[Federal Register Volume 61, Number 11 (Wednesday, January 17, 1996)]
[Proposed Rules]
[Pages 1162-1182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-409]



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

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 556, 560, 563, 571

[No. 96-1]
RIN 1550-AA94


Lending and Investment

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: Pursuant to section 303 of the Community Development and 
Regulatory Improvement Act of 1994 (CDRIA) and the Regulatory 
Reinvention Initiative of the Vice President's National Performance 
Review, the Office of Thrift Supervision (OTS) has reviewed each of its 
lending and investment regulations and related policy statements set 
forth in the Code of Federal Regulations (CFR) to determine whether it 
is necessary, imposes the least possible burden consistent with safety 
and soundness, and is written in a clear, straightforward manner. As a 
result, the OTS today is proposing to update, reorganize, and 
substantially streamline its lending and investment regulations and 
policy statements.

DATES: Comments must be received on or before April 16, 1996.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552, Attention Docket No. 96-1. These 
submissions may be hand-delivered to 1700 G Street, NW., from 9:00 a.m. 
to 5:00 p.m. on business days; they may be sent by facsimile 
transmission to FAX Number (202) 906-7755. Comments will be available 
for inspection at 1700 G Street, NW., from 9:00 a.m. until 4:00 p.m. on 
business days.

FOR FURTHER INFORMATION CONTACT: For general information contact: 
William J. Magrini, Project Manager, Supervision Policy (202) 906-5744; 
Ellen J. Sazzman, Counsel (Banking and Finance), (202) 906-7133; or 
Deborah Dakin, Assistant Chief Counsel, (202) 906-6445, Regulations and 
Legislation Division, Chief Counsel's Office. For information about 
preemption, contact Evelyne Bonhomme, Counsel (Banking and Finance), 
(202) 906-7052, Regulations and Legislation Division, Chief Counsel's 
Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, 
DC 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background of the proposal
II. Historical overview of current lending and investment 
regulations
III. Discussion
    A. General description of objectives
    1. Removal of unnecessary regulations
    2. Converting regulations into guidance
    3. Reorganization of lending and investment regulations
    4. Continuity of current position on federal preemption in 
lending area
    B. Section-by-section analysis
    1. Disposition of existing sections
    2. New Part 560--Lending and investment
IV. Proposed disposition of lending-and investment-related 
regulations
V. Request for comment
VI. Paperwork Reduction Act of 1995
VII. Executive Order 12866
VIII. Regulatory Flexibility Act Analysis
IX. Unfunded Mandates Act of 1995

I. Background of the Proposal

    In a comprehensive review of the agency's regulations in the spring 
of 1995, the OTS identified numerous obsolete or redundant regulations 
that could be quickly repealed. On December 27, 1995, the OTS published 
a final rule in the Federal Register repealing these regulations.1 
This resulted in an eight percent reduction in OTS regulations.

    \1\ 60 FR 66866 (December 27, 1995).
---------------------------------------------------------------------------

    As part of its review in the spring of 1995, the OTS also 
identified several key areas in its regulations for a more intensive, 
systematic regulatory burden review. These areas--lending and 
investment authority, subsidiaries and equity investments, insurance 
and fees, and charter and bylaws--were selected for intensive review 
because they are vital to thrift operations, had not been developed on 
an interagency basis, and had not been substantively reviewed in recent 
years.
    Today's proposal presents the results of the review of the lending 
and investment regulations, the first of the subject areas the OTS has 
identified for intensive review. Today's proposal, if adopted in final 
form, will reduce the number of lending and investment regulations from 
43 to 23, and result in a net reduction of 11 pages of CFR text.
    We reviewed each lending and investment regulation under the 
following criteria:
     Is the regulation current?
     Can the regulation be eliminated without endangering 
safety and soundness, diminishing consumer protection, or violating 
statutory requirements?
     Is the regulation's subject matter more suited for a 
policy statement or handbook guidance?
     Is the regulation consistent with the regulations of the 
other federal banking agencies?
     Can the regulation be easily understood?
    Today's proposal reorganizes the lending and investment regulations 
into a more rational, user-friendly framework. The proposal removes 
unnecessary detail from loan documentation regulations in favor of 
general safety and soundness requirements, removes unnecessary 
restrictions on the lending and investment powers of federal savings 
associations (including restrictions on certain commercial loans and 
community development investments), minimizes inequities between 
federal and state associations, and eliminates redundant or obsolete 
provisions.
    This proposal was developed in consultation with those who use the 
regulations on a daily basis: the agency's regional examination staff 
and representatives of the thrift industry. Regional staff made 
recommendations 

[[Page 1163]]
on the changes being considered. An industry focus group meeting among 
seven thrift representatives, an industry trade association, and OTS 
staff discussed staff's initial recommendations.
    Both regional staff and industry representatives supported the 
overall approach presented. They raised some questions, however, that 
are addressed in the discussion below.

II. Historical Overview of Current Lending and Investment 
Regulations

    The OTS's current lending and investment regulations have remained 
virtually unchanged since they were adopted in 1983, following 
enactment of the Garn-St Germain Depository Institutions Act of 1982 
(DIA).2 Before the DIA, the Home Owners' Loan Act (HOLA) 3 
had set forth in great detail specific lending and investment 
authorities and accompanying restrictions. The DIA changed this 
approach, modifying HOLA section 5(c) to list the broad categories of 
investment authorities afforded federal savings associations and to 
indicate which of these categories were subject to percentage-of-assets 
limitations. The statute provided that the HOLA 5(c) authorities could 
be exercised subject to regulations promulgated by the Federal Home 
Loan Bank Board (FHLBB), the OTS's predecessor agency. HOLA section 
5(c) retains that format today, referring to the Director of the OTS, 
rather than the FHLBB.

    \2\ Pub. L. 97-320, 96 Stat. 1469, October 15, 1982.
    \3\ 12 U.S.C. 1461-1470.
---------------------------------------------------------------------------

    Before 1983, the FHLBB's lending and investment regulations were 
based on the premise that HOLA's investment authorities had to be 
implemented expressly by regulation.4 That year, the FHLBB 
modified its lending and investment regulations to reflect a new 
regulatory approach, stating:

    \4\ 48 FR 23032 (May 23, 1983).
---------------------------------------------------------------------------

    In order to grant associations the maximum flexibility to 
exercise the authorities granted by the HOLA, the Board has 
determined to revise the general approach to regulating investment 
activities of Federal associations.
    Accordingly, Part 545 now addresses the authority of 
associations only to limit [or] interpret [the statutory 
authorizations] or [to] recognize incidental authority. Federal 
associations may exercise all of the authority granted by the HOLA 
subject only to limitations contained in the regulations.5

    \5\ Id.
---------------------------------------------------------------------------

    As a result, the regulations do not currently list all of a federal 
association's lending and investment authorities. The FHLBB emphasized 
that ``deletion of sections specifically implementing existing 
authority does not mean that any authority can no longer be 
exercised.'' 6

    \6\ 48 FR 23032.
---------------------------------------------------------------------------

    As inherited from the FHLBB, today's lending and investment 
regulations still contain a fair amount of detail and restrictions in 
some areas, such as real estate lending; minimal guidance in others, 
such as general leasing authority; and do not mention other important 
investment authorities at all, such as the ability to invest in 
mortgage-backed securities. Many of the restrictions that the FHLBB 
retained in the 1983 regulations, such as loan-to-value requirements, 
limitations on the maximum terms of loans, and some percentage-of-
assets limitations beyond those found in the statute were based on 
safety and soundness concerns.
    While neither the basic lending and investment authorities nor the 
lending and investment regulations have changed greatly since 1983, the 
safety and soundness restrictions on both federal and state savings 
associations have been comprehensively revised. The Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 7 
(FIRREA) imposed new capital, loans to one borrower, and appraisal 
requirements and tied the investment powers of state savings 
associations more closely to federal association powers. The Federal 
Deposit Insurance Corporation Improvement Act of 1991 8 (FDICIA) 
required new real estate lending standards, as well as operational and 
managerial standards. The OTS has adopted new regulations in all of 
these areas, most on an interagency basis with the other federal 
banking agencies. A number of these regulations directly affect the 
ways and extent to which thrifts may make investments and loans and 
obviate the need for some specific provisions currently found in the 
lending and investment regulations.

    \7\ Pub. L. 101-73, 103 Stat. 183, Aug. 9, 1989.
    \8\ Pub. L. 102-242, 105 Stat. 2236, Dec. 19, 1991.
---------------------------------------------------------------------------

III. Discussion

A. General Description of Objectives

    The OTS is today proposing a comprehensive revision of the lending 
and investment regulations to reflect statutory and regulatory changes, 
as well as the agency's and industry's experience with the current 
regulations. This section will discuss the overall objectives behind 
today's proposal. A section-by-section analysis follows in Part III.B.
1. Removal of Unnecessary Regulations
    The first objective of the OTS proposal is to remove unnecessary, 
duplicative, or outdated lending and investment regulations. By 
clearing out the unnecessary regulations, the OTS hopes to reduce 
regulatory compliance costs and enhance the profitability of thrift 
institutions. Examples of the regulations slated for removal are 
Sec. 563.97 (loans in excess of 90 percent of value), Sec. 545.44 
(mortgage transactions with the Federal Home Loan Mortgage 
Corporation), and Sec. 545.37 (combination loans).
    In some instances, the agency believes that safety and soundness 
concerns still require a regulation, but that this objective can be 
satisfied with a less burdensome regulation. For example, the agency is 
proposing to amend the scope of ``commercial loans'' under current 
Sec. 545.46(b) to exclude commercial loans made by service 
corporations. This will free up additional lending authority within the 
statutory limit of 10 percent of assets for commercial loans by a 
federal savings association. The agency is also proposing to remove 
outdated restrictions on manufactured home loans and investments in 
government securities and state housing corporations.
2. Converting Regulations Into Guidance
    Second, the proposal would convert certain regulatory requirements 
to handbook guidance. The goal of such a transfer would be to provide 
thrifts with guidance about what the agency considers to be generally 
safe and sound practices in a particular area, while giving them more 
flexibility in addressing safety and soundness concerns than the 
regulations currently allow.
    In making determinations about moving specific provisions out of 
the lending and investment regulations and into guidance, the OTS has 
carefully looked at whether the other federal banking agencies have 
specific regulations addressing those issues, such as classification of 
assets and loan documentation, or whether they rely more on guidance. 
Thrift lending regulations traditionally have been lengthy, generally 
providing far more detail and leaving less room for the exercise of 
judgment by the industry and examiners than have bank lending 
regulations.
    Section 303 of CDRIA encourages the federal banking agencies to 
move towards greater uniformity in regulations and guidelines on common 
supervisory issues. In the past, the federal banking agencies have 
worked together to develop common regulations affecting lending, 
notably the appraisal and real estate lending standards 

[[Page 1164]]
regulations. Pursuant to section 303 and in continuation of this 
movement towards uniformity, the OTS is proposing to shift from a more 
regulation-specific to a more guidance-oriented approach in its lending 
and investment regulations.
    One example of this proposed shift in approach is loan 
documentation. Currently, Sec. 563.170(c) (1)-(9) lists a number of 
documents that thrifts must maintain in connection with various types 
of secured and unsecured extensions of credit. While the document list 
may provide a useful checklist and may be appropriate as guidance, all 
transactions may not require all documents. Conversely, safety and 
soundness concerns for a particular transaction may necessitate 
different or additional documents beyond those listed in the 
regulation. Accordingly, the OTS proposes replacing those specific 
documentation requirements with a more general lending documentation 
regulation based on interagency safety and soundness guidelines.9

    \9\ Standards for Safety and Soundness, 60 FR 35674 (July 10, 
1995).
---------------------------------------------------------------------------

    Both industry representatives attending the focus group meeting and 
regional staff raised questions about the effect of incorporating 
material currently in regulations into handbooks or other guidance. 
Some industry representatives believed that many in the industry and 
examination staff view the guidelines in the handbooks as equivalent to 
binding regulations and would not perceive a burden reduction in such a 
transfer. Various regional staff raised the opposite concern: that if 
requirements were moved from regulations to guidance the agency would 
find it more difficult to convince some in the industry to operate in a 
safe and sound manner in those areas.
    By proposing to remove some specific lending regulations and to 
rely more heavily on general safety and soundness standards, the OTS is 
in no way signalling that an association would not need to maintain 
adequate loan documentation or to classify its assets and establish 
appropriate valuation allowances. Generally accepted accounting 
principles and principles of safety and soundness will still require 
these steps to be taken. In most circumstances, supervisory guidance 
provided in Regulatory Bulletins, Thrift Bulletins, the Thrift 
Activities Handbook and other sources can and should be relied upon to 
define safe and sound practices.
    In its ongoing training programs, however, the OTS will continue to 
emphasize to examiners that guidance documents should not be confused 
with regulations. In particular situations, it may be prudent for 
institutions to deviate from what is stated in standard guidance 
documents. Examiners and thrift management both have a responsibility 
to consider what is safe and sound under all the facts of each 
circumstance. Neither should rely on the regulations and guidance 
documents in rote fashion.
    Provided both management and examiners understand the proper role 
of regulations and guidance, and the overarching requirement for safe 
and sound operations and practices, a move away from detailed 
regulations and toward greater reliance on guidance should provide 
institutions with more flexibility without diminishing safety and 
soundness. The OTS believes that regulations should be reserved for 
core safety and soundness requirements. Details on prudent operating 
practices should be relegated to guidance. Otherwise, regulated 
entities can find themselves unable to respond to market innovations 
because they are trapped in a rigid regulatory framework developed in 
accordance with conditions prevailing at an earlier time.
    Today's proposal represents the agency's current best judgment 
about the right balance between which provisions affecting lending and 
investment should be binding regulations and which should be guidance 
conveying the OTS's more detailed views on what generally constitutes 
safe and sound standards under current market conditions. The agency 
specifically seeks comments on whether the proposal achieves these 
goals.
3. Reorganization of Lending and Investment Regulations
    The agency has received comments over the years that its lending 
and investment regulations are hard to locate and difficult to follow. 
The agency is proposing two remedies for this problem. First, all 
lending and investment regulations will be moved into a new part 560, 
``Lending and Investment,'' that will specify which regulations apply 
to all savings associations (such as loan documentation, disclosure, 
and real estate lending standards) and which apply only to federal 
savings associations (such as specific lending powers). This part will 
include provisions currently located in parts 545 and 563 that are 
being modified as part of today's proposal. The OTS expects that this 
part will ultimately include all lending and investment regulations 
except for Appraisals (located in part 564).
    The OTS also proposes to remove unnecessary restatements of 
statutory authority and limitations from various sections of part 545. 
These would be replaced by a regulation in chart format that would 
provide easy reference to the statutory authority for, and statutory 
limitations on, federal associations' lending powers. Notes to the 
chart would set forth any additional regulatory restrictions. The 
agency seeks comment on whether such a chart would make it easier to 
locate lending authorities and to determine which restrictions apply.
    Because of the FHLBB's 1983 decision that part 545 would not repeat 
all of HOLA section 5(c)'s lending powers but only those where 
additional restrictions apply, the proposed chart, based on the current 
part 545, is not comprehensive. Although many of the most significant 
authorities are listed, some more obscure authorities are not. The 
agency seeks comment on whether the proposed chart would be more useful 
if it included statutory provisions not currently set forth in the 
regulations.
4. Continuity of Current Position on Federal Preemption in Lending Area
    One of the points made by industry representatives in the focus 
group meeting was that OTS should maintain a clear and consistent 
position on the preemptive effect of its lending regulations, 
especially if those regulations are restructured, amended, converted 
into guidance, or deleted. The OTS has long held that, with certain 
narrow exceptions, any state laws or regulations that purport to affect 
the lending operations of federal savings associations are preempted. 
Such preemption is essential to the OTS's regulation of the operations 
of federal savings associations because lending is one of the most 
important functions of a savings association. None of the changes 
discussed today should be construed as evidencing in any way an intent 
by the OTS to change this long-held position. Whether the OTS continues 
to have a specific regulation addressing a particular aspect of lending 
or chooses to remove a federal regulation to streamline its regulations 
and reduce regulatory burden, the agency still intends to occupy the 
entire field of lending regulation for federal savings associations.
    Because the lending regulations are being moved out of Part 545 
and, thus, separated from the general preemption provision that 
currently appears in Part 

[[Page 1165]]
545,10 the OTS is proposing to include a general lending 
preemption provision in new Part 560. This provision (discussed more 
fully in the section-by-section analysis in Section III.B.2 below) 
merely restates long-standing preemption principles applicable to 
federal savings associations, as developed in a long line of court 
cases and legal opinions by the OTS and the FHLBB.

