ARM loans to businesses. To 
address this concern, the final rule adopted in 1988 used the 
definition of ``ARM loan'' that appears in the current regulation and 
clarified in Sec. 34.10 that the disclosures required under Reg. Z must 
be provided only to consumers in ARM loan transactions.
    The OCC believes that the reminder to comply with Reg. Z 
disclosures when making a consumer ARM loan was appropriate when the 
OCC-imposed disclosure requirements were removed, but now is 
unnecessary. Accordingly, the proposal removes this section in its 
entirety. The proposal also removes the term ``consumer credit,'' since 
it was used only in Sec. 34.10.
Nonfederally Chartered Commercial Banks (Proposed Section 34.24)
    Section 807(b) of the Garn-St Germain Act (Pub. L. 97-320, 96 Stat. 
1545 (12 U.S.C. 3801 note)) requires the OCC to identify those 
provisions of its ARM regulation that are inappropriate for 
nonfederally chartered banks. In implementing section 807(b), the OCC 
determined that all of the provisions of subpart B were appropriate, 
and so stated in current Sec. 34.11. Proposed Sec. 34.25 retains this 
statement in order to comply with the statute, and removes certain 
unnecessary citations to statutory authority.
Transition Rule (Proposed Section 34.25)
    Current Sec. 34.12 provides that national banks were authorized to 
make or administer loans during a ``window period'' beginning on the 
date the current rule was adopted (March 11, 1988) and ending October 
1, 1988, if the loans complied with the OCC rules in effect before the 
March 11, 1988 amendment. Following October 1, 1988, all ARM loans have 
been required to comply with part 34, as revised.
    The proposed changes remove what are now unnecessary references to 
the window period. The proposal retains the remainder of this section 
to assist the reader who wishes to determine if a given loan complied 
with applicable laws in effect when the loan was made. Commenters are 
requested to address whether retention of this provision is still 
useful.

Subpart C--Appraisals

    The OCC is not proposing any changes to the rules governing the use 
of appraisals.

Subpart D--Real Estate Lending Standards

    The OCC is not proposing any changes to the real estate lending 
standards.

Subpart E--OREO

Definitions (Section 34.81)
    Current Sec. 34.81 contains the definitions used in subpart E. The 
proposal makes two changes to these definitions in addition to 
stylistic edits. First, proposed Sec. 34.81 defines OREO to include 
only ``debts previously contracted'' (DPC) real estate and former 
banking premises. The proposal removes the term ``covered transactions 
real estate'' from the definition of OREO, thereby rendering the 
definition of covered transactions real estate unnecessary. Second, the 
proposal removes the term ``transaction value'' and corresponding 
definition. These proposed changes are addressed in order, below.
    The current rule defines covered transactions real estate as DPC 
property or former banking premises that a national bank is in the 
process of selling in accordance with current Sec. 34.83(a)(6) (i.e., 
receiving at least 10 percent of the property's sales price through 
cash, principal and interest payments, and/or private mortgage 
insurance). However, there is no special rule for the divestiture or 
disposition of covered transactions real estate. The regulation treats 
such real estate as OREO, and imposes the same requirements as are 
imposed on other forms of OREO. Accordingly, there is no reason to 
identify covered transaction real estate as a special class of OREO 
property.
    This proposed change to the definition of OREO is not intended to 
change the ability of national banks to dispose of OREO through the 
means specified in current Sec. 34.83(a)(6). Rather, it is intended 
simply to remove a term that is unnecessary and potentially confusing.
    The proposal also removes the term ``transaction value'' because 
it, too, is unnecessary and potentially confusing. Current subpart E of 
part 34 defines transaction value as ``the recorded investment 
amount,'' a term that also is defined. However, subpart C defines 
``transaction value'' differently, creating potential confusion. Since 
``transaction value'' is used only once in part 34 (in current 
Sec. 34.84(a)(1)(ii)) outside of the current definition section in 
subpart E, and since the entire substance of that term's definition is 
``the recorded investment amount,'' the OCC proposes to replace 
``transaction value'' with 

