[Federal Register Volume 61, Number 190 (Monday, September 30, 1996)]
[Rules and Regulations]
[Pages 50951-50984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23726]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 556, 560, 563, 566, 571, 590

[No. 96-87]
RIN 1550-AA94


Lending and Investment

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS or Office) is today 
issuing a final rule updating, reorganizing, and substantially 
streamlining its lending and investment regulations and policy 
statements. These amendments are being made pursuant to the Regulatory 
Reinvention Initiative of the Vice President's National Performance 
Review (Reinvention Initiative) and section 303 of the Community 
Development and Regulatory Improvement Act of 1994 (CDRIA), which 
requires OTS and the other federal banking agencies to review, 
streamline, and modify regulations and policies to improve efficiency, 
reduce unnecessary costs, and remove inconsistent, outmoded, and 
duplicative requirements.

EFFECTIVE DATE: October 30, 1996.

FOR FURTHER INFORMATION CONTACT: For general information contact: 
William J. Magrini, Senior Project Manager, (202) 906-5744, Supervision 
Policy; Ellen J. Sazzman, Counsel (Banking and Finance), (202) 906-
7133; or Deborah Dakin, Assistant Chief Counsel, (202)

[[Page 50952]]

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, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Summary of Comments and Description of the Final Rule
    A. General Discussion of the Comments
    B. Section-by-Section Analysis
    1. Existing Lending and Investment Sections
    2. New Part 560--Lending and Investment
III. Disposition of Existing Lending and Investment Regulations
IV. Administrative Procedure Act
V. Paperwork Reduction Act of 1995
VI. Executive Order 12866
VII. Regulatory Flexibility Act Analysis
VIII. Unfunded Mandates Act of 1995
IX. Effective Date

I. Background

    In a comprehensive review of its regulations, beginning in the 
spring of 1995, pursuant to section 303 of the CDRIA 1 and the 
Administration's Reinvention Initiative, OTS identified its lending and 
investment regulations as an important area for updating and 
streamlining. Lending and investment are key areas of thrift operations 
and these regulations had not been comprehensively reviewed in a number 
of years. Each lending and investment regulation was reviewed to 
determine whether it was current and understandable; could be 
eliminated without endangering safety and soundness, diminishing 
consumer protection or violating statutory requirements; addressed 
subject matter more suited for handbook guidance; and was consistent 
with the regulations of the other banking agencies. OTS also sought 
industry input regarding staff's initial recommendations through an 
industry focus group meeting among seven thrift representatives, an 
industry trade association and OTS staff. As a result of this review, 
OTS identified a number of ways in which its lending and investment 
regulations could be revised to reduce regulatory burden. On January 
17, 1996, OTS issued a notice of proposed rulemaking.2
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    \1\ 12 U.S.C. 4803(a)(1).
    \2\ 61 FR 1162 (January 17, 1996).
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    Today's final rule is substantially similar to the January 
proposal. Readers will note, however, that the final rule also sets 
forth, for ease of reference, the full text of OTS's regulations on 
lending limits, real estate lending standards, disclosures on 
adjustable-rate mortgages, and the reappraisal of real estate owned 
(REO). These regulations have been moved, with only technical and 
conforming changes, into new Part 560, Lending and Investment, so that 
all lending regulations will be grouped together and more easily 
located. The final rule also incorporates technical corrections to fix 
cross-references in other regulations to regulations that are being 
modified, moved, or removed as part of this final rule.
    The final rule reduces the number of lending and investment 
regulations from 43 to 23 and results in a net reduction of 11 pages of 
CFR text. As it proposed, OTS has removed unnecessary, duplicative, and 
outdated lending and investment regulations such as Sec. 563.97 (loans 
in excess of 90% of value), Sec. 545.44 (mortgage transactions with the 
Federal Home Loan Mortgage Corporation (Freddie Mac)), and Sec. 545.37 
(combination loans). OTS has also revised certain regulations to be 
less burdensome, e.g., amending the scope of commercial loans under 
current Sec. 545.46(b) to exclude commercial loans made by service 
corporations from its parent's percentage-of-assets limitations and 
removing restrictions on manufactured home loans and investments in 
government securities and state housing corporations.
    OTS has also converted the detail in some regulations into guidance 
to give thrifts more flexibility in addressing safety and soundness 
concerns in a particular area, e.g., current Sec. 563.160 (loan 
classification) and current Sec. 563.170(c) (loan documentation). OTS's 
movement toward a more guidance-oriented approach in the lending and 
investment area brings OTS's regulations into greater uniformity with 
those of the other federal banking agencies consistent with the 
objectives of section 303 of the CDRIA.
    OTS's objective in removing the detail from some regulations and 
relying on a more general set of regulations and safety and soundness 
standards is to allow institutions greater flexibility in their lending 
and investment operations. However, OTS still insists that an 
association maintain adequate loan documentation, classify its assets, 
and establish appropriate valuation allowances consistent with 
generally accepted accounting principles and safety and soundness.
    OTS is also sensitive to commenters' concerns regarding the 
potential for examiners to treat guidelines as binding regulations. OTS 
will emphasize the proper interpretation of supervisory guidance in its 
examiner training programs to ensure that guidance is not treated in 
the same manner as binding regulations.
    OTS has also reorganized its lending and investment regulations to 
make them easier to locate and use. First, all lending and investment 
regulations have been moved to a new Part 560, ``Lending and 
Investment,'' that specifies 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 incorporates provisions 
currently located in Parts 545 and 563 that are being modified as part 
of today's final rule. It also incorporates sections currently located 
in Part 563 that are being transferred to Part 560 without change. 
These regulations--real estate lending standards, disclosure 
requirements for adjustable-rate mortgages, lending limits, and 
appraisal requirements for real estate owned--are being moved to Part 
560 for the convenience of those using OTS's lending regulations.
    OTS has also removed unnecessary restatements of statutory 
authority and limitations from various sections of Part 545 and 
replaced them with a regulation in chart format that provides easy 
reference to the statutory authority for, and limitations on, federal 
associations' lending and investment powers.
    OTS has added a general lending preemption provision in new Part 
560. This provision (discussed more fully in the section-by-section 
analysis in Sec. II.B. below) restates long-standing preemption 
principles applicable to federal savings associations, as reflected in 
earlier regulations, court cases, and numerous legal opinions issued by 
OTS and the Federal Home Loan Bank Board (FHLBB), OTS's predecessor 
agency. In those opinions, OTS has consistently taken the position 
that, with certain narrow exceptions, any state laws that purport to 
affect the lending operations of federal savings associations are 
preempted. None of the changes implemented today should be construed as 
evidencing in any way an intent by OTS to change this long held 
position: OTS still intends to occupy the field of lending regulation 
for federal savings associations. OTS believes that the new lending 
preemption regulation is clearer and should significantly reduce the 
instances in which institutions need to request interpretive guidance 
from OTS.
    In summary, OTS believes that regulations that address safety and