    \10\ 12 CFR 545.2.
---------------------------------------------------------------------------

B. Section-by-Section Analysis

1. Disposition of Existing Sections

Part 545  Operations (Federal Savings Associations)

Section 545.31  Election Regarding Classification of Loans or 
Investments

    Paragraph (a) of Sec. 545.31 sets forth the OTS's general rule that 
where a loan or investment meets the requirements of more than one 
authority, the association may elect to place it in any applicable 
category. The OTS proposes to retain this paragraph in modified form as 
new Sec. 560.31(a).
    The OTS is considering moving the description in Sec. 545.31(a) of 
the essential characteristics of a loan that can be classified as a 
real estate loan into a separate definitional section of the 
regulations 11 along with the definition of loan commitment 
currently found in paragraph (b).

    \11\ The question of whether regulatory definitions should all 
be moved into a centralized location in the regulations or instead 
be located in or near the sections to which they relate will be 
addressed in a subsequent proposal regarding the structure and 
organization of OTS regulations (``Regulatory Structure Proposal''). 
We anticipate that any changes proposed in the Regulatory Structure 
Proposal will be made final at the same time any changes proposed 
today are made final.
---------------------------------------------------------------------------

    Paragraph (b) also provides that loan commitments are included in 
total assets and accounted for as an investment for purposes of 
determining applicable statutory or regulatory investment limitations 
only to the extent that funds are advanced and not repaid. The OTS 
proposes to combine this provision into new Sec. 560.31(a).
    Paragraph (c) addresses the treatment of loans sold to third 
parties for purposes of calculating percentage-of-assets investment 
limitations. Paragraph (d) addresses treatment of loans secured by 
assignment of loans. The OTS proposes to retain both paragraphs in new 
Sec. 560.31.

Section 545.32  Real Estate Loans

    Paragraph (a) of Sec. 545.32 reiterates the HOLA's general grant of 
statutory authority for federal savings associations to make or invest 
in residential (home) or nonresidential real estate loans.12 The 
OTS proposes to delete this paragraph and move the statutory reference 
into the proposed lending/investment powers chart.

    \12\ 12 U.S.C. 1464 (c)(1)(B), (c)(2)(B).
---------------------------------------------------------------------------

    Paragraphs (b) (1) and (2) of Sec. 545.32 duplicate more 
comprehensive interagency-developed real estate lending standards and 
appraisal standards set forth at 12 CFR 563.100-101 and 12 CFR Part 564 
respectively. Accordingly, the OTS proposes to delete these paragraphs.
    Paragraphs (b) (3), (4), (5), and (6) of Sec. 545.32 discuss 
federal savings associations' authority to adjust the terms of real 
estate loans, to amortize real estate loans, to charge certain initial 
fees for real estate loans, and to establish escrow accounts. The HOLA 
expressly authorizes federal savings associations to ``invest in, sell 
or otherwise deal in * * * loans on the security of liens upon 
residential real property'' and ``nonresidential real property.'' 
13 This express authorization to make real estate loans 
necessarily includes within it the authority to adjust and fix the 
terms of each loan, including loan charges, an escrow account, the 
terms for repayment, and the circumstances under which a repayment 
obligation can be modified. The OTS believes that the authority to 
adjust, amortize, establish escrow accounts for, and charge fees for 
loans properly falls within the scope of savings associations' 
statutory authority to originate loans, and these powers do not need to 
be specifically identified or restricted in the CFR.

    \13\ 12 U.S.C. 1464 (c)(1)(B), (c)(2)(D).
---------------------------------------------------------------------------

    Because these paragraphs have been relied upon in preemption 
opinions of the FHLBB and the OTS, the agency emphasizes that by 
proposing to remove these paragraphs, the OTS does not intend any 
change in federal thrifts' authority to conduct these activities, but 
rather to enhance associations' flexibility in lending. Each of these 
areas is specifically cited in proposed new Sec. 560.2 as an area in 
which state law is preempted.
    Paragraph (c) of Sec. 545.32 defines the phrase ``loan made on the 
security of real estate.'' The OTS is considering moving this paragraph 
to a definitional section of the regulations or deleting this paragraph 
entirely as part of its Regulatory Structure Proposal. Questions have 
arisen about the application of the current description of secured real 
estate loan both in the context of asset classification and the making 
of real estate loans in foreign countries. The OTS seeks comment on 
whether the current definition of secured real estate loan has provided 
adequate guidance for savings associations and how it could be 
clarified or updated.
    Paragraph (d) of Sec. 545.32 addresses loan-to-value ratios and 
duplicates more comprehensive interagency real estate lending 
standards.14 Accordingly, the OTS proposes to delete this 
paragraph.

    \14\ 12 CFR 563.100-563.101.
---------------------------------------------------------------------------

Section 545.33  Home Loans

    The introductory paragraph of Sec. 545.33 generally describes home 
loans. The OTS is considering moving this paragraph to a new 
definitional section of the regulations as part of the Regulatory 
Structure Proposal.
    Paragraph (a) describes the authority of savings associations to 
amortize home loans. The OTS proposes to delete this paragraph for the 
reasons discussed under Sec. 545.32(b)(3)-(6).
    Paragraph (b) addresses loan-to-value ratios for home loans. The 
OTS proposes to delete this paragraph because the interagency real 
estate lending standards address the same issues in a more 
comprehensive and current manner.
    Paragraph (c) sets forth limitations on the adjustments that may be 
made to residential mortgages. Paragraph (c) requires that adjustments 
to rates, payments, or loan balances be tied to a national or regional 
index outside the control of the savings association or a formula or 
schedule set forth in the loan contract. Loans must also comply with 
the notice requirements of 12 CFR 563.99, which address disclosure 
requirements for fixed-rate and adjustable-rate mortgage (ARM) loans 
made by all savings associations.
    The OTS proposes to delete paragraph (c).15 Because 
Sec. 563.99 would remain in place, savings associations would still be 
required to provide full disclosure regarding adjustments in rates, 
payments, and loan balances. However, the substantive restrictions on 
how these adjustments can be made that now appear in Sec. 545.33(c) 
would be eliminated. These limitations are much more detailed than 
those required of other institutions offering mortgages. When these 
adjustment limitations were last substantially revised, in 1983, ARMs 
were still relatively new in the marketplace. Consumers did not have a 
wide range of choices of lenders offering this type of loan. Today, 
consumers are much more familiar with this type of loan and have a wide 
variety of possible 

[[Page 1166]]
sources for obtaining home mortgages. The OTS believes that as long as 
information about adjustments to interest rates, term, payments, and 
loan balances is clearly disclosed to purchasers, the details should be 
a matter of contract between the savings association and the purchaser. 
The agency specifically solicits comments about whether any of the 
provisions in Sec. 545.33(c) should be retained.

    \15\ The last sentence in paragraph (c)(5) concerns a federal 
thrift's right to call a loan due and payable under certain 
circumstances. OTS proposes to incorporate this provision into new 
Sec. 560.2.
---------------------------------------------------------------------------

    Among the provisions that would be removed is the requirement that 
an ARM's interest rate adjustment be tied to an external index. Some 
federal savings associations have argued that this external control 
provision puts savings associations at a competitive disadvantage in 
the current ARM market and inhibits their ability to manage their 
assets. Generally federal savings associations, national banks 16, 
and those housing creditors who elect to operate under the Alternative 
Mortgage Parity Act 17 are subject to this requirement. The OTS 
solicits comment on whether it should retain this requirement or, 
alternatively, a requirement of a national or regional index. The OTS 
also solicits comment on how federal thrifts might structure their ARM 
lending programs to ensure that consumers are protected if adjustments 
are not tied to an external index.

    \16\ 12 CFR 34.7. The Office of the Comptroller of the Currency 
has recently proposed amendments to its real estate lending 
regulations that would not amend this requirement. The preamble to 
the proposal did not explain why OCC proposes to retain this 
requirement. See 60 FR 35353, 35355-35356 (July 7, 1995).
    \17\ The Alternative Mortgage Parity Act, Pub. L. 97-320, Title 
VII, authorizes certain housing creditors to make alternative 
mortgage transactions not withstanding any contrary state law under 
certain conditions. Among the conditions that housing creditors that 
rely on the Parity Act and are not commercial banks or credit unions 
must satisfy is compliance with applicable OTS regulations on ARMs, 
which include this paragraph. See 12 CFR 545.33(f).
---------------------------------------------------------------------------

    Paragraph (d) of Sec. 545.33 addresses loans on cooperatives. The 
OTS proposes to delete this paragraph. The interagency real estate 
lending standards address the same issues as paragraph (d)(1) in a more 
comprehensive and flexible manner. No comparable reserve requirement to 
that set forth in paragraph (d)(1) exists for state-chartered thrifts. 
The OTS solicits comment on whether the provisions of (d)(2), which set 
forth what may constitute security for such a loan, should be included 
in guidance.
    Paragraph (e) addresses loans to facilitate trade-in or exchange. 
The OTS proposes to delete this paragraph because the interagency real 
estate lending standards address the same issues in a more 
comprehensive and flexible manner.
    Paragraph (f) specifies the OTS regulations that state savings 
associations and certain other state lenders who elect to make loans 
under the Alternative Mortgage Parity Act must follow. The Alternative 
Mortgage Parity Act preempts state laws that might otherwise limit 
certain state creditors' ability to offer ARMs if they comply with the 
OTS regulations identified in this paragraph. The agency is concerned 
that this paragraph is not easy to locate for those affected by it. The 
OTS therefore proposes to move the provisions of this paragraph, as 
modified to reflect changes elsewhere in today's proposal, into new 
Sec. 560.210, as part of a subpart dealing with alternative mortgages, 
with a title that highlights its content.

Section 545.34  Limitations for Home Loans Secured by Borrower-Occupied 
Property

    Paragraph (a) permits federal savings associations to include due-
on-sale clauses in loan instruments to the extent authorized under 
federal statutes and regulations, regardless of state prohibitions of 
due-on-sale clauses.18 The OTS proposes to remove this paragraph 
and incorporate its provisions into new Sec. 560.2.

    \18\ 12 U.S.C. 1701j-3, 12 CFR Part 591.
---------------------------------------------------------------------------

    Paragraphs (b) and (c) permit federal savings associations to 
include provisions imposing late fees and prepayment penalties in loan 
contracts on home loans subject to certain conditions. The OTS proposes 
to remove these paragraphs and incorporate these limitations, which may 
provide protection for borrowers, into new Sec. 560.34. The OTS 
solicits comment on whether these restrictions are important for 
borrowers.

Section 545.35  Other Real Estate Loans

    Section 545.35 sets forth federal savings associations' authority 
to lend and invest in nonresidential real estate subject to certain 
statutory and regulatory limitations. Paragraph (a) requires compliance 
with real estate lending standards. Paragraph (b) reiterates the 
statutory limit of 400 percent of an association's total capital 
imposed on investments in nonresidential real estate. The OTS proposes 
to delete this section, incorporate the reference to federal savings 
associations' statutory authority to invest in nonresidential real 
estate loans into the proposed lending and investment powers chart, and 
place the limitations into an accompanying endnote.

Section 545.36  Loans To Acquire or To Improve Real Estate

    Section 545.36 sets forth regulatory investment limitations 
pertaining to acquisition, development, and construction loans. The OTS 
proposes to delete this section inasmuch as the interagency real estate 
lending standards and interagency safety and soundness standards 
address the same issues in a more comprehensive and current manner. 
Paragraphs (c) and (d) of Sec. 545.36 would be incorporated into the 
Thrift Activities Handbook to provide additional guidance to thrifts 
making development loans beyond that contained in the interagency real 
estate lending standards.

Section 545.37  Combination Loans

    Section 545.37 allows thrifts to combine loans authorized by part 
545. The OTS proposes to delete this section as unnecessary and vague.

Section 545.38  Insured and Guaranteed Loans

    Paragraphs (a) and (b) of Sec. 545.38 authorize Federal thrifts to 
make insured and guaranteed residential real estate loans, 
notwithstanding other provisions of part 545 but subject to certain 
conditions. The OTS proposes to delete these paragraphs as unnecessary. 
Federal savings associations may make an unlimited percentage of 
residential real estate loans, subject to the interagency real estate 
lending standards. Other regulatory restrictions affecting such loans 
have either already been removed from part 545 or are proposed for 
deletion today.
    Paragraph (c) addresses nonresidential real estate loans that are 
guaranteed by the Economic Development Administration, the Farmers Home 
Administration, or the Small Business Administration. The OTS proposes 
to delete this paragraph and incorporate the HOLA's statutory grant of 
authority for Federal thrifts to make guaranteed nonresidential real 
estate loans in the endnotes to the proposed lending and investment 
powers chart.

Section 545.39  Loans Guaranteed Under the Foreign Assistance Act of 
1961

    This section reiterates the HOLA's statutory grant of authority 
19 to Federal thrifts to make loans guaranteed under the Foreign 
Assistance Act (FAA).20 The 

[[Page 1167]]
OTS proposes to delete this section and incorporate its provisions into 
the proposed lending powers and investment chart and endnotes and new 
Sec. 560.43. The OTS solicits comment on whether thrifts have invested 
in or made loans guaranteed under the FAA.