[[Page 35357]]
``recorded investment amount'' in Sec. 34.85(a)(1)(ii).
Holding Period (Section 34.82)
    Current Sec. 34.82 restates those provisions of the statute that 
govern how long a national bank may hold OREO. It also identifies when 
the holding period begins, and clarifies that a statutory redemption 
period imposed by State law will delay the beginning of when the 
holding period runs.
    Proposed Sec. 34.82 is similar to current Sec. 34.82. The proposed 
rule clarifies, in Sec. 34.82(b)(2), that the holding period begins on 
the date that a national bank abandons former banking premises without 
relocating to another site (such as might happen when a branch is 
closed). The proposed rule also makes changes to improve clarity and to 
remove provisions that are redundant in light of 12 U.S.C. 29. The 
proposal relocates the requirement that a national bank dispose of OREO 
when prudent judgment dictates from Sec. 34.83 (which addresses the 
method of disposition) to Sec. 34.82 (which addresses timing of 
disposition). Finally, proposed Sec. 34.82 retains a statement 
regarding a bank's obligation to dispose of OREO. This statement 
clarifies that OREO, as defined in the regulation, is subject to the 
divestiture provisions. Without such a statement, questions might 
remain concerning whether the five-year holding period (and any 
extension thereof) would be available for the disposition of certain 
types of properties (such as former banking premises that become OREO).
Disposition of Real Estate (Section 34.83)
    Currently, Sec. 34.83(a)(5) permits disposition of leases only 
through assignment or a ``coterminous sublease'' (i.e., a lease with 
the same duration as the remainder of the master lease). Many national 
banks hold long-term leases and are unable either to assign them or to 
find a coterminous sublessee, notwithstanding the bank's best efforts 
to do so. As industry consolidation and technological advances further 
reduce the need for branch office space, this problem likely will 
become more severe.
    A bank has the option of entering into non-coterminous subleases in 
order to minimize financial losses stemming from a long-term lease. 
However, the OCC currently does not recognize the entering into a non-
coterminous sublease as a ``disposition'' of the OREO for purposes of 
part 34, thus resulting in a bank being cited for a violation of law 
even though the bank is attempting in good faith to comply. To address 
this problem, proposed Sec. 34.83(a)(3) permits the divestiture period 
to be suspended for the duration of a non-coterminous sublease.
    The following example illustrates how this change would work. 
Assume that a national bank holds a 30-year lease and, after one year 
from the date the lease becomes OREO, the bank finds a sublessee 
willing to sublease the property for ten years. At the end of that 10-
year sublease, the bank, under the proposed rule, would have four years 
remaining in the initial 5-year divestiture period within which to 
assign the lease or find a sublessee. If the bank enters into another 
non-coterminous sublease, then, at the expiration of that sublease, the 
bank would have the unused portion of the divestiture period in which 
to dispose of the property or enter into another sublease.
    The OCC believes that this proposal is consistent with 12 U.S.C. 
29. The statute precludes the ``possession of any real estate under 
mortgage, or the title and possession of any real estate purchased to 
secure any debts due to it,'' for a period exceeding five years (or ten 
years, if the initial period is extended by the OCC). This mandatory 
divestiture provision is silent with respect to leases. The OCC 
previously concluded that it is appropriate, for safety and soundness 
reasons, to treat leases as OREO and require their disposition within 
the same divestiture period as applies to other types of OREO property. 
Experience has shown, however, that implementation of 12 U.S.C. 29 can 
produce an unnecessarily harsh result when the property in question is 
a long-term lease. The OCC has reexamined its current position and has 
determined that when property is leased pursuant to a bona fide lease, 
the element of ``possession'' that is key to the limitations of 12 
U.S.C. 29 may not be present. Therefore, the OCC believes that when a 
bank leases premises pursuant to a bona fide lease, 12 U.S.C. 29 
provides a basis to take a more flexible approach to leaseholds that 
become OREO.
    This option would be available, however, only if the bank in 
question acts in good faith in acquiring the lease. The OCC remains 
concerned about banks speculating in real estate, and, therefore, would 
retain the discretion under the proposed rule to require a bank to take 
immediate steps to divest a lease if the OCC determines that the bank 
is engaged in speculation. Thus, for instance, if a bank originates 
several long-term leases ostensibly for future bank use but soon 
thereafter converts the leases to OREO and subleases them to non-
coterminous sublessees, the OCC would have the right under the proposed 
rule to deem the divestiture period not to have been suspended. In such 
a situation, the bank also risks being cited for acquiring real estate 
in violation of 12 U.S.C. 29.
    The OCC seeks comment on the appropriateness of permitting the 
suspension of the divestiture period in the manner described above.
    The proposal makes numerous stylistic changes to Sec. 34.83 that 
simplify the current regulation and eliminate unnecessary repetition. 
The proposal modifies Sec. 34.83(b) to clarify that disposition efforts 
must be ongoing throughout the disposition period. Finally, as 
previously noted, the proposal relocates the provision in current 
Sec. 34.83 (requiring disposition when prudent judgment dictates) to 
proposed Sec. 34.82.
Future Bank Expansion (Proposed Section 34.84)
    Proposed Sec. 34.84 creates a new section for the OCC's rule on 
future bank expansion that currently appears as part of Sec. 34.83. The 
OCC intends for this new section to make the future bank expansion rule 
easier to locate.
Appraisal Requirements (Proposed Section 34.85)
    Current Sec. 34.84 provides that a national bank should obtain 
either an appraisal or evaluation, as appropriate under 12 CFR part 34, 
subpart C, when real estate is transferred to OREO or when OREO is 
sold. The current rule provides an exception to this requirement if a 
national bank already has a valid appraisal or evaluation for the 
property in question. Banks are to monitor the value of each parcel of 
OREO in a manner consistent with prudent banking practice.
    The proposal makes no substantive change to this section. As noted 
above in the discussion of the definition section of subpart E, the 
proposal removes the term ``transaction value'' and uses ``recorded 
investment amount'' in lieu thereof.
Additional Expenditures and Notification (Proposed Section 34.86)
    The current rule, which is set out in Sec. 34.85, specifies that 
national banks are to notify the OCC at least 30 days prior to 
implementing a development or improvement plan for OREO when the 
estimated cost of the plan exceeds a specified threshold. The rule 
makes exceptions to this notice requirement for re-fitting existing 
buildings and for normal repairs. The rule also specifies that national 
banks may make ``prudent advances'' to complete a project 