    \19\ 12 U.S.C. 1464(c)(4)(C).
    \20\ 22 U.S.C. 2181, 2184.
---------------------------------------------------------------------------

Section 545.40  Loans on Low-Rent Housing

    Section 545.40 exempts loans made pursuant to certain low rent 
housing programs of the Department of Housing and Urban Development 
from regulatory maximum loan term and loan-to-value limitations. The 
OTS proposes to delete this section as unnecessary because the loan 
term and loan-to-value ratio limitations referred to in this section 
have already been or are now being removed from OTS regulations. By 
deleting this section, the OTS does not intend to limit Federal 
thrifts' authority to make low-rent housing loans pursuant to 
applicable statutory and regulatory provisions, but rather to remove 
obsolete restrictions that only serve to confuse CFR users.

Section 545.41  Community Development Loans and Investments

    Section 545.41 reiterates the HOLA's statutory grant of authority 
to Federal savings associations to make direct community development 
loans and investments, subject to an overall 5 percent of assets 
limitation.21 The OTS proposes to delete this section and 
incorporate the statutory authority reference into the proposed lending 
and investment powers chart. The chart will separately list the 
sublimit of 2 percent of assets for equity investments in community 
development real estate under this authority.

    \21\ See 12 U.S.C. 1464(c)(3)(B).
---------------------------------------------------------------------------

Section 545.42  Home Improvement Loans

    Section 545.42 reiterates the HOLA's statutory grant of authority 
to Federal thrifts to make home improvement loans subject to prudent 
lending standards.22 The OTS proposes to delete this section and 
incorporate the reference to Federal thrifts' statutory authority to 
make home improvement loans into the proposed lending and investment 
powers chart.

    \22\ 12 U.S.C. 1464(c)(1)(J).
---------------------------------------------------------------------------

Section 545.43  State Housing Corporation Investment-Insured

    Section 545.43 reiterates the HOLA's grant of statutory authority 
to Federal thrifts to invest in State housing corporation loans 23 
subject to a regulatory 30 percent of assets limitation. This section 
also duplicates restrictions in current Sec. 563.95, which regulates 
investment in State housing corporations for all savings 
associations.24 The OTS proposes to delete Sec. 545.43 and 
incorporate the reference to the HOLA's statutory grant of authority to 
Federal thrifts to invest in State housing corporation loans into the 
proposed lending and investment powers chart.

    \23\ 12 U.S.C. 1464(c)(1)(P).
    \24\ Section 563.95, as discussed later, is proposed to be 
modified and moved into new Part 560.
---------------------------------------------------------------------------

Section 545.44  Mortgage Transactions With the Federal Home Loan 
Mortgage Corporation

    Section 545.44 provides, in accordance with HOLA Sec. 5(c)(1)(E) 
and the Federal Home Loan Mortgage Corporation (FHLMC) Act, that 
Federal thrifts may enter into or perform mortgage transactions with 
the FHLMC. It does not impose any additional regulatory restrictions, 
nor does it currently exempt these transactions from any regulatory 
restrictions. The OTS proposes to delete this section as an unnecessary 
reiteration of statutory authority and savings associations' inherent 
power to enter into business contracts. The OTS also solicits comments 
on whether the OTS should incorporate the definition of ``mortgage'' 
set forth in Sec. 302 of the FHLMC Act, currently cross-referenced in 
this section, in a general definitional section as part of its 
Regulatory Structure Proposal.

Section 545.45  Manufactured Home Financing

    Paragraph (a) of Sec. 545.45 contains several definitions relating 
to manufactured home financing. The proposed disposition of this 
section will render these definitions unnecessary and, therefore, the 
OTS proposes to delete this paragraph.
    Paragraph (b) of Sec. 545.45 reiterates the HOLA's statutory grant 
of authority to federal thrifts to invest in or make manufactured home 
loans.25 The OTS proposes to delete this paragraph and incorporate 
the statutory reference to federal thrifts' authority to invest in 
manufactured home loans into the proposed lending and investment powers 
chart.

    \25\ 12 U.S.C. 1464(c)(1)(J).
---------------------------------------------------------------------------

    Paragraphs (c) and (d) of Sec. 545.45 address inventory financing 
and retail financing for manufactured home chattel paper and establish 
term and loan to value limits for such loans. The OTS believes these 
paragraphs describe underwriting standards for manufactured homes that 
are more suitable as guidance and proposes to transfer these paragraphs 
to the Thrift Activities Handbook. The OTS solicits comment as to 
whether these paragraphs provide useful guidance to savings 
associations.26

    \26\ One commenter on the agency's August 28, 1995 proposal to 
remove unnecessary provisions from its regulations suggested the 
removal of the provisions in paragraphs (d)(2)(ii)(chattel paper 
must generally be payable within 20 years in substantially equal 
payments) and (iii)(the financed amount may not exceed certain loan 
to value ratios), claiming that they imposed a competitive 
disadvantage for federal savings associations.
---------------------------------------------------------------------------

    Paragraph (e) provides that a federal thrift's sale of manufactured 
home chattel paper must be sold without recourse. Since it was adopted, 
the OTS has adopted a capital regulation that requires thrifts to hold 
appropriate levels of capital against all sales with recourse.27 
The OTS therefore proposes to delete this paragraph.

    \27\ See 12 CFR 567.1(kk), 567.6(a)(2)(i)(C).
---------------------------------------------------------------------------

Section 545.46  Commercial Loans

    Paragraph (a) of Sec. 545.46 reiterates the HOLA's grant of 
statutory authority to federal thrifts to invest in and make commercial 
loans not to exceed 10 percent of their assets.28 The OTS proposes 
to delete this paragraph and incorporate the authority and statutory 
limitation in paragraph (a) into the proposed lending and investment 
powers chart.

    \28\ 12 U.S.C. 1464(c)(2)(A). The language in Sec. 545.46(a) 
regarding pre-1984 investment limits is obsolete and will be 
deleted.
---------------------------------------------------------------------------

    The agency is also proposing to delete paragraph (b). This 
paragraph defines commercial loans to include commercial overdrafts 
related to demand accounts and commercial unsecured loans by service 
corporations. Paragraph (b)(1) (commercial overdrafts) will be 
incorporated into an endnote to the lending and investment powers 
chart. Thus, commercial overdrafts will continue to be subject to the 
commercial lending limit.
    As for commercial loans made at the service corporation level, 
however, the agency has determined that the statutory maximum 3 percent 
of assets that federal savings associations may invest in service 
corporations generally provides a sufficient safeguard for the savings 
association, as it does for all other types of activities conducted in 
service corporations. Under the current service corporation regulation, 
only a service corporation's commercial loans are aggregated with its 
parent's loans for purposes of statutory percentage-of-assets 
limitations on general investment 

[[Page 1168]]
authority.29 Other service corporation investments are not. The 
agency believes such a distinction is no longer warranted and that such 
loans should no longer be subject to the statutory 10 percent of assets 
limitation on commercial lending set forth in HOLA section 5(c)(2)(A).

    \29\ 12 CFR 545.74(c)(1)(1995). For purposes of some other 
regulations, such as loans to one borrower (12 CFR 563.99) and 
transactions with affiliates (12 CFR 563.41 and 563.42), investments 
at the service corporation level are aggregated with investments of 
the parent savings association. Today's proposal does not affect 
those regulatory provisions.
---------------------------------------------------------------------------

    By removing these loans from the definition of commercial loans, 
federal savings associations' limited authority to make commercial 
loans will be somewhat enhanced, benefiting both thrifts and their 
customers, without endangering safety and soundness or thrifts' primary 
mission of providing mortgage lending.

Section 545.47  Overdraft Loans

    Section 545.47 reiterates the HOLA's statutory grant of authority 
to federal thrifts to make loans specifically related to transaction 
accounts, which includes overdraft loans.30 The OTS proposes to 
delete this section and incorporate the reference to federal thrifts' 
statutory authority to make overdraft loans into the proposed lending 
and investment powers chart.

    \30\ 12 U.S.C. 1464(c)(1)(A).
---------------------------------------------------------------------------

    The endnote accompanying this provision will specify that 
commercial overdraft loans formerly covered by Sec. 545.46 remain 
subject to the same commercial lending limits.

Section 545.48  Letters of Credit

    Section 545.48 authorizes federal thrifts to issue letters of 
credit in conformance with the Uniform Commercial Code or the Uniform 
Customs and Practices for Documentary Credits and subject to certain 
general standards. As already discussed, the HOLA expressly authorizes 
federal thrifts to invest in or make commercial loans, and this express 
authorization to make commercial loans necessarily includes within it 
the authority to issue letters of credit. For ease of reference, the 
OTS proposes to reference the authority of federal thrifts to issue 
letters of credit in the proposed lending and investment powers chart.
    The OTS believes it would be useful to establish general standards 
for the issuance of letters of credit for all savings associations. The 
OTS therefore also proposes to incorporate the substance of 
Sec. 545.48(a), modified to include a broader range of permissible 
letters of credit, into new Sec. 560.120 as prudent lending standards 
for the issuance of letters of credit. The OTS believes, and industry 
representatives at the focus group meeting concurred, that many states 
have already incorporated similar standards and that most associations 
already have such prudent practices in place.
    The OTS solicits comment on whether transferring the substance of 
Sec. 545.48(a) to the new part 560 would provide needed uniform 
standards for all savings associations, the benefits of which would 
outweigh any additional burden on state-chartered savings associations. 
Alternatively, the OTS invites comment on whether Sec. 545.48(a) should 
be transferred to handbook guidance.
    The OTS proposes to delete paragraph (b) of Sec. 545.48, which 
addresses the treatment of funds advanced under a letter of credit 
without compensation from the account party, because it duplicates 
Sec. 545.31(b), which the OTS proposes to incorporate into new 
Sec. 560.31(a).

Section 545.49  Loans on Securities

    Section 545.49 reiterates the HOLA's statutory grant of authority 
to federal thrifts to invest in loans to financial institutions and 
brokers secured by obligations backed by the United States government 
or certain agencies or instrumentalities thereof.31 The OTS 
proposes to delete this section and incorporate a reference to thrifts' 
statutory authority to invest in such loans secured by U.S. government 
or agency backed obligations into the proposed lending and investment 
powers chart. The introductory paragraph that limits permissible 
investments in agencies or instrumentalities of the United States to 
those entities named in Sec. 566.1(g)(3) is being removed as 
unnecessary.

    \31\ 12 U.S.C. 1464(c)(1)(C), (D), (E), (F).
---------------------------------------------------------------------------

Section 545.50  Consumer Loans

    Section 545.50 reiterates the HOLA's statutory grant of authority 
to federal thrifts to make consumer loans subject to a 35 percent of 
assets limit.32 For purposes of determining compliance with this 
limit, federal thrifts must aggregate their consumer loans with any 
investments in corporate debt securities and commercial paper.33 
In other words, a federal thrift's aggregate investments in consumer 
loans, corporate debt securities, and commercial paper may not exceed 
35 percent of its assets.

    \32\ 12 U.S.C. 1464(c)(2)(D).
    \33\ Id.
---------------------------------------------------------------------------

    The OTS proposes to delete Sec. 545.50 and to incorporate the 
reference to federal thrifts' statutory authority to make consumer 
loans, subject to the statutory asset limit, into the proposed lending 
and investment powers chart. The OTS plans to include an endnote 
incorporating the provisions of Sec. 545.50(c), which addresses loans 
to dealers in consumer goods. The OTS is considering moving paragraph 
(b) of Sec. 545.50, which defines consumer loans, to a consolidated 
definitional location in the regulations as part of its Regulatory 
Structure Proposal. The OTS solicits comment on how the definition of 
consumer loan can be clarified for categorization purposes and 
coordinated with other OTS regulations that address consumer 
credit.34 The current definition of consumer loan that appears in 
Sec. 545.50(b) expressly excludes credit cards. As a result, under 
current regulations, credit card loans are not subject to the 35 
percent of assets investment limit applicable to consumer loans, 
corporate debt securities, and commercial paper. A separate regulation, 
Sec. 545.51 (discussed below), governs the credit card activity of 
federal savings associations. No percentage of assets limits are 
imposed on credit cards by that regulation.

    \34\ Compare 12 CFR 545.50(b)'s definition of consumer loan, 
which excludes credit extended in connection with credit cards, with 
12 CFR 561.12, which defines consumer credit for purposes of the 
regulations in part 563 to include credit cards.
---------------------------------------------------------------------------

    This approach mirrors the HOLA. The statutory provision authorizing 
federal thrifts to invest in consumer loans, corporate debt securities, 
and commercial paper subject to a 35 percent of assets limit is 
separate from the statutory provision that authorizes them to invest in 
credit cards. The statutory provision authorizing credit cards contains 
no percentage of assets limit.
    The OTS has reviewed the legislative history of the two statutory 
provisions. The legislative history does not provide clear guidance 
regarding whether any linkage was intended. Thus, under normal rules of 
statutory interpretation, the plain language of the statute would 
ordinarily be given effect. As indicated above, the plain language 
imposes no percentage of assets limit on credit card operations. This 
does not mean that federal thrifts can make unlimited credit card 
loans, however. Independent of the investment authorizations in HOLA 
section 5, all savings associations are required to meet the qualified 
thrift lender test.35 Credit card loans count as qualified thrift 
investments only to a very limited extent. The qualified thrift 

[[Page 1169]]
lender test effectively requires all savings associations to hold a 
substantial amount of residential mortgage-related assets.

    \35\ 12 U.S.C. 1467a(m).
---------------------------------------------------------------------------

    The proposed rule carries forward the pattern of OTS's existing 
regulations. Under the proposed rule, credit card loans would not be 
subjected to the 35 percent of assets limit. The OTS solicits comment, 
however, regarding whether this is the proper approach.

Section 545.51  Credit Cards

    As discussed above, Sec. 545.51(a) reiterates the HOLA's grant of 
statutory authority to federal thrifts to issue credit cards and extend 
credit in connection therewith, and otherwise engage in credit card 
operations.36 The OTS proposes to delete this section and 
incorporate a reference to federal savings associations' statutory 
authority to engage in credit card operations into the proposed 
lending/investment powers chart. Consistent with the current form of 
Sec. 545.51(a), credit card operations would not be subject to the 35 
percent of assets limit.

    \36\ 12 U.S.C. 1464(b)(4).
---------------------------------------------------------------------------

    Paragraph (b), addressing the confidentiality of personal security 
identifiers in conjunction with credit card operations, would be 
deleted as redundant with the provisions of the Electronic Funds 
Transfer Act and Regulation E.37

    \37\ See 15 U.S.C. 1693 et seq. and 12 CFR part 205 
respectively.
---------------------------------------------------------------------------

Section 545.52  Loans on Savings Accounts

    Section 545.52 reiterates the HOLA's statutory grant of authority 
to federal thrifts to make loans on the security of savings accounts 
and sets forth a regulatory limitation on such loans.38 The OTS 
proposes to delete this section and incorporate the reference to 
federal thrifts' statutory authority to make loans on savings accounts 
into the proposed lending and investment powers chart. The limitation 
on loans on savings accounts to the withdrawal amount of the savings 
account set forth in paragraph (b) will be retained as an endnote.

    \38\ 12 U.S.C. 1464(c)(1)(A).
---------------------------------------------------------------------------

Section 545.53  Finance Leasing

    This section authorizes federal thrifts to engage in various 
leasing activities that are the functional equivalent of lending, 
subject to certain regulatory limitations.39 The OTS proposes to 
reference federal thrifts' finance leasing authority with applicable 
limitations in the proposed lending and investment powers chart.

    \39\ Section 545.53 cites several HOLA lending provisions, 12 
U.S.C. 1464(c)(1)(B), (c)(2)(A), and (c)(2)(D), as the basis for 
federal thrifts' leasing authority.
---------------------------------------------------------------------------

    The OTS is also proposing to consolidate the finance leasing 
requirements of this section with the general leasing requirements of 
Sec. 545.78 into one streamlined section, new Sec. 560.41. As part of 
this consolidation and streamlining, OTS proposes to delete the term 
limits in paragraph (c)(2) of Sec. 545.53. Institutions should be free 
to establish their own term limits based on prudent underwriting 
criteria and market conditions. OTS proposes to amend the residual 
value requirement for finance leases in current Sec. 545.53(c)(2). The 
current rule states that no more than 20 percent of the return may be 
realized from the residual value of the property. Commenters have 
stated that this language is confusing and that the 20 percent 
requirement is too strict in light of the fact that the Office of the 
Comptroller of the Currency (OCC) allows national banks to make leases 
with a residual value of 25 percent of the original cost of the 
property to the lessor. Therefore, OTS proposes to amend its residual 
value requirement for finance leases, to clarify the language and to 
incorporate the 25 percent standard.40

    \40\ The OCC has recently proposed amendments to its leasing 
regulation at 60 FR 46246 (September 6, 1995).
---------------------------------------------------------------------------

    The OTS solicits comment on whether it should consolidate the 
salvage powers described in this section and in the service corporation 
regulations into one new section that will outline salvage powers on 
all types of loans and investments.

Section 545.72  Government Obligations

    Section 545.72 reiterates the HOLA's grant of statutory authority 
to federal thrifts to invest in obligations of any state, territory, or 
political subdivision thereof.41 The OTS proposes to delete this 
section and incorporate the reference to federal thrifts' statutory 
authority to invest in government obligations into the proposed lending 
and investment powers chart. The provisions of Sec. 545.72(a) regarding 
investments in obligations meeting investment grade requirements will 
be incorporated into new Sec. 560.42 and noted in the endnotes to the 
chart.

    \41\ 12 U.S.C. 1464(c)(1)(H).
---------------------------------------------------------------------------

    Other provisions of Sec. 545.72 will also be modified and 
incorporated into new Sec. 560.42. In order to encourage additional 
safe and sound community-related investments under this provision, the 
agency is proposing to modify the regulatory restrictions currently 
contained in Sec. 545.72(b) for unrated government obligations before 
incorporating them into the new section.
    First, the agency is clarifying that the 1 percent of assets 
limitation for investments in obligations of a state or political 
subdivision where a savings association has its home or a branch office 
that do not meet the rating or full faith and credit requirements of 
Sec. 545.72(a) is an aggregate limit. However, the OTS is proposing to 
allow savings associations to invest additional amounts in such 
obligations, without geographic restrictions, if the obligation is 
approved for investment by the OTS. This will allow savings 
associations additional flexibility while allowing the agency the 
opportunity to monitor the potential riskiness of such investments.
    The OTS is also proposing to remove the restriction on gold-related 
obligations contained in paragraph (c) as obsolete.42

    \42\ See 57 FR 40352 (September 3, 1992).
---------------------------------------------------------------------------

Section 545.73  Inter-American Savings and Loan Bank

    Section 545.73 reiterates federal savings associations' statutory 
authority to invest in the share capital and capital reserve of the 
Inter-American Savings and Loan Bank, subject to statutory and 
regulatory limitations on the amount of the investment.43 The OTS 
proposes to remove this section and incorporate this authority and 
limitations into the new lending and investment powers chart, endnotes 
and new Sec. 560.43, which addresses foreign assistance investments. As 
with investments authorized under the Foreign Assistance Act, discussed 
earlier under Sec. 545.39, the OTS solicits comment on the extent to 
which federal savings associations have utilized this authority.

    \43\ 12 U.S.C. 1464(c)(4)(C).
---------------------------------------------------------------------------

Section 545.74  Service Corporations

    The OTS proposes, as discussed under Sec. 545.46 above, to no 
longer aggregate commercial loans made by a savings association's 
service corporation with such loans made by the savings association 
itself for purposes of the statutory 10 percent of assets limitation. 
The agency proposes a conforming change to Sec. 545.74(c)(1)(vi), where 
this regulatory aggregation is repeated. The remaining provisions of 
Sec. 545.74 are under separate review as part of the agency's 
reinvention of its subsidiaries regulations. 

[[Page 1170]]


Section 545.75  Commercial Paper and Corporate Debt Securities

    Section 545.75(a) reiterates the HOLA's grant of statutory 
authority to federal thrifts to invest in commercial paper and 
corporate debt securities.44 The OTS proposes to delete this 
paragraph and to reference federal thrifts' statutory authority to 
invest in commercial paper and corporate debt securities in the 
proposed lending and investment powers chart. The agency proposes to 
retain the limitations on these investments contained in paragraphs (b) 
and (c) and to move them into a new Sec. 560.40 on commercial paper and 
corporate debt securities in part 560. The agency solicits comment on 
whether these provisions should, alternatively, be removed from the 
regulations and incorporated as guidance in the Thrift Activities 
Handbook.

    \44\ 12 U.S.C. 1464(c)(2)(D).
---------------------------------------------------------------------------

    The agency proposes to delete paragraph (d) as no longer having any 
practical application for thrifts in light of section 28(d) of the 
Federal Deposit Insurance Act. Paragraph (d) authorizes a Federal 
savings association to invest in commercial paper and corporate debt 
securities not meeting the rating and marketability requirements of 
paragraphs (b) and (c), so long as such investments are not otherwise 
prohibited by section section 28(d) of the FDIA, which prohibits 
investments in junk bonds. The OTS solicits comment as to whether there 
is any scenario under which paragraph (d) is still relevant.

Section 545.78  Leasing

    Section 545.78(a) reiterates the HOLA's grant of statutory 
authority to federal thrifts to invest in tangible personal property 
for leasing purposes.45 The OTS proposes to incorporate this 
statutory authority reference into the proposed lending and investment 
powers chart. The OTS also proposes to delete paragraph (b) of 
Sec. 545.78, which imposes a maximum 70 percent residual value limit 
for general leasing activities, because the OTS believes that such an 
underwriting restriction may be unduly restrictive if applied in all 
cases. Such lease underwriting considerations are more appropriately 
addressed in the Thrift Activities Handbook as guidance. As discussed 
under Sec. 545.53 earlier, new part 560 will contain a Sec. 560.41 
addressing both finance leasing and general leasing authority.

    \45\ 12 U.S.C. 1464(c)(2)(C).
---------------------------------------------------------------------------

Part 556  Statements of Policy

Section 556.2  Power To Engage In Escrow Business

    Section 556.2 addresses federal thrifts' power to engage in the 
escrow business. The OTS proposes to delete this policy statement. As 
already discussed with regard to Sec. 545.32(b)(6), the OTS believes 
that the authority to establish escrow accounts is subsumed within the 
authority of federal savings associations to make loans and does not 
need to be specifically identified in the CFR.

Section 556.3  Real Estate

    Section 556.3(a) addresses the treatment of motels as either 
improved nonresidential real estate or combination home and business 
property for real estate categorization purposes. The OTS proposes to 
delete this paragraph and incorporate it into guidance. Section 
556.3(b) permits federal thrifts to purchase paving certificates that 
constitute a lien on property securing an association's loan. The OTS 
proposes to delete this section and transfer the language of the policy 
statement to the Thrift Activities Handbook.

Section 556.10  First Liens on Properties Sold by the Secretary of HUD

    Section 556.10 reiterates federal thrifts' authority to make 
mortgage loans insured by the Federal Housing Administration and 
secured by first liens on improved real estate and discusses the 
treatment and documentary evidence of such loans after disposal by the 
Secretary of Housing and Urban Development. The OTS proposes to delete 
this policy statement and move it to guidance in the Thrift Activities 
Handbook.

Part 563--Operations (All Savings Associations)

Section 563.95  Investment in State Housing Corporations

    Section 563.95 covers investments in or loans to state housing 
corporations by all savings associations. It imposes certain 
conditions, including percentage-of-asset limitations, depending on the 
type of loan or investment and the savings association's capital level. 
The OTS proposes to modify and update this section and move it into a 
new Sec. 560.121 in new part 560.
    Paragraph (a) deals with loans to, and investments in obligations 
of, state housing corporations that are secured, directly or 
indirectly, by first liens on insured improved real estate. The OTS 
proposes to remove percentage-of-asset limitations in this paragraph 
(a). Although in the agency's opinion the existing percentage-of-assets 
limitations would not affect most savings associations that make this 
type of investment, removing the limit will allow thrifts to exercise 
business judgment in determining the amount they wish to invest in such 
loans and obligations, subject, as always, to overall safety and 
soundness considerations.
    The OTS proposes to update the language in paragraph (b), which 
covers investments in obligations of state housing corporations that do 
not fall under paragraph (a), in several ways. First, the agency 
proposes to remove the outdated limitation based on a thrift's level of 
``general reserves surplus and undivided profits.'' Instead, any thrift 
that is adequately capitalized under 12 CFR Part 565 may make such 
investments. Second, the OTS proposes to allow investments under 
paragraph (b) to be made in obligations of state housing corporations 
located in any state in which the association has its home or a branch 
office. Third, the OTS proposes to revise the aggregate limit on such 
investments to equal a thrift's total capital under 12 CFR Part 567 and 
to move this requirement into a new paragraph (b)(2). Finally, the 
agency proposes to delete the requirement that a thrift may make no 
more than 25 percent of its aggregate investment in this type of 
obligation in the obligations of any one state housing corporation. 
This requirement effectively requires an institution to invest in four 
state housing corporations any time it wishes to invest in one.
    The agency also proposes to delete existing paragraph (c), which 
allows thrifts (that otherwise have the legal authority to do so) to 
make direct equity investments in equity securities of state housing 
authorities. Federal thrifts currently do not have authority to invest 
in equity securities of state housing corporations, and section 28 of 
the FDIA constrains state chartered thrifts from making, or retaining 
past July 1, 1994, any equity investment not permissible for federal 
thrifts.46 The OTS solicits comment as to whether there is any 
scenario under which paragraph (c) is still relevant.

    \46\ See 12 U.S.C. 1831e(c), which states that a state chartered 
savings association ``may not directly acquire or retain any equity 
investment of a type or in an amount that is not permissible for a 
Federal savings association,'' with a limited exception for service 
corporation investments.
---------------------------------------------------------------------------

    The agency proposes to move paragraph (d), substantially unchanged, 
into new Sec. 560.121 as paragraph (c). This paragraph addresses a 
thrift's obligation before making an investment 

[[Page 1171]]
in a state housing corporation, to obtain the corporation's agreement 
to make information available to the OTS upon request.

Section 563.97  Loans in Excess of 90 Percent of Value

    Section 563.97 authorizes thrifts to make loans on the security of 
residential real estate with loan-to-value ratios in excess of 90 
percent of value, consistent with the interagency real estate lending 
standards. The OTS proposes to delete this section because the 
interagency real estate lending standards address the same issues in a 
more comprehensive manner.

Section 563.99  Fixed-Rate and Adjustable-Rate Mortgage Loan 
Disclosures, Adjustment Notices, and Interest Rate Caps

    Section 563.99 defines fixed and adjustable rate mortgage loans and 
requires thrifts to make certain disclosures to applicants of 
adjustable rate mortgage loans. The OTS is considering moving the 
definitions in paragraph (a) to a consolidated definitional location in 
the regulations as part of the Regulatory Structure Proposal. The 
agency also expects ultimately to move this section into new Part 560, 
Subpart C, ``Adjustable Rate Mortgages.''
    The disclosure requirements of Sec. 563.99 and the Federal Reserve 
Board's (FRB) Truth in Lending Regulation Z 47 are substantially 
parallel except for their coverage of certain types of credit 
transactions. Pursuant to Sec. 303(b) of the CDRIA, the FRB is required 
to review its regulations with respect to disclosures pursuant to the 
TILA with regard to adjustable-rate mortgages in order to simplify the 
disclosures, if necessary, and make the disclosures more meaningful and 
comprehensible to consumers.48 Accordingly, the OTS will undertake 
a comprehensive review of Sec. 563.99 in conjunction with the FRB's 
section 303 review of Regulation Z.

    \47\ See 12 CFR 226.19(b), 226.20(c).
    \48\ 12 U.S.C. 4803.
---------------------------------------------------------------------------

    Currently Sec. 563.99 covers all adjustable rate loans with a term 
of more than one year, secured by property occupied or to be occupied 
by the borrower. Unlike Sec. 563.99, Regulation Z's coverage is not 
determined by the nature of the secured property but rather by other 
criteria, e.g., the extension of credit must be for personal, family, 
or household purposes.49

    \49\ 12 CFR 226.1(c)(1)(iv).
---------------------------------------------------------------------------

    As the regulations currently interact, certain transactions are 
encompassed by Sec. 563.99 but not by Regulation Z. For example, a 
savings association that makes a business purpose adjustable rate 
mortgage loan secured by a home would be subject to the disclosure 
requirements set forth at Sec. 563.99; however, no disclosures would be 
required under Regulation Z.50 In order to establish parity in 
coverage with respect to disclosure requirements among lenders, the OTS 
is today proposing to revise Sec. 563.99 to exclude from that section's 
coverage adjustable rate loans that are primarily for a business, 
commercial, or agricultural purposes, consistent with Regulation 
Z.51

    \50\ Regulation Z exempts from its disclosure requirements 
extensions of credit primarily for business, commercial, or 
agricultural purposes. See 12 CFR 226.3(a)(1).
    \51\ 12 CFR 226.3(a).
---------------------------------------------------------------------------

Section 563.100-.101  Real Estate Lending Standards

    These sections prescribe real estate lending standards that require 
all savings associations to adopt and maintain comprehensive written 
real estate lending policies that are consistent with safe and sound 
practices and with the Guidelines for Real Estate Lending.52 
Savings associations' policies must address certain lending 
considerations including loan-to-value limits, loan administration 
procedures, portfolio diversification standards, and documentation, 
approval, and reporting requirements. The OTS is not proposing changes 
to these sections today, but plans ultimately to redesignate and move 
them substantially unchanged into a new part 560.

    \52\ Appendix A to the Real estate lending standards at 
Secs. 563.100-563.101.
---------------------------------------------------------------------------

    The OTS adopted the real estate lending standards pursuant to an 
interagency effort mandated by section 304 of the FDICIA.53 
Pursuant to Section 303 of the CDRIA, the OTS and the other banking 
agencies are each to review these standards and 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.'' 54 The OTS welcomes comments on the 
impact that the real estate lending standards, including the 
Guidelines, are having on the availability of the types of credit and 
communities described above.