[[Page 35358]]
involving OREO if the advances are reasonably calculated to reduce any 
shortfall between the parcel's market value and the bank's recorded 
investment amount, and if they are not made for the purpose of 
speculating in real estate. The remaining provisions of Sec. 34.86 
clarify the procedures to be followed under this subsection.
    The proposal moves the exceptions to the notice requirements to 
proposed Sec. 34.85(b)(1). No change in the substance of the procedures 
is proposed, however. The proposal rewords current Sec. 34.85(b)(3) 
(proposed new Sec. 34.86(b)(3)) to simplify the procedures for 
informing banks of the OCC's decision regarding proposed additional 
expenditures.
    The OCC also seeks comment on whether the current standard 
regarding completion of OREO development or improvement projects 
provides sufficient guidance, or whether a different standard would be 
appropriate for additional expenditures made in connection with OREO 
development or improvement.
Accounting Treatment (Proposed Section 34.87)
    The current rule specifies that OREO reporting should conform to 
instructions in the Consolidated Report of Condition and Income. The 
proposal retains this provision.
Application (Current Section 34.88)
    Current Sec. 34.88 provides that subpart E is applicable to all 
OREO held by a national bank, including OREO in existence since 
September 17, 1993. The proposal removes this provision since it is 
unnecessary and potentially confusing.
    The following table directs readers to the provision(s) of the 
current regulation, if any, upon which the proposed provision is based, 
and identifies generally the action taken.

                            Derivation Table                            
------------------------------------------------------------------------
       Revised section            Original section          Comments    
------------------------------------------------------------------------
34.1(a).....................  ........................  Added.          
34.1(b).....................  34.1(b).................  Modified.       
34.2(a).....................  34.4(a).................  Modified.       
34.2(b).....................  ........................  Added.          
34.2(c).....................  ........................  Added.          
34.3........................  34.1(a).................  Modified.       
34.4(a).....................  34.2(a).................  Modified.       
34.4(b).....................  ........................  Added.          
                              34.2(b).................  Removed.        
                              34.3....................  Removed.        
34.5........................  34.4(a).................  Modified.       
34.5........................  34.4(b).................  Modified.       
34.20(a)....................  34.5(a).................  Modified.       
34.20(b)....................  34.6(b).................  No change.      
34.20(c)....................  34.6(b).................  No change.      
34.21(a)....................  34.6(a).................  Modified.       
34.21(b)....................  34.6(b).................  Modified.       
34.22.......................  34.7....................  Modified.       
                              34.8....................  Removed.        
34.23.......................  34.9....................  Modified.       
                              34.10...................  Removed.        
34.24.......................  34.11...................  Modified.       
34.25.......................  34.12...................  Modified.       
34.81(a)....................  ........................  Added.          
                              34.81(b)................  Removed.        
34.81(b)....................  34.81(c)................  No change.      
34.81(c)....................  34.81(d)................  No change.      
34.81(d)....................  34.81(e)................  No change.      
34.81(e)....................  34.81(a)................  Modified.       
34.81(f)....................  34.81(f)................  No change.      
                              34.81(g)................  Removed.        
34.82(a)....................  34.82(a)................  Modified.       
34.82(b)....................  34.82(b)................  Modified.       
34.82(c)....................  34.82(c)................  Modified.       
34.82(a)....................  34.83(a)................  Modified.       
34.83(a)(1)(i)..............  34.83(a)(1).............  Modified.       
34.83(a)(1)(ii).............  34.83(a)(2).............  Modified.       
34.83(a)(1)(iii)............  34.83(a)(3).............  Modified.       
34.83(a)(2).................  34.83(a)(4).............  Modified.       
34.83(a)(3).................  34.83(a)(5).............  Modified.       
34.83(a)(4).................  34.83(a)(6).............  Modified.       
34.83(b)....................  34.83(b)................  Modified.       
34.84.......................  34.83(c)................  No change.      
34.85(a)....................  34.84(a)................  Modified.       
34.85(b)....................  34.84(b)................  Modified.       
34.85(c)....................  34.84(c)................  Modified.       
34.86(a)(1).................  34.85(a)(2)(i)..........  No change.      
34.86(a)(2).................  34.85(a)(2)(ii).........  No change.      
34.86(a)(3).................  ........................  Added.          
34.86(b)....................  34.85(b)................  Modified.       
34.86(b)(1).................  34.85(a)(1).............  Modified.       

[[Page 35359]]
                                                                        
34.87.......................  34.86...................  No change.      
                              34.87...................  Removed.        
------------------------------------------------------------------------


Regulatory Flexibility Act

    It is hereby certified that this regulation will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required. This 
regulation will reduce the regulatory burden on national banks, 
regardless of size, by simplifying and clarifying current regulatory 
requirements.

Executive Order 12866

    The OCC has determined that this proposal is not a significant 
regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates 
Act) requires that an agency prepare a budgetary impact statement 
before promulgating a Notice of Proposed Rulemaking (NPRM) likely to 
result in a rule that includes a Federal mandate that may result in the 
annual expenditure of $100 million or more in any one year by State, 
local, and tribal governments, in the aggregate, or by the private 
sector. If a budgetary impact statement is required, section 205 of the 
Unfunded Mandates Act requires an agency to identify and consider a 
reasonable number of alternatives before promulgating an NPRM. The OCC 
has determined that the rule will not result in expenditures by State, 
local, and tribal governments, or by the private sector, of more than 
$100 million in any one year. Accordingly, the OCC has not prepared a 
budgetary impact statement or specifically addressed the regulatory 
alternatives considered. As discussed in the preamble, the rule will 
reduce unnecessary burdens on national banks seeking to engage in real 
estate lending.

List of Subjects in 12 CFR Part 34

    Mortgages, National banks, Reporting and recordkeeping 
requirements.

Authority and Issuance

    For the reasons set out in the preamble, the OCC proposes to amend 
part 34 of chapter I of title 12 of the Code of Federal Regulations as 
set forth below:

PART 34--REAL ESTATE LENDING AND APPRAISALS

    1. The authority citation for part 34 is revised to read as 
follows:

    Authority: 12 U.S.C. 1 et seq., 29, 93a, 371, 1701j-3, 1828(o), 
and 3331 et seq.

    2. Part 34 is amended by revising subparts A, B, and E to read as 
follows:

Subpart A--General

Sec.
34.1  Purpose and scope.
34.2  Definitions.
34.3  General rule.
34.4  Applicability of State law.
34.5  Due-on-sale clauses.

Subpart B--Adjustable-Rate Mortgages

34.20  Definitions.
34.21  General rule.
34.22  Index.
34.23  Prepayment fees.
34.24  Nonfederally chartered commercial banks.
34.25  Transition rule.

Subpart C--Appraisals

* * * * *

Subpart D--Real Estate Lending Standards

* * * * *

Subpart E--Other Real Estate Owned

34.81  Definitions.
34.82  Holding period.
34.83  Disposition of real estate.
34.84  Future bank expansion.
34.85  Appraisal requirements.
34.86  Additional expenditures and notification.
34.87  Accounting treatment.