    \53\ See 57 FR 62890 (December 31, 1992).
    \54\ 12 U.S.C. 4803(a)(1)(C).
---------------------------------------------------------------------------

Section 563.160  Classification of Certain Assets

    Section 563.160  requires thrifts to classify their own assets and 
establish valuation allowances. The OTS proposes to delete this section 
in its entirety.55

    \55\ The OTS has already requested comment on deleting the 
definitions of ``substandard,'' ``doubtful,'' and ``loss'' set forth 
in paragraph (b), and the definition of ``Special Mention'' assets 
in paragraph (e) because definitions of those terms are contained in 
the Thrift Activities Handbook. 58 FR 38730 (July 20, 1993). 
Commenters supported such deletions. The OTS proposed deleting 
paragraph (f) as part of its regulatory review proposal of August 
28, 1995, and received no unfavorable comments.
---------------------------------------------------------------------------

    Section 563.160 was added in 1987 pursuant to section 402 of CEBA, 
which amended the HOLA to add a new section 9 requiring that the FHLBB, 
the OTS's predecessor, adopt regulations establishing an asset 
classification system. FIRREA removed that section and in turn amended 
the HOLA to require only that OTS asset classification regulations and 
policies be no less stringent than the OCC's.56 None of the 
banking agencies, including OCC, has an asset classification 
regulation. Their asset classification systems are set forth in 
supervisory guidance.

    \56\ See HOLA section 4(c), 12 U.S.C. 1463.
---------------------------------------------------------------------------

    In order to more closely parallel the asset classification systems 
of the other federal banking agencies, the OTS believes that 
Sec. 563.160 can be removed without impairing safety and soundness. The 
existing asset classification system will be placed in the Thrift 
Activities Handbook.
    This change in no way relieves thrifts of the responsibility to 
properly classify their assets and establish prudent valuation 
allowances as necessary. Nor does it reduce the OTS's statutory 
supervisory authority to require associations to classify their assets 
and establish valuation allowances based on examination findings.

Section 563.170  Examinations and Audits; Appraisals; Establishment and 
Maintenance of Records

    Paragraph (a) of Sec. 563.170 authorizes the OTS to examine thrifts 
consistent with OTS policies and to annually assess thrifts for the 
costs of such examinations based on the thrifts' assets. The OTS 
proposes to retain this paragraph.
    Paragraph (b) authorizes the OTS to select appraisers to perform 
appraisals of real estate in connection with examinations and audits 
and requires thrifts to pay for such appraisal services. The agency 
proposes to retain this paragraph.
    Paragraph (c) sets forth general record maintenance requirements 
for savings associations to ensure that examiners have access to an 
accurate and complete record of all business transacted by the thrift. 
The OTS proposes to retain this 

[[Page 1172]]
general introductory paragraph, with a modification to incorporate 
language in current paragraph (c)(9) on maintaining records required by 
other laws or regulations.
    Paragraphs (c)(1)-(9) set forth a list of specific loan documents 
that, at a minimum, thrifts must maintain to comply with 
Sec. 563.170(c). While the documents listed are generally appropriate 
and could be used as a checklist for prudent lending, a rigid 
requirement that all documents be present for each loan is too 
restrictive and does not necessarily address all safety and soundness 
concerns. Currently, if an institution is missing any of the documents 
required by regulation, it is technically in violation of that 
regulation, even if the safety and soundness intent of the regulation 
has been satisfied. Conversely, safety and soundness concerns may, in a 
particular instance, necessitate different or additional documentation 
beyond those records listed in the regulation.
    For example, Sec. 563.170(c)(1)(v) requires either a financial 
statement or a credit report for all loans, ostensibly to justify the 
borrower's willingness and ability to repay the loan. However, the 
ability and willingness of a borrower to repay a consumer or home loan 
may be better demonstrated with a verification of employment (not 
currently required) and a satisfactory credit report, rather than a 
financial statement. For commercial borrowers, verification by the 
institution that the borrower's financial statements accurately reflect 
all assets, liabilities, and any other guarantees or encumbrances is 
more important to the decision to extend credit than the mere presence 
of a financial statement.
    Since FIRREA, several interagency regulations have been developed 
that include guidelines for proper loan documentation. These 
underwriting and documentation standards minimize the need for OTS to 
have a regulation setting specific documentation requirements.
    Guidelines appended to the interagency real estate lending 
standards state that an institution should establish loan 
administration procedures that address documentation.57 The OTS 
also sets forth loan documentation and credit underwriting requirements 
in the interagency Standards for Safety and Soundness and Guidelines 
Establishing Standards for Safety and Soundness to which all federal 
insured depository institutions are expected to adhere.58

    \57\ See 12 CFR part 563, subpart D, appendix A.
    \58\ 12 CFR Part 570 and Appendix A thereto, 60 FR 35674 (July 
10, 1995).
---------------------------------------------------------------------------

    The OTS proposes replacing the specific documentation listed in 
paragraphs (c)(1)-(9) with more general documentation standards in a 
new Sec. 560.170 in part 560. These proposed standards are drawn from 
the interagency guidelines establishing standards for safety and 
soundness.
    Deleting these paragraphs would not only relieve savings 
associations of documentation requirements that exceed those for banks 
and other financial institutions but also may enable savings 
associations to take better advantage of technological marketplace 
advances such as telephone and computerized home banking. The OTS 
invites comment as to whether the proposed revisions to loan 
documentation requirements are sufficiently flexible to accommodate 
savings associations' participation in telephone and computerized home 
banking.
    The OTS is considering transferring the current document list in 
paragraphs (c)(1)-(5), (7), to the Thrift Activities Handbook to be 
used as a checklist of records generally maintained by prudent lenders 
to support a loan.
    Paragraph (c)(10) of Sec. 563.170 exempts certain small business 
loans from the documentation requirements set forth in paragraphs 
(c)(1)-(7). The OTS proposes to delete paragraph (c)(10) inasmuch as 
the revision of paragraphs (c)(1)-(7) eliminates the need for this 
exemption.
    Paragraph (d) of Sec. 563.170 addresses change in location of 
accounting or control records. Paragraph (e) addresses use of data 
processing services for maintenance of records. The OTS proposes to 
retain these paragraphs, but solicits comments on how these paragraphs 
might be updated to reflect technological changes in record 
maintenance.

Section 563.172  Re-evaluation of Real Estate Owned

    Section 563.172 requires savings associations to appraise all real 
estate owned (REO) at the earlier of in-substance foreclosure or at the 
time of acquisition and, thereafter, as dictated by prudent management 
policy. The OTS is considering deleting this section inasmuch as 
thrifts can apply the appraisal regulations and general accounting 
principles (GAAP) to determine when an appraisal may be appropriate or 
necessary for safety and soundness. If it is retained, this section 
would be incorporated into new part 560. The OTS solicits comment on 
the need for this section and on how the interaction between this 
section and the appraisal regulations at part 564 might be clarified.

Part 571  Statements of Policy

Section 571.8  Investment in State Housing Corporations

    Section 571.8 limits savings associations' investment authority in 
state housing corporations to certain public and private corporations 
and agencies. The OTS proposes to delete this policy statement as an 
unnecessary limitation on the definition of state housing corporation.

Section 571.13   Participation Interests in Pools of Loans

    Section 571.13 addresses appropriate documentation for a savings 
association's purchase of a participation interest in a pool of loans 
(in the nature of mortgage-backed securities) and indicates that 
compliance with the documentation requirements of Sec. 563.170 may be 
impracticable for such transactions. The OTS proposes to delete this 
section inasmuch as the proposed revision of Sec. 563.170(c) would 
eliminate the need for this policy statement. The OTS plans to transfer 
the documentation guidance for purchases of participation interests in 
pools of loans to the Thrift Activities Handbook.

Section 571.20  Payment for Appraisals

    Section 571.20 addresses payment by savings associations for 
appraisals obtained as part of an OTS examination. The OTS proposes to 
delete this section and expects to transfer this policy statement to 
the Thrift Activities Handbook.

Section 571.22  Most Favored Lender Status

    Section 571.22 implements section 4(g) of the HOLA, which 
authorizes savings associations to charge on any extension of credit an 
interest rate equal to the greater of (a) one percentage point above 
the discount rate on 90-day commercial paper in effect at the Federal 
Reserve bank in the Federal Reserve district in which the savings 
association is located or (b) the rate allowed by the laws of the State 
in which the savings association is located. The OTS proposes to move 
the provisions of this section into new section 560.2 without 
substantive modification.
    However, the OTS requests specific comment on one aspect of 
Sec. 571.22. Paragraph (b) indicates that any savings association 
seeking to make loans at the 

[[Page 1173]]
interest rate authorized for a state most favored lender must also 
comply with the same ``substantive state law requirements'' that are 
applicable to that state lender when making loans of the same type. The 
OCC, which administers a very similar statutory provision for national 
banks, uses a slightly different phrase to describe what types of state 
laws must be complied with pursuant to the most favored lender 
doctrine. The OCC requires national banks to comply with all state laws 
that apply to the state most favored lender and are ``material to the 
determination of the interest rate'' authorized under state law.59 
The OTS has previously opined that this standard is essentially the 
same as the OTS's ``substantive law'' standard.60 Accordingly, 
when addressing interpretive questions, the OTS has looked to the case 
law and other precedent interpreting the national bank standard. In 
order to promote both clarity and parity, the OTS specifically requests 
comment regarding whether paragraph (b) of Sec. 571.22 should be 
replaced in its entirety with a reference to state laws that are 
``material to the determination of the interest rate.''

    \59\ 12 CFR 7.7310.
    \60\ OTS Op. Chief Counsel, Oct. 14, 1992.
---------------------------------------------------------------------------

2. New Part 560--Lending and Investment
    The OTS proposes to adopt a new part 560, Lending and Investment, 
that will ultimately include all of the agency's lending and investment 
regulations except for Appraisals (part 564) and subsidiary-related 
investments (currently under separate review). The agency believes that 
this reorganization will make it much easier for those using the 
agency's regulations to find all relevant lending and investment 
powers, authorities, and limitations.

Section 560.1  Authority and Scope (Proposed)

    This proposed section sets out the basic statutory authority for 
lending and which regulations in this part will apply only to federal 
savings associations and which to all savings associations. It also 
briefly sets forth the agency's expectations that all lending and 
investment activities are to be conducted prudently, consistent with 
safety and soundness, with adequate portfolio diversification, and in a 
manner appropriate for the size of the institution, the nature and 
scope of its operations, and conditions in its lending market.

Section 560.2  Applicability of Law (Proposed)

    This proposed section sets forth the OTS's longstanding position, 
as developed in caselaw and legal opinions by both the OTS and its 
predecessor, the FHLBB, and as currently reflected in Sec. 545.2, on 
the federal preemption of state laws purporting to affect the lending 
activities of federal savings associations. Because the lending 
regulations are being moved out of Part 545 and, thus, separated from 
Sec. 545.2 and because many of the details of the lending regulations 
that have been cited in preemption opinions are being removed, the OTS 
proposes to include new Sec. 560.2 to confirm and carry forward its 
existing preemption position.
    As discussed in Section III.A.4., above, lending is one of the core 
activities in which federal savings associations engage. The OTS 
believes that Federal preemption of State laws purporting to affect 
lending is critical to filling the agency's mandate under HOLA sections 
4(a) and 5(a) to provide for the safe and sound operation of Federal 
savings associations in accordance with the best practices of thrift 
institutions in the United States. Today's proposal, which deals only 
with preemption in the lending area and does not amend Sec. 545.2, 
provides general standards drawn from caselaw and legal opinions and 
the agency's current regulations. The agency is hopeful that the 
increased clarity and specificity of Sec. 560.2 will reduce confusion 
and the need for frequent preemption inquiries to OTS.

Subpart A--Lending and Investment Powers for Federal Savings 
Associations

    This subpart will contain lending and investment regulations 
directly applicable only to federal savings associations.

Section 560.30  General Lending and Investment Powers (Proposed)

    Proposed Sec. 560.30 takes the form of a chart that lists many of 
the lending and investment powers granted to federal thrifts by the 
HOLA. It is derived from the regulations that currently appear in part 
545. An important component of this regulation are the endnotes to the 
chart that elaborate upon statutory limitations, impose regulatory 
limitations, or otherwise describe conditions on the exercise of these 
powers.
    Although the chart references many of the more commonly used 
powers, it does not give a complete listing of all statutory lending 
and investment authorities. The OTS solicits comment on whether a chart 
in this format makes the CFR easier to use. The OTS also invites 
comment on whether the chart would be more useful if it codified all 
statutory powers, even those without statutory or regulatory 
limitations or those rarely used.

Section 560.31  Election Regarding Categorization of Investments and 
Related Calculations

    This proposed section is derived from current Sec. 545.31, 
incorporating the modifications described earlier under that section.

Section 560.34  Limitations on Home Loans

    This proposed section is derived from current Sec. 545.34 (b) and 
(c).

Section 560.40  Commercial Paper and Corporate Debt Securities

    This proposed section is derived from paragraphs (b) and (c) of 
current Sec. 545.75.

Section 560.41  Leasing

    This proposed section is a consolidation and reorganization of 
current Sec. 545.53 (finance leasing) and Sec. 545.78 (general leasing 
authority), incorporating the modifications described under those 
sections.

Section 560.42  State and Local Government Obligations

    This proposed section is derived from section 5(c)(1)(H) of the 
HOLA and paragraphs (a) and (b) of current Sec. 545.72.

Section 560.43  Foreign Assistance Investments

    This proposed section is a consolidation and reorganization of 
current Secs. 545.39 and 545.73.

Subpart B--Lending and Investment Provisions Applicable to All Savings 
Associations

    This proposed subpart will contain safety and soundness based 
lending standards and provisions applicable to all savings 
associations, including state savings associations, to the extent that 
they have the authority to make the investments it discusses. The 
agency expects to move its Real Estate Lending Standards and 
Guidelines, currently located at 12 CFR 563.100-.101 and Appendix A to 
Part 563, Subpart D, into this subpart.

Section 560.120  Letters of Credit

    This proposed section is derived from current Sec. 545.48 and 
establishes standards for letters of credit for all savings 
associations.

[[Page 1174]]


Section 560.121  Investments in State Housing Corporations

    This proposed section is derived from current Sec. 563.95, 
incorporating the modifications described earlier under that section.

Section 560.170  Records for Lending Transactions

    This proposed section will contain general loan documentation 
requirements based on the interagency safety and soundness standards 
and guidelines found at 12 CFR Part 570. It will replace the specific 
loan documentation requirements currently found at 12 CFR 563.170(c) 
(1)-(10).

Subpart C--Adjustable Rate Mortgages

    This proposed subpart will contain new Sec. 560.210, ``Alternative 
Mortgage Parity Act'' and will also ultimately include ARM disclosure 
requirements currently found in Sec. 563.99, with the possible 
amendments discussed under that section.

Section 560.210  Alternative Mortgage Parity Act

    This proposed section is derived from current Sec. 545.33(f), 
``Notice of housing creditors regarding alternative mortgage 
transactions.'' The OTS has observed that housing creditors interested 
in engaging in alternative mortgage transactions could not easily 
locate this section and believes placing it into a subpart specifically 
dealing with alternative mortgages will make it more accessible to 
users. The section has been streamlined and modified to reflect changes 
proposed today, including the removal of cross-references of provisions 
proposed for repeal.

IV. Proposed Disposition of Lending- and Investment-Related 
Regulations

    The following chart displays the proposed reorganization of OTS's 
existing lending- and investment-related regulations.

----------------------------------------------------------------------------------------------------------------
         Original provision                 New provision                             Comment                   
----------------------------------------------------------------------------------------------------------------
Sec.  545.31(a)....................  Sec.  560.31(a)............  Modified; last sentence to be addressed in    
                                                                   Regulatory Structure rulemaking.             
Sec.  545.31(b)....................  Sec.  560.31(a)............  Modified; last sentence to be addressed in    
                                                                   Regulatory Structure rulemaking.             
Sec.  545.31(c),(d)................  Sec.  560.31(b), (c).......  Unchanged.                                    
Sec.  545.32(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.32(b)(1),(2).............  ...........................  Removed.                                      
Sec.  545.32(b)(3)-(6).............  ...........................  Removed, included as areas in which state law 
                                                                   is preempted under Sec.  560.2.              
Sec.  545.32(c)....................  ...........................  To be addressed in Regulatory Structure       
                                                                   rulemaking.                                  
Sec.  545.32(d)....................  ...........................  Removed.                                      
Sec.  545.33 Introductory paragraph  ...........................  To be addressed in Regulatory Structure       
                                                                   rulemaking.                                  
Sec.  545.33(a)-(e)................  ...........................  Removed, included as area in which state law  
                                                                   is preempted under Sec.  560.2.              
Sec.  545.33(f)....................  Sec.  560.210..............  Modified.                                     
Sec.  545.34(a)....................  Sec.  560.2................  Modified and reorganized.                     
Sec.  545.34(b), (c)...............  Sec.  560.34...............  Substantially unchanged.                      
Sec.  545.35.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.36.......................  ...........................  Removed. Paragraphs (c) and (d) to be         
                                                                   incorporated into guidance.                  
Sec.  545.37.......................  ...........................  Removed.                                      
Sec.  545.38(a),(b)................  ...........................  Removed.                                      
Sec.  545.38(c)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.39(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.39(b)....................  Sec.  560.43...............  Modified.                                     
Sec.  545.40.......................  ...........................  Removed.                                      
Sec.  545.41.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.42.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.43.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.44.......................  ...........................  Removed.                                      
Sec.  545.45(a),(b)................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.45(c),(d)................  ...........................  To be incorporated into guidance.             
Sec.  545.45(e)....................  ...........................  Removed.                                      
Sec.  545.46(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.46(b) introductory         Sec.  560.30...............  Incorporated into lending and investment      
 paragraph and (b)(1).                                             powers chart.                                
Sec.  545.46(b)(2).................  ...........................  Removed.                                      
Sec.  545.47.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.48.......................  Sec.  560.30...............  Authority incorporated into lending and       
                                                                   investment powers chart.                     
Sec.  545.48(a)....................  Sec.  560.120..............  Modified.                                     
Sec.  545.48(b)....................  ...........................  Removed.                                      
Sec.  545.49.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.50(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.50(b)....................  ...........................  To be addressed in Regulatory Structure       
                                                                   rulemaking.                                  
Sec.  545.50(c)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.51(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.51(b)....................  ...........................  Removed.                                      
Sec.  545.52.......................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.53(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.53(b)-(d)................  Sec.  560.41...............  Significantly changed.                        
Sec.  545.72 Introductory paragraph  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.72(a), (b)...............  Sec.  560.42...............  Significantly changed.                        
Sec.  545.72(c)....................  ...........................  Removed.                                      
Sec.  545.73 Introductory paragraph  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.73(a), (b)...............  Sec.  560.43...............  Modified.                                     

[[Page 1175]]
                                                                                                                
Sec.  545.74(c)(1)(vi).............  ...........................  Removed.                                      
Sec.  545.75(a)....................  Sec.  560.30...............  Incorporated into lending and investment      
                                                                   powers chart.                                
Sec.  545.75(b), (c)...............  Sec.  560.40...............  Modified.                                     
Sec.  545.75(d)....................  ...........................  Removed.                                      
Sec.  545.78.......................  Sec.  560.30. See also       Significantly changed and incorporated into   
                                      560.41.                      lending and investment powers chart.         
Sec.  556.2........................  ...........................  Removed.                                      
Sec.  556.3........................  ...........................  To be incorporated into guidance.             
Sec.  556.10.......................  ...........................  To be incorporated into guidance.             
Sec.  563.95.......................  Sec.  560.121..............  Significantly changed.                        
Sec.  563.97.......................  ...........................  Removed.                                      
Sec.  563.99.......................  ...........................  Modified by adding new paragraph (g).         
Sec.  563.160......................  ...........................  Removed.                                      
Sec.  563.170(a),(b)...............  ...........................  Unchanged.                                    
Sec.  563.170(c)...................  ...........................  Modified.                                     
Sec.  563.170(c)(1)-(10)...........  Sec.  560.170..............  Significantly changed.                        
Sec.  563.170(d),(e)...............  ...........................  Unchanged.                                    
Sec.  563.172......................  ...........................  Modifications or removal under consideration. 
Sec.  571.8........................  ...........................  Removed.                                      
Sec.  571.13.......................  ...........................  Removed.                                      
Sec.  571.20.......................  ...........................  To be incorporated into guidance.             
Sec.  571.22.......................  Sec.  560.2................  No substantive change.                        
----------------------------------------------------------------------------------------------------------------



V. Request for Comment

    The OTS invites comment on all aspects of the proposal as well as 
specific comments on the proposed changes. For the convenience of the 
reader, specific areas noted for comment earlier in this preamble are 
repeated under section B., below.

A. General Areas for Comment

    The OTS also solicits comments on several broader areas of concern:
    (1) What is the best approach for providing clear guidance on the 
preemptive effect of OTS's lending regulations for federal savings 
associations?
    (2) Could a supervisory approach more dependent on general 
guidelines and safety and soundness standards lead to differences in 
interpretation of regulatory requirements and safety and soundness 
standards? Would these differences result in unnecessary 
misunderstandings and confrontations between institutions and 
supervisory staff? What types of communications or training would ease 
the transition to a supervisory approach more dependent on guidelines?
    (3) Are there regulatory or policy barriers in OTS's lending and 
investment regulations that prevent or otherwise discourage savings 
associations from investing in community development activities? As 
discussed above, OTS is proposing to remove unnecessary restrictions 
from its regulations on investments in government obligations and state 
housing corporations. The agency seeks comments on other regulatory 
changes that would encourage safe and sound community lending that are 
within its statutory authority.
    (4) While savings associations have, and will continue to have, a 
focus on mortgage lending, it is important that the regulations do not 
impair their ability to offer other types of loans. A savings 
association should be able to structure its portfolio of assets to 
offer the best mix of income-producing products that will meet its 
community's credit needs consistent with statutory authority. The 
agency is proposing to remove commercial loans made by service 
corporations from the overall commercial lending limit, which it 
believes is consistent with safety and soundness and within its 
statutory authority. The agency solicits comments on what other 
regulations affecting federal savings associations' commercial lending, 
especially small business lending, authority could be modified.

B. Specific Requests for Comment

    For the convenience of the reader, the specific points on which the 
proposal requests comment are repeated below:
    (1) Should the regulation contain a chart listing the most commonly 
used lending and investment powers that would make it easier to locate 
lending authorities and determine which restrictions apply? Would such 
a chart be more useful if it included statutory provisions not 
currently set forth in the regulations?
    (2) Today's proposal represents the agency's current best 
considered judgment about the right balance between which provisions 
affecting lending should be binding regulations and which should be 
guidance conveying the OTS's general views on safety and soundness 
standards. Does the proposal achieve these goals?
    (3) The section-by-section analysis highlights particular lending 
provisions that the agency is considering modifying or removing in an 
effort to streamline the lending regulations and remove unnecessary 
restrictions. Are specific, detailed regulations needed in these areas?
    (4) Has the current definition of secured real estate loan provided 
adequate guidance for savings associations and how could it be 
clarified or updated?
    (5) Should any of the provisions in Sec. 545.33(c), limitations on 
adjustments to mortgages, be retained?
    (6) Should OTS retain the requirement that an index used for an ARM 
must be outside the institution's control or, alternatively, a 
requirement of a national or regional index? The OTS also solicits 
comment on how federal thrifts might structure their ARM lending 
programs to ensure that consumers are protected if adjustments need not 
be tied to external indices.
    (7) Should the provisions of Sec. 545.33(d)(2), which set forth 
what may constitute security for a loan on a cooperative, be included 
in guidance?
    (8) Are the restrictions on late fees and prepayment penalties on 
home loans, currently found in Sec. 545.34(b) and (c) and proposed to 
be incorporated into new Sec. 560.34, important for borrowers?
    (9) Have thrifts invested in or made loans guaranteed under the 
Foreign Assistance Act?
    (10) How can OTS best reference federal thrifts' authority to make 
low-rent housing loans in the proposed lending and investment powers 
chart? 

[[Page 1176]]

    (11) Should the definition of ``mortgage'' set forth in Sec. 302 of 
the FHLMC Act, currently cross-referenced in Sec. 545.44, be 
incorporated into a future general definitional section?
    (12) Do paragraphs (c) and (d) of Sec. 545.45 on manufactured home 
financing underwriting standards provide useful guidance to savings 
associations?
    (13) Does transferring the substance of the letters of credit 
regulation, Sec. 545.48(a), to the new part 560 provide needed uniform 
standards for the thrift industry, the benefits of which would outweigh 
any additional burden on state savings associations? Alternatively, 
should Sec. 545.48(a) be transferred to handbook guidance?
    (14) How can the definition of consumer loan be clarified for 
classification purposes and coordinated with other OTS regulations that 
define consumer credit differently?
    (15) Should the salvage powers described in the leasing regulation 
(proposed new Sec. 560.41) and in the service corporation regulation 
(Sec. 545.74) be consolidated into one new section that will outline 
salvage powers on all types of loans and investments?
    (16) To what extent have savings associations utilized the 
authority to invest in the Inter-American Savings and Loan Bank?
    (17) The agency proposes to retain paragraphs (b) and (c) of 
current Sec. 545.75 and to move them into a new Sec. 560.40 on 
commercial paper and corporate debt securities in part 560. Should 
these provisions, alternatively, be removed from the regulations and 
incorporated as guidance in the Thrift Activities Handbook?
    (18) The agency proposes to delete paragraph (d) of current 
Sec. 545.75, commercial paper and corporate debt securities, as no 
longer having any practical application for savings associations in 
light of section 28(d) of the FDIA. Is there any scenario under which 
paragraph (d) is still relevant?
    (19) Pursuant to 303 of the CDRIA, the OTS and the other banking 
agencies are each to review these standards and to consider the impact 
that such standards have on credit availability for small business, 
residential, and agricultural purposes, and on low- and moderate-income 
communities. What impact have the interagency real estate lending 
standards, including the Guidelines, had on the availability of the 
types of credit and communities described above?
    (20) Are the proposed revisions to loan documentation requirements 
(proposed new Sec. 560.170) sufficiently flexible to accommodate 
participation in telephone and computerized home banking?
    (21) Paragraph (d) of Sec. 563.170 addresses change in location of 
accounting or control records. Paragraph (e) addresses use of data 
processing services for maintenance of records. How can these 
paragraphs be updated to reflect technological changes in record 
maintenance?
    (22) What is the need for Sec. 563.172, re-evaluation of real 
estate? How can the interaction between this section and the appraisal 
regulations at part 564 be clarified?
    (23) Should paragraph (b) of Sec. 571.22 (most favored lender) be 
replaced in its entirety with a reference to state laws that are 
``material to the determination of the interest rate,'' in order to 
clarify the meaning of paragraph (b) and to promote parity between 
savings associations and national banks?

VI. Paperwork Reduction Act of 1995

    The OTS invites comment on:
    (1) Whether the proposed collection of information contained in 
this notice of proposed rulemaking is necessary for the proper 
performance of the agency's functions, including whether the 
information has practical utility;
    (2) The accuracy of the agency's estimate of the burden of the 
proposed information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected; and
    (4) Ways to minimize the burden of the information collection, 
including the use of automated collection techniques or other forms of 
information technology.
    Respondents/recordkeepers are not required to respond to this 
collection of information unless it displays a currently valid OMB 
control number.
    The reporting requirements contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on all aspects of this information collection 
should be sent to the Office of Management and Budget, Paperwork 
Reduction Project (1550), Washington, DC 20503 with copies to the OTS, 
1700 G Street, NW., Washington, DC 20552.
    The recordkeeping requirements in this notice of proposed 
rulemaking are found in 12 CFR 560.170 and 563.170. The recordkeeping 
requirements set forth in this notice of proposed rulemaking are needed 
by the OTS in order to supervise savings associations and develop 
regulatory policy. The likely recordkeepers are OTS-regulated savings 
associations.
    Estimated number of respondents and/or recordkeepers: 1,460.
    Estimated average annual burden hours per recordkeeper: 422 hours.
    Estimated total annual reporting and recordkeeping burden: 616,431 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for the period of time respondent/
recordkeeper owns the loan plus three years.

VII. Executive Order 12866

    The Director of the OTS has determined that this proposed rule does 
not constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

VIII. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OTS certifies that this proposal will not have a significant economic 
impact on a substantial number of small entities. The proposal does not 
impose any additional burdens or requirements upon small entities and 
lowers several paperwork and other burdens on all savings associations.

IX. Unfunded Mandates Act of 1995

    The OTS has determined that the requirements of this proposed 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, a budgetary impact statement is not required 
under section 202 of the Unfunded Mandates Act of 1995.

List of Subjects

12 CFR Part 545

    Accounting, Consumer protection, Credit, Electronic funds 
transfers, Investments, Manufactured homes, Mortgages, Reporting and 
recordkeeping requirements, Savings associations.

12 CFR Part 556

    Savings associations.

12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.

12 CFR Part 563

    Accounting, Advertising, Crime, Currency, Flood insurance, 
Investments, Mortgages, Reporting and recordkeeping requirements, 
Savings associations, Securities, Surety bonds. 

[[Page 1177]]


12 CFR Part 571

    Accounting, Conflicts of interest, Investments, Reporting and 
recordkeeping requirements, Savings associations.

    Accordingly, and under the authority of 12 U.S.C. 1462a, the Office 
of Thrift Supervision proposes to amend chapter V, title 12, Code of 
Federal Regulations, as set forth below.

PART 545--OPERATIONS

    1. The authority citation for part 545 continues to read as 
follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.


Sec. 545.31  [Amended]

    2. Section 545.31 is amended by removing the first two sentences of 
paragraph (a), and paragraphs (c) and (d).


Sec. 545.32  [Amended]

    3. Section 545.32 is amended by removing and reserving paragraphs 
(a), (b), and (d).


Sec. 545.33  [Amended]

    4. Section 545.33 is amended by removing and reserving paragraphs 
(a) through (f).


Secs. 545.34-545.43, 545.45-545.49  [Removed]

    5. Sections 545.34 through 545.43 and 545.45 through 545.49 are 
removed.


Sec. 545.50  [Amended]

    6. Section 545.50 is amended by removing and reserving paragraphs 
(a) and (c).


Secs. 545.51-545.53  [Removed]

    7. Sections 545.51 through 545.53 are removed.


Sec. 545.72-545.73  [Removed]

    8. Sections 545.72 through 545.73 are removed.
    9. Section 545.74 is amended by revising paragraph (c)(1)(vi) to 
read as follows:


Sec. 545.74  Service corporations.