Subpart A--General


Sec. 34.1  Purpose and scope.

    (a) Purpose. The purpose of this part is to set forth standards for 
real estate-related lending and associated activities by national 
banks.
    (b) Scope. For the purposes of 12 U.S.C. 371 and subparts A and B 
of this part, loans secured by liens on interests in real estate 
include loans made upon the security of condominiums, leaseholds, 
cooperatives, forest tracts, land sales contracts, and construction 
project loans. Construction project loans are not subject to subparts A 
and B, however, if they have a maturity not exceeding 60 months and are 
made to finance the construction of either:
    (1) A building where there is a valid and binding agreement entered 
into by a financially responsible lender or other party to advance the 
full amount of the bank's loan upon completion of the building; or
    (2) A residential or farm building.


Sec. 34.2  Definitions.

    (a) Due-on-sale clause means any clause that gives the lender or 
any assignee or transferee of the lender the power to declare the 
entire debt payable if all or part of the legal or equitable title or 
an equivalent contractual interest in the property securing the loan is 
transferred to another person, whether by deed, contract, or otherwise.
    (b) State means any State of the United States of America, the 
District of Columbia, Puerto Rico, the Virgin Islands, the Northern 
Mariana Islands, American Samoa, and Guam.
    (c) State law limitations means any State statute, regulation, 
ruling, or order of any State agency, or judicial decision regarding a 
State statute, regulation, ruling, or order.


Sec. 34.3  General rule.

    A national bank may make, arrange, purchase, or sell loans or 
extensions of credit, or interests therein, that are secured by liens 
on, or interests in, real estate, subject to terms, conditions, and 
limitations prescribed by the Comptroller of the Currency by order, 
rule, or regulation.


Sec. 34.4  Applicability of State law.

    (a) Specific preemption. National banks may make real estate loans 
under 12 U.S.C. 371 and Sec. 34.3 without regard to State law 
limitations as to:
    (1) The amount of a loan in relation to the appraised value of the 
real estate;
    (2) The schedule for the repayment of principal and interest;
    (3) The term to maturity of the loan;
    (4) The aggregate amount of funds that may be loaned upon the 
security of real estate; and
    (5) The covenants and restrictions that must be contained in a 
lease to qualify the leasehold as acceptable security for a real estate 
loan.
    (b) General standards. The OCC will apply recognized principles of 
Federal preemption in considering whether State laws apply to other 
real estate lending activities of national banks.


Sec. 34.5  Due-on-sale clauses.

    A national bank may make or acquire a loan or interest therein, 
secured by a 

[[Page 35360]]
lien on real property, that includes a due-on-sale clause. Except as 
set forth in 12 U.S.C. 1701j-3(d) (which contains a list of 
transactions in which due-on-sale clauses may not be enforced), due-on-
sale clauses in loans, whenever originated, shall be valid and 
enforceable for transfers of the secured property occurring after 
December 8, 1983, notwithstanding any State law limitations to the 
contrary. For the purposes of this section, the term real property 
includes residential dwellings such as condominium units, cooperative 
housing units, and residential manufactured homes, and the term lender 
means a government agency or person, including a corporation, 
partnership, trust, or association, making a real property loan, or any 
assignee or transferee, in whole or in part, of that person or agency.

Subpart B--Adjustable-Rate Mortgages


Sec. 34.20  Definitions.

    (a) Adjustable-rate mortgage (ARM) loan means an extension of 
credit made to finance or refinance the purchase of, and secured by a 
lien on, a one-to-four family dwelling, including a condominium unit, 
cooperative housing unit, or residential manufactured home, where the 
lender, pursuant to an agreement with the borrower, may adjust the rate 
of interest from time to time. This term does not apply to fixed-rate 
extensions of credit that are payable at the end of a term that, when 
added to any terms for which the bank has promised to renew the loan, 
is shorter than the term of the amortization schedule.
    (b) Affiliate has the same meaning as in 12 U.S.C. 371c.
    (c) Subsidiary has the same meaning as in 12 U.S.C. 371c.


Sec. 34.21  General rule.

    (a) Authorization. National banks and their subsidiaries may make, 
sell, purchase, participate in, or otherwise deal in ARM loans and 
interests therein without regard to any State law limitations on those 
activities.
    (b) Purchase of loans not in compliance. National banks may 
purchase or participate in ARM loans that were not made in accordance 
with this part, except that loans purchased, in whole or in part, from 
an affiliate or subsidiary must comply with this part.