* * * * *
    (c) * * *
    (1) * * *
    (vi) Commercial loans and participations therein.
* * * * *


Sec. 545.75  [Removed]

    10. Section 545.75 is removed.


Sec. 545.78  [Removed]

    11. Section 545.78 is removed.

PART 556--STATEMENTS OF POLICY

    12. The authority citation for part 556 continues to read as 
follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C. 
1693-1693r.


Secs. 556.2, 556.3, 556.10  [Removed]

    13. Sections 556.2, 556.3, and 556.10 are removed.
    14. Part 560 is added to read as follows:

PART 560--LENDING AND INVESTMENT

Sec.
560.1  General.
560.2  Applicability of law.

Subpart A--Lending and Investment Powers for Federal Savings 
Associations

560.30  General lending and investment powers for Federal savings 
associations.
560.31  Election regarding categorization of loans or investments 
and related calculations.
560.34  Limitations on home loans.
560.40  Commercial paper and corporate debt securities.
560.41  Leasing.
560.42  State and local government obligations.
560.43  Foreign assistance investments.

Subpart B--Lending and Investment Provisions Applicable to All Savings 
Associations

560.120  Letters of credit.
560.121  Investment in state housing corporations.
560.170  Records for lending transactions.

Subpart C--Adjustable Rate Mortgages

560.210 Alternative Mortgage Parity Act.

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828, 1701j-3, 
3803, 3806; 42 U.S.C. 4106.


Sec. 560.1  General.

    (a) Authority and scope. This part is being issued by the OTS under 
its general rulemaking and supervisory authority under the Home Owners' 
Loan Act, 12 U.S.C. 1462 et seq. Subpart A of this part sets forth the 
lending and investment powers and authority of Federal savings 
associations. Subpart B of this part contains safety-and-soundness 
based lending and investment provisions applicable to all savings 
associations. Subpart C of this part deals with adjustable-rate 
mortgages.
    (b) General lending standards. Each savings association is expected 
to conduct its lending and investment activities prudently. Each 
association should use lending and investment standards that are 
consistent with safety and soundness and ensure adequate portfolio 
diversification and are appropriate for the size and condition of the 
institution, the nature and scope of its operations, and conditions in 
its lending market. Each association should adequately monitor its 
portfolio and collateral.


Sec. 560.2  Applicability of law.

    (a) General standards. In considering whether State laws apply to 
the lending and investment activities of Federal savings associations, 
the OTS will apply generally recognized principles of Federal 
preemption of state law. For purposes of this part, ``State law'' 
includes any State statute, regulation, ruling, order or judicial 
decision. The OTS intends to occupy the entire field of lending 
regulation for Federal savings associations. For purposes of clarity, 
paragraphs (b) and (d) of this section set forth specific areas in 
which State laws are expressly preempted as they purport to affect 
lending by Federal savings associations and any limitations on such 
preemption. Paragraph (c) of this section sets forth the specific areas 
in which state laws that may have an effect on lending are not 
preempted by Federal law.
    (b) Express preemption. Federal savings associations may make all 
loans and investments authorized under federal law, including this 
part, without regard to limitations in state law purporting to regulate 
such activities, including, without limitation, laws governing:
    (1) Licensing, registration and filings and reports;
    (2) Loan to value ratios;
    (3) Amortization of loans, including the deferral and 
capitalization of interest;
    (4) Adjustments to the interest rate, payment, balance, or term to 
maturity of the loan, including calling a loan due and payable upon the 
passage of a number of years since closing or a specified event 
external to the loan;
    (5) Loan-related fees, including without limitation, initial 
charges, late charges, and prepayment penalties;
    (6) Escrow accounts;
    (7) Security property, including leaseholds;
    (8) Disclosure requirements and access to credit reports;
    (9) Requirements on disbursements and repayments;
    (10) Mortgage processing;
    (11) Usury and interest rate ceilings to the extent provided in 12 
U.S.C. 1735f-7(a) and part 590 of this chapter and 12 U.S.C. 1463(g) 
and paragraph (d) of this Sec. 560.2; and
    (12) Due-on-sale clauses to the extent provided in 12 U.S.C. 1701j-
3 and part 591 of this chapter.
    (c) State laws that are not preempted. Notwithstanding paragraph 
(b) of this 

[[Page 1178]]
section, state laws in the following areas are not preempted as they 
affect the lending operations of Federal savings associations:
    (1) General contract law;
    (2) General real property law;
    (3) Homestead laws specified in 12 U.S.C. 1462a(f);
    (4) Tort law; and
    (5) Criminal law.
    (d) Most favored lender. (1) Under 12 U.S.C. 1463(g), savings 
associations are authorized to charge interest at a rate not to exceed 
the greater of either one percent above the Federal Reserve ninety-day 
discount rate or the rate allowed to the most favored lender on the 
particular class of loans under State law whenever the greater of 
either of these rates exceeds the rate the association is permitted to 
charge by State law.
    (2) Savings associations may only charge the preferential rates 
reserved for most favored lenders when they are making the same type of 
loans as the most favored lender. Accordingly, savings associations may 
not charge the maximum loan rates permitted for small loan companies 
unless that loan meets the substantive state law requirements as to 
loan term amount, use of proceeds, identity of borrower, and so forth. 
Consumer protections specifically required in such loans when made by 
the most favored lender are also to be considered substantive and must 
be included in loans made by savings associations that desire to use 
most-favored-lender rates.
    (3) Federal savings associations are not required to submit to 
state most-favored-lender restrictions that are primarily procedural or 
regulatory in nature. Such restrictions include licensing, bonding, and 
reporting to State authorities. The degree to which state-chartered 
savings associations must comply with such restrictions will be 
determined by their State supervisors.

Subpart A--Lending and Investment Powers for Federal Savings 
Associations


Sec. 560.30 General lending and investment powers for Federal savings 
associations.

    Pursuant to section 5(c) of the Home Owners Loan Act (HOLA), 12 
U.S.C. 1464(c), a federal savings association may make, invest in, 
purchase, sell, participate in, or otherwise deal in (including 
brokerage or warehousing) all loans and investments allowed under 
section 5(c) of the HOLA including, without limitation, the following 
loans, extensions of credit, and investments, subject to the 
limitations indicated and any such terms, conditions, or limitations as 
may be prescribed from time to time by the Office by policy directive, 
order, or regulation:

                                       Lending and Investment Powers Chart                                      
----------------------------------------------------------------------------------------------------------------
                                                                               Statutory percentage of assets   
              Category                         HOLA authorization               limitations (endnotes contain   
                                                                             applicable regulatory limitations) 
----------------------------------------------------------------------------------------------------------------
Commercial loans...................  5(c)(2)(A)...........................  10% of total assets.                
Commercial paper and corporate debt  5(c)(2)(D)...........................  Up to 30% of total assets.1,.2      
 securities.                                                                                                    
Community development..............  5(c)(3)(B)...........................  5% of total assets.                 
Community development direct         5(c)(3)(B)...........................  2% of total assets.\3\              
 investments.                                                                                                   
Consumer loans.....................  5(c)(2)(D)...........................  Up to 35% of total assets.1,.4      
Credit cards.......................  5(b)(4)..............................  None.\5\                            
Education loans....................  5(c)(3)(A)...........................  5% of total assets.                 
Finance leasing....................  5(c)(1)(B)...........................  Based on collateral type for        
                                     5(c)(2)(A)...........................   property financed.\6\              
                                     5(c)(2)(D)...........................                                      
Foreign assistance investments.....  5(c)(4)(C)...........................  1% of total assets.\7\              
General leasing....................  5(c)(2)(C)...........................  10% of assets.\6\                   
Home improvement loans.............  5(c)(1)(J)...........................  None.\5\                            
Home (residential) loans \8\.......  5(c)(1)(B)...........................  None. 5, 9                          
Letters of credit..................  5(c)(2)(A)...........................  Included in aggregate 10% of assets 
                                                                             commercial lending limitation.\10\ 
Loans secured by accounts..........  5(c)(1)(A)...........................  None.5, 11                          
Loans to financial institutions,     5(c)(1)(H)...........................  None.5, 12                          
 brokers, and dealers.                                                                                          
Manufactured home loans............  5(c)(1)(J)...........................  None.5, 13                          
Nonresidential real property loans.  5(c)(2)(B)...........................  400% of total capital.\14\          
State and local government           5(c)(1)(H)...........................  None5, 15                           
 obligations.                                                                                                   
State housing corporations.........  5(c)(1)(P)...........................  None.5, 16                          
Transaction account loans,           5(c)(1)(A)...........................  None.5,17                           
 including overdrafts.                                                                                          
----------------------------------------------------------------------------------------------------------------
NOTES:                                                                                                          
\1\ For purposes of determining a Federal savings association's percentage assets limitation, investment in     
  commercial paper and corporate debt securities must be aggregated with the Federal savings association's      
  investment in consumer loans.                                                                                 
\2\ A Federal savings association may invest in commercial paper and corporate debt securities, which includes  
  corporate debt securities convertible into stock, subject to the provisions of Sec.  560.40.                  
\3\ This 2% of assets limitation is a sublimit within the overall 5% of assets limitation on community          
  development loans and investments.                                                                            
\4\ Amounts in excess of 30% of assets, in aggregate, may be invested only in loans made by the association     
  directly to the original obligor and for which no finder's or referral fees have been paid. A Federal savings 
  association may include loans to dealers in consumer goods to finance inventory and floor planning in the     
  total investment made under this section.                                                                     
\5\ While there is no statutory limit on certain categories of loans and investments, including credit card     
  loans, home improvement loans, and deposit account loans, the OTS may establish an individual limit on such   
  loans or investments if the association's concentration in such loans or investments presents a safety and    
  soundness concern.                                                                                            
\6\ A Federal savings association may engage in leasing activities subject to the provisions of Sec.  560.41.   
\7\ This 1% of assets limitation applies to the aggregate outstanding investments made under the Foreign        
  Assistance Act and in the capital of the Inter-American Savings and Loan Bank. Such investments may be made   
  subject to the provisions of Sec.  560.43.                                                                    
\8\ A home (or residential) loan includes loans secured by on one-to-four family dwellings, multi-family        
  residential property and loans secured by a unit or units of a condominium or housing cooperative.            
\9\ A Federal savings association may make home loans subject to the provisions of Sec.  560.34.                
\10\ A Federal savings association may issue letters of credit subject to the provisions of Sec.  560.120.      

[[Page 1179]]
                                                                                                                
\11\ Loans secured by savings accounts and other time deposits may be made without limitation, provided the     
  Federal savings association obtains a lien on, or a pledge of, such accounts. Such loans may not exceed the   
  withdrawable amount of the account.                                                                           
\12\ A Federal savings association may only invest in loans secured by obligations of, or by obligations fully  
  guaranteed as to principal and interest by, the United States or any of its agencies or instrumentalities     
  where the borrower is a financial institution insured by the Federal Deposit Insurance Corporation or is a    
  broker or dealer registered with the Securities and Exchange Commission and the market value of the securities
  for each loan at least equals the amount of the loan at the time it is made.                                  
\13\ If the wheels and axles of the manufactured home have been removed and it is permanently affixed to a      
  foundation, a loan secured by a combination of a manufactured home and developed residential lot on which it  
  sits may be treated as a home loan.                                                                           
\14\ Without regard to any limitations of this part, a Federal savings association may make or invest in the    
  fully insured or guaranteed portion of nonresidential real estate loans insured or guaranteed by the Economic 
  Development Administration, the Farmers Home Administration, or the Small Business Administration.            
  Unguaranteed portions of guaranteed loans must be aggregated with uninsured loans when determining an         
  association's compliance with the 400% of capital limitation for other real estate loans.                     
\15\ This category includes obligations issued by any state, territory, or possession of the United States or   
  political subdivision thereof (including any agency, corporation, or instrumentality of a state or political  
  subdivision), subject to Sec.  560.42.                                                                        
\16\ A Federal savings association may invest in state housing corporations subject to the provisions of Sec.   
  560.121.                                                                                                      
\17\ Payments on accounts in excess of the account balance (overdrafts) on commercial deposit or transaction    
  accounts shall be considered commercial loans for purposes of determining the association's percentage of     
  assets limitation.                                                                                            




Sec. 560.31  Election regarding categorization of loans or investments 
and related calculations.

    (a) If a loan or other investment is authorized under more than one 
section of the Home Owners' Loan Act, as amended, or this part, a 
Federal savings association may designate under which section the loan 
or investment has been made. Such a loan or investment may be 
apportioned among appropriate categories, and may be moved, in whole or 
part, from one category to another. A loan commitment shall be counted 
as an investment and included in total assets of a Federal savings 
association only to the extent that funds have been advanced and not 
repaid pursuant to the commitment.
    (b) Loans sold to a third party shall be included in calculation of 
a percentage-of-assets investment limitation only to the extent they 
are sold with recourse.
    (c) A Federal savings association may make a loan secured by 
assignment of loans to the extent that it could, under applicable law 
and regulations, make or purchase the underlying assigned loans.


Sec. 560.34  Limitations on home loans.

    (a) Late charges. A Federal savings association may include in the 
loan contract a provision authorizing the imposition of a late charge 
with respect to the payment of any delinquent periodic payment. With 
respect to any loan made after July 31, 1976, on the security of a home 
occupied or to be occupied by the borrower, no late charge, regardless 
of form, shall be assessed or collected by a Federal savings 
association, unless any monthly billing, coupon, or notice the Federal 
savings association may provide regarding installment payments due on 
the loan discloses the date after which the charge may be assessed. A 
Federal savings association may not impose a late charge more than one 
time for late payment of the same installment, and any installment 
payment made by the borrower shall be applied to the longest 
outstanding installment due. A Federal savings association shall not 
assess a late charge as to any payment received by it within fifteen 
days after the due date of such payment. No form of such late charge 
permitted by this paragraph shall be considered as interest to the 
Federal savings association and the Federal savings association shall 
not deduct late charges from the regular periodic installment payments 
on the loan, but must collect them as such from the borrower.
    (b) Loan payments and prepayments. Except for loans to natural 
persons secured by borrower-occupied property and on which periodic 
advances are being made, payments on the principal indebtedness of all 
loans on real estate shall be applied directly to reduction of such 
indebtedness, but prepayments made on an installment loan may be 
reapplied from time to time wholly or partly to offset payments which 
subsequently accrue under the loan contract. A Federal savings 
association may impose a penalty on the prepayment of a loan as 
provided in the loan contract.


Sec. 560.40  Commercial paper and corporate debt securities.

    Pursuant to 12 U.S.C. 1464(c)(2)(D), a Federal savings association 
may invest in, sell, or hold commercial paper and corporate debt 
securities subject to the provisions of this section.
    (a) Limitations. (1) Commercial paper must be:
    (i) Denominated in dollars; and
    (ii)(A) As of the date of purchase, as shown by the most recently 
published rating made of such investments by at least two nationally 
recognized investment ratings services, rated in either one of the two 
highest categories; or
    (B) If unrated, guaranteed by a company having outstanding paper 
that is rated as provided in paragraph (a)(1)(ii)(A) of this section.
    (2) Corporate debt securities must be:
    (i) Denominated in dollars;
    (ii) Securities that may be sold with reasonable promptness at a 
price that corresponds reasonably to their fair value; and
    (iii) Rated in one of the four highest categories by a nationally 
recognized investment ratings service at its most recently published 
rating before the date of purchase of the security.
    (3) A Federal savings association's total investment in the 
commercial paper and corporate debt securities of any one issuer, or 
issued by any one person or entity affiliated with such issuer, 
together with other loans shall not exceed the general lending 
limitations contained in Sec. 563.93(c) of this chapter.
    (4) Investments in corporate debt securities convertible into stock 
are subject to the following additional limitations:
    (i) The purchase of securities convertible into stock at the option 
of the issuer is prohibited;
    (ii) At the time of purchase, the cost of such securities must be 
written down to an amount that represents the investment value of the 
securities considered independently of the conversion feature; and
    (iii) Federal savings associations are prohibited from exercising 
the conversion feature.
    (5) A Federal savings association shall maintain information in its 
files adequate to demonstrate that it has exercised prudent judgment in 
making investments under this section.
    (b) Notwithstanding the limitations contained in this section, the 
Office may permit investment in corporate debt securities of another 
savings association in connection with the purchase or sale of a branch 
office or in connection with a supervisory merger or acquisition.


Sec. 560.41  Leasing.

    (a) Authorization. Pursuant to general lending authority in 12 
U.S.C. 1464(c)(1)(B), 1464(c)(2)(A), and 1464(c)(2)(D), a Federal 
savings association may engage in leasing activities that are the 
functional equivalent of lending, subject to the 

[[Page 1180]]
limitations of this section. Pursuant to 12 U.S.C. 1464(c)(2)(C), a 
Federal savings association may invest in tangible personal property 
for the purpose of leasing that property, subject to the limitations of 
this section.
    (b) General. A Federal savings association may become the legal or 
beneficial owner of tangible personal property or real property for the 
purpose of leasing such property, may obtain an assignment of a 
lessor's interest in a lease of such property, and may incur 
obligations incidental to its position as the legal or beneficial owner 
and lessor of the leased property, subject to the limitations of this 
section.
    (c) Finance leasing. (1) A financing lease of tangible personal 
property made to a natural person for personal, family or household 
purposes pursuant to this section shall be subject to all limitations 
applicable to the amount of a Federal savings association's investment 
in consumer loans. A financing lease made for commercial, corporate, 
business, or agricultural purposes pursuant to this section shall be 
subject to all limitations applicable to the amount of a Federal 
savings association's investment in commercial loans. A financing lease 
of residential or nonresidential real property made pursuant to this 
section shall be subject to all limitations applicable to the amount of 
a Federal savings association's investment in real estate loans.
    (2) To qualify as the functional equivalent of a loan, a financing 
lease must meet all of the following requirements:
    (i) The lease must be a net, full-payout lease representing a non-
cancelable obligation of the lessee, notwithstanding the possible early 
termination of the lease.
    (ii) Both the estimated residual value of the property and that 
portion of the estimated residual value relied upon by the lessor to 
satisfy the requirements of a full-payout lease must be reasonable in 
light of the nature of the leased property and all relevant 
circumstances so that realization of the lessor's full investment plus 
the cost of financing the property depends primarily on the 
creditworthiness of the lessee, and not on the residual market value of 
the leased property.
    (iii) At the termination of a financing lease, either by expiration 
or default, property acquired must be liquidated or released on a net 
basis as soon as practicable. Any property held in anticipation of 
releasing must be reevaluated and recorded at the lower of fair market 
value or book value.
    (3) Definitions. For the purposes of this section:
    (i) The term net lease means, a lease under which the Federal 
savings association will not, directly or indirectly, provide or be 
obligated to provide for:
    (A) The servicing, repair or maintenance of the leased property 
during the lease term;
    (B) The purchasing of parts and accessories for the leased 
property; Provided, that improvements and additions to the leased 
property may be leased to the lessee upon its request in accordance 
with the full-payout requirements of this section;
    (C) The loan of replacement or substitute property while the leased 
property is being serviced;
    (D) The purchasing of insurance for the lessee, except where the 
lessee has failed to discharge a contractual obligation to purchase or 
maintain insurance; or
    (E) The renewal of any license, registration of filing for the 
property unless such action by the Federal savings association is 
necessary to protect its interest as an owner or financier of the 
property.
    (ii) The term full-payout lease means a lease transaction in which 
any unguaranteed portion of the estimated residual value relied on by 
the association to yield the return of its full investment in the 
leased property, plus the estimated cost of financing the property over 
the term of the lease does not exceed 25% of the original cost of the 
property to the lessor.
    (iii) The term realization of investment means that a Federal 
savings association that enters into a lease financing transaction must 
reasonably expect to realize the return of its full investment in the 
leased property, plus the estimated cost of financing the property over 
the term of the lease from:
    (A) Rentals;
    (B) Estimated tax benefits, if any; and
    (C) The estimated residual value of the property at the expiration 
of the term of the lease.
    (d) General leasing. (1) Pursuant to section 5(c)(2)(C) of the 
HOLA, a Federal savings association may invest in tangible personal 
property, including vehicles, manufactured homes, machinery, equipment, 
or furniture for the purpose of rental or sale. Lease investments made 
under this section are not restricted to being the functional 
equivalent of loans as is the case for financing leases.
    (2) A Federal savings association's investments in such property 
may not exceed 10% of its assets.
    (e) Salvage powers. If, in good faith, a Federal savings 
association believes that there has been an unanticipated change in 
conditions that threatens its financial position by significantly 
increasing its exposure to loss, the provisions of this section shall 
not prevent the Federal savings association:
    (1) As the owner and lessor under a net, full-payout lease, from 
taking reasonable and appropriate action to salvage or protect the 
value of the property or its interest arising under the lease;
    (2) As the assignee of a lessor's interest in a lease, from 
becoming the owner and lessor of the leased property pursuant to its 
contractual right, or from taking any reasonable and appropriate action 
to salvage or protect the value of the property or its interest arising 
under the lease; or
    (3) From including any provisions in a lease, or from making any 
additional agreements, to protect its financial position or investment 
in the circumstances set forth in paragraphs (d)(1) and (d)(2) of this 
section.


Sec. 560.42  State and local government obligations.

    Pursuant to 12 U.S.C. 1464(c)(1)(H), a Federal savings association 
may invest in obligations issued by any State or political subdivision 
thereof, subject to the following conditions:
    (a) A Federal savings association may not invest more than 10% of 
its capital in obligations of any one issuer, exclusive of general 
obligations of the issuer.
    (b) The obligations must continue to hold one of the four highest 
national investment grade ratings, or must be issued by a public 
housing agency and backed by the full faith and credit of the United 
States.
    (c) Notwithstanding the limitations in paragraph (b) of this 
section, a Federal savings association may invest, in the aggregate, up 
to one percent of its assets in the obligations of a State, territory, 
possession, or political subdivision in which the association's home 
office or a branch office is located.
    (d) Notwithstanding the limitations in paragraphs (b) and (c) of 
this section, a Federal savings association may invest in any 
obligations approved by the Office.


Sec. 560.43  Foreign assistance investments.

    Pursuant to 12 U.S.C. 1464(c)(4)(C), a Federal savings association 
may make foreign assistance investments in an aggregate amount not to 
exceed one percent of its assets, subject to the following conditions:
    (a) For any investment made under the Foreign Assistance Act, the 
loan agreement shall specify what constitutes an event of default, and 
provide that 

[[Page 1181]]
upon default in payment of principal or interest under such agreement, 
the entire amount of outstanding indebtedness thereunder shall become 
immediately due and payable, at the lender's option. Additionally, the 
contract of guarantee shall cover 100% of any loss of investment 
thereunder, except for any portion of the loan arising out of fraud or 
misrepresentation for which the party seeking payment is responsible, 
and provide that the guarantor shall pay for any such loss in U.S. 
dollars within a specified reasonable time after the date of 
application for payment.
    (b) To make any investments in the share capital and capital 
reserve of the Inter-American Savings and Loan Bank, a Federal savings 
association must be adequately capitalized and have adequate allowances 
for loan and lease losses. The Federal savings association's aggregate 
investment in such capital or capital reserve, including the amount of 
any obligations undertaken to provide said Bank with reserve capital in 
the future (call-able capital), will not, as a result of such 
investment, exceed one-quarter of 1% of its assets or $100,000, 
whichever is less.

Subpart B--Lending and Investment Provisions Applicable to All 
Savings Associations


Sec. 560.120  Letters of credit.

    (a) To the extent that a savings association has been given the 
authority to invest in letters of credit elsewhere, a savings 
association may issue and commit to issue letters of credit within the 
scope of and in conformance with the laws and rules of practice 
recognized by law, such as the Uniform Commercial Code, the Uniform 
Customs and Practice for Documentary Credits, the United Nations 
Commission on International Trade Law, the Convention on Independent 
Guarantees and Standby Letters of Credit, and the Uniform Rules for 
Bank-to-Bank Reimbursements Under Documentary Credits. Savings 
associations may pledge collateral to secure its obligations 
thereunder, subject to the following requirements:
    (1) Each letter of credit must conspicuously state that it is a 
letter of credit;
    (2) The issue's undertaking must contain a specified expiration 
date or be for a definite term, and must be limited in amount;
    (3) The issuer's obligation to pay must be solely dependent upon 
the presentation of conforming documents as specified in the letter of 
credit, and not upon the factual performance or nonperformance by the 
parties to the underlying transaction; and
    (4) The account party must have an unqualified obligation to 
reimburse the issuer for payments made under the letter of credit.
    (b) To the extent funds are advanced under a letter of credit 
without compensation from the account party, the amount shall be 
treated as an extension of credit subject to percentage-of-assets 
limits and other requirements under an applicable provision of this 
part.


Sec. 560.121  Investment in state housing corporations.

    (a) Any savings association to the extent it has legal authority to 
do so, may make investments in, commitments to invest in, loans to, or 
commitments to lend to any state housing corporation; provided, that 
such obligations or loans are secured directly, or indirectly through a 
fiduciary, by a first lien on improved real estate which is insured 
under the National Housing Act, as amended, and that in the event of 
default, the holder of such obligations or loans has the right 
directly, or indirectly through a fiduciary, to subject to the 
satisfaction of such obligations or loans the real estate described in 
the first lien, or the insurance proceeds.
    (b) Any savings association that is adequately capitalized may, to 
the extent it has legal authority to do so, invest in obligations 
(including loans) of or issued by any state housing corporation 
incorporated in the State in which such savings association has its 
home or a branch office; provided (except with respect to loans), that:
    (1) The obligations are rated in one of the four highest grades as 
shown by the most recently published rating made of such obligations by 
a nationally recognized rating service; or
    (2) The obligations, if not rated, are approved by the Office. The 
aggregate outstanding direct investment in obligations under paragraph 
(b) of this section shall not exceed the amount of the savings 
association's total capital.
    (c) Each state housing corporation in which a savings association 
invests under the authority of paragraph (b) of this section shall 
agree, before accepting any such investment (including any loan or loan 
commitment), to make available at any time to the Office such 
information as the Office may consider to be necessary to ensure that 
investments are properly made under this section.


Sec. 560.170  Records for lending transactions.

    In establishing and maintaining its records pursuant to 
Sec. 563.170 of this chapter, each savings association and service 
corporation should establish and maintain loan documentation practices 
that:
    (a) Ensure that the institution can make an informed lending 
decision and can assess risk on an ongoing basis;
    (b) Identify the purpose and all sources of repayment for each 
loan, and assess the ability of the borrower(s) and any guarantor(s) to 
repay the indebtedness in a timely manner;
    (c) Ensure that any claims against a borrower, guarantor, security 
holders, and collateral are legally enforceable;
    (d) Demonstrate appropriate administration and monitoring of its 
loans; and
    (e) Take into account the size and complexity of a loan.

Subpart C--Adjustable Rate Mortgages


Sec. 560.210  Alternative Mortgage Parity Act.

    Pursuant to 12 U.S.C. 3803, housing creditors that are not 
commercial banks, credit unions, or Federal savings associations may 
make alternative mortgage transactions as defined by that section and 
further defined and described by applicable regulations identified 
herein, notwithstanding any state constitution, law, or regulation. In 
accordance with 12 U.S.C. 3807(b), this part 560 and 12 CFR 563.99 are 
identified as appropriate and applicable to the exercise of this 
authority and all regulations not so identified are deemed 
inappropriate and inapplicable. Housing creditors engaged in credit 
sales should read the term ``loan'' as ``credit sale'' wherever 
applicable.

PART 563--OPERATIONS

    15. The authority citation for part 563 continues to read as 
follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1828, 3806.


Sec. 563.95  [Removed]

    16. Section 563.95 is removed.


Sec. 563.97  [Removed]

    17. Section 563.97 is removed.
    18. Section 563.99 is amended by adding paragraph (g) to read as 
follows:


Sec. 563.99  Fixed-rate and adjustable-rate mortgage loan disclosures, 
adjustment notices, and interest rate caps.

* * * * *
    (g) Exempt transactions. This section does not apply to an 
extension of credit primarily for a business, commercial, or 
agricultural purpose.


Sec. 563.160  [Removed]

    19. Section 563.160 is removed. 
    
[[Page 1182]]



Sec. 563.170  [Amended]

    20. Section 563.170 is amended by revising paragraph (c) to read as 
follows:


Sec. 563.170  Examinations and audits; appraisals; establishment and 
maintenance of records.

* * * * *
    (c) Establishment and maintenance of records. To enable the Office 
to examine savings associations and affiliates and audit savings 
associations, affiliates, and service corporations pursuant to the 
provisions of paragraph (a) of this section, each savings association, 
affiliate, and service corporation shall establish and maintain such 
accounting and other records as will provide an accurate and complete 
record of all business it transacts. This includes, without limitation, 
establishing and maintaining such other records as are required by 
statute or any other regulation to which the savings association, 
affiliate, or service corporation is subject. The documents, files, and 
other material or property comprising said records shall at all times 
be available for such examination and audit wherever any of said 
records, documents, files, material, or property may be.
* * * * *

PART 571--STATEMENTS OF POLICY

    21. The authority citation for part 571 continues to read as 
follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.


Secs. 571.8, 571.13, 571.20, 571.22  [Removed]

    22. Sections 571.8, 571.13, 571.20, and 571.22 are removed.

    Dated: January 5, 1996.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 96-409 Filed 1-16-96; 8:45 am]
BILLING CODE 6720-01-P