Sec. 34.22  Index.

    If a national bank makes an ARM loan to which 12 CFR 226.19(b) 
applies (i.e., the annual percentage rate of a loan may increase after 
consummation, the term exceeds one year, and the consumer's principal 
dwelling secures the indebtedness), the loan documents must specify an 
index to which changes in the interest rate charged will be linked. 
This index must be readily available to, and verifiable by, the 
borrower and beyond the control of the bank. A national bank may use as 
an index any measure of market rates of interest that meets these 
requirements. The index may be either single values of the chosen 
measure or a moving average of the chosen measure calculated over a 
specified period.


Sec. 34.23  Prepayment fees.

    A national bank offering or purchasing ARM loans may impose fees 
for prepayments notwithstanding any State law prohibitions of, or 
limitations on, those fees. For the purpose of this part, prepayments 
do not include:
    (a) Payments that exceed the required payment amount to avoid or 
reduce negative amortization; or
    (b) Principal payments, in excess of those necessary to retire the 
outstanding debt over the remaining loan term at the then-current 
interest rate, that are made in accordance with rules governing the 
determination of monthly payments contained in the loan documents.


Sec. 34.24  Nonfederally chartered commercial banks.

    Pursuant to 12 U.S.C. 3803(a), nonfederally chartered commercial 
banks may make ARM loans in accordance with the provisions of this 
subpart.


Sec. 34.25  Transition rule.

    If, on October 1, 1988, a national bank had made a loan or binding 
commitment to lend under an ARM loan program that complied with the 
requirements of 12 CFR part 29 in effect prior to October 1, 1988 (See 
12 CFR Parts 1 to 199, revised as of January 1, 1988) but would have 
violated any of the provisions of this subpart, the national bank may 
continue to administer the loan or binding commitment to lend in 
accordance with that loan program. All ARM loans or binding commitments 
to make ARM loans that a national bank entered into after October 1, 
1988, must comply with all provisions of this subpart.

Subpart C--Appraisals

* * * * *

Subpart D--Real Estate Lending Standards

* * * * *

Subpart E--Other Real Estate Owned


Sec. 34.81  Definitions.

    (a) Capital means:
    (1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-
based capital under the OCC's Minimum Capital Ratios in appendix A of 
12 CFR part 3; plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's Tier 2 capital, for purposes of the calculation 
of risk-based capital under 12 CFR part 3.
    (b) Debts previously contracted (DPC) real estate means real estate 
(including capitalized and operating leases) acquired by a national 
bank through any means in full or partial satisfaction of a debt 
previously contracted.
    (c) Former banking premises means real estate (including 
capitalized and operating leases) for which banking use no longer is 
contemplated. This includes real estate originally acquired for future 
expansion that no longer will be used for expansion or other banking 
purposes.
    (d) Market value means the value determined in accordance with 
subpart C of this part.
    (e) Other real estate owned (OREO) means:
    (1) DPC real estate; and
    (2) Former banking premises.
    (f) Recorded investment amount means:
    (1) For loans, the recorded loan balance, as determined by 
generally accepted accounting principles; and
    (2) For former banking premises, the net book value.
Sec. 34.82  Holding period.

    (a) Holding period for OREO. A national bank shall dispose of OREO 
at any time that prudent judgment dictates, but not later than the end 
of the holding period (or an extension thereof) permitted by 12 U.S.C. 
29.
    (b) Commencement of holding period. The holding period begins on 
the date that:
    (1) Ownership of the property is originally transferred to a 
national bank;
    (2) A bank completes relocation from former banking premises to new 
banking premises or ceases to use the former banking premises without 
relocating; or
    (3) A bank decides not to use real estate acquired for future bank 
expansion.
    (c) Effect of statutory redemption period. For DPC real estate that 
is subject to a redemption period imposed under state law, the holding 
period begins at the expiration of that redemption period. 

[[Page 35361]]



Sec. 34.83  Disposition of real estate.

    (a) Disposition. A national bank may comply with its obligation to 
dispose of real estate under 12 U.S.C. 29 in the following ways:
    (1) With respect to OREO in general:
    (i) By entering into a transaction that is a sale under generally 
accepted accounting principles;
    (ii) By entering into a transaction that involves a loan guaranteed 
or insured by the United States government or by an agency of the 
United States government or a loan eligible for purchase by a 
Federally-sponsored instrumentality that purchases loans; or
    (iii) By selling the property pursuant to a land contract or a 
contract for deed;
    (2) With respect to DPC real estate, by retaining the property for 
its own use as bank premises or by transferring it to a subsidiary or 
affiliate for use in the business of the subsidiary or affiliate;
    (3) With respect to a capitalized or operating lease, by obtaining 
an assignment or a coterminous sublease. If a national bank enters into 
a sublease that is not coterminous, the period during which the master 
lease must be divested will be suspended for the duration of the 
sublease, and will begin running again upon termination of the 
sublease. Should the OCC determine that a bank has entered into a lease 
for the purpose of real estate speculation in violation of 12 U.S.C. 29 
and this part, the OCC will take appropriate measures to address the 
violation, including requiring the bank to take immediate steps to 
divest the lease; and
    (4) With respect to a transaction that does not qualify as a 
disposition under paragraphs (a) (1) through (3) of this section, by 
receiving or accumulating from the purchaser an amount in cash, 
principal and interest payments, and private mortgage insurance 
totalling at least 10 percent of the sales price, as measured in 
accordance with generally accepted accounting principles.
    (b) Disposition efforts and documentation. The national bank shall 
make diligent and ongoing efforts to dispose of each parcel of OREO, 
and shall maintain documentation adequate to reflect those efforts.


Sec. 34.84  Future bank expansion.

    A national bank normally should use real estate acquired for future 
bank expansion within five years. After holding such real estate for 
one year, the bank shall state, by resolution of the board of directors 
or an appropriately authorized bank official or subcommittee of the 
board, definite plans for its use. The resolution or other official 
action must be available for inspection by national bank examiners.


Sec. 34.85  Appraisal requirements.

    (a) In general. (1) Upon transfer to OREO, the national bank shall 
substantiate the parcel's market value by obtaining either:
    (i) An appraisal in accordance with subpart C of this part; or
    (ii) An appropriate evaluation when the recorded investment amount 
is equal to or less than the threshold amount in subpart C of this 
part.
    (2) The national bank shall develop a prudent real estate 
collateral evaluation policy that allows the bank to monitor the value 
of each parcel of OREO in a manner consistent with prudent banking 
practice.
    (b) Exception. If a national bank obtained, in accordance with 
subpart C of this part, a valid appraisal or an appropriate evaluation 
in connection with a real estate loan, then the bank need not obtain 
another appraisal or evaluation when it acquires ownership of the 
property. However, the bank shall continue to follow the prudent real 
estate collateral evaluation policy required in paragraph (a)(2) of 
this section.
    (c) Sales of OREO. A national bank need not obtain a new appraisal 
or evaluation when selling OREO if the sale is consummated based on a 
valid appraisal or an appropriate evaluation.


Sec. 34.86  Additional expenditures and notification.

    (a) Additional expenditures on OREO. For OREO that is a development 
or improvement project, a national bank may make advances to complete 
the project if the advances:
    (1) Are reasonably calculated to reduce any shortfall between the 
parcel's market value and the bank's recorded investment amount;
    (2) Are not made for the purpose of speculation in real estate; and
    (3) Are consistent with safe and sound banking practices.
    (b) Notification procedures. (1) A national bank shall notify the 
appropriate supervisory office at least 30 days before implementing a 
development or improvement plan for OREO when the sum of the plan's 
estimated cost, the bank's current recorded investment amount, and any 
unpaid prior liens on the property exceeds 10 percent of the bank's 
capital. A national bank need notify the OCC under this paragraph only 
once. A national bank need not notify the OCC that the bank intends to 
re-fit an existing building for new tenants or to make normal repairs 
and incur maintenance costs to protect the value of the collateral.
    (2) The required notification must demonstrate that the additional 
expenditure is consistent with the conditions and limitations in 
paragraph (a) of this section.
    (3) Unless informed otherwise, the bank may implement the proposed 
plan on the thirty-first day (or sooner, if notified by the OCC) 
following receipt by the OCC of the bank's notification, subject to any 
conditions imposed by the OCC.


Sec. 34.87  Accounting treatment.

    OREO, and sales of OREO, are to be accounted for in accordance with 
the Instructions for the preparation of the Consolidated Reports of 
Condition and Income.

    Dated: June 9, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-16476 Filed 7-6-95; 8:45 am]
BILLING CODE 4810-33-P