[[Page 50953]]

soundness requirements should generally be limited to those 
requirements necessary for OTS to carry out its supervisory 
responsibilities. If regulations are unnecessarily detailed and rigid, 
regulated entities may find themselves unable to respond to market 
innovations. Today's final rule achieves what OTS believes is the right 
balance by placing essential safety and soundness requirements in 
binding regulations and putting more expansive guidance on sensible 
practices in handbooks.

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

    The public comment period on the January 17 proposal closed on 
April 16, 1996. Fourteen commenters responded to the notice of proposed 
rulemaking. Seven federal savings associations, three national 
financial institution trade associations, two law firms, one national 
bank, and one state appraiser trade association submitted comments.
    All but one of the commenters generally supported OTS efforts to 
update, streamline, and reorganize its lending and investment 
regulations. Commenters praised OTS's proposed elimination of 
unnecessary and burdensome lending and investment restrictions and 
indicated that the proposed modifications would be helpful. Commenters 
believed that the proposed changes would significantly reduce the 
compliance burden on the thrift industry and facilitate greater 
operational flexibility and product innovation. Commenters generally 
concurred with OTS's view that many of the proposed amendments would 
provide savings associations with the flexibility needed to compete 
with other financial institutions, particularly commercial banks, to 
engage in new lending activities made possible by technological 
changes, and to respond more quickly to market innovation. Most 
commenters also supported the consolidation of all lending and 
investment regulations into a new Part 560.
    Commenters also generally supported OTS's proposal to shift some of 
its regulations to guidance in the Thrift Activities Handbook 
(Handbook). Commenters noted that moving specific loan documentation 
requirements currently found in Sec. 563.170, specific loan 
classification requirements currently in Sec. 563.160, and restrictions 
on investments in commercial paper and corporate debt securities 
currently in Sec. 545.75 into the Handbook was appropriate, given that 
OTS now has more sophisticated examination and reporting methods and 
better trained examiners to monitor thrift activities. Commenters 
recognized that OTS regulations traditionally have been more detailed 
and less flexible than those applicable to banks. They agreed that 
OTS's proposal to move from a somewhat regulation-specific to a more 
guidance-oriented approach would give thrifts more flexibility to 
address safety and soundness concerns in a manner best suited to each 
individual institution. Commenters also believed that shifting OTS 
regulations into the Handbook would reduce the costs of regulatory 
compliance by increasing a thrift's operational flexibility.
    At least one commenter was concerned, however, that the Handbook 
could become so detailed that it would stifle product innovation and 
management judgment or duplicate provisions that remained in the 
regulations. Commenters also expressed the concern that examiners might 
view guidelines in the Handbook as binding requirements with no 
resulting relief in regulatory burden. To prevent this, commenters 
supported OTS's plan to provide examiner training that would emphasize 
the intended flexibility of supervisory guidance. Additionally, OTS is 
reviewing the text of regulations being repealed today to determine 
what portions will provide helpful guidance and what portions should be 
disposed of altogether. The process of converting regulatory text to 
guidance will be done thoughtfully, recognizing the different roles 
performed by regulations and guidance.
    A number of commenters raised concerns that the proposed changes on 
preemption of state laws affecting lending might be misunderstood as a 
narrowing of OTS's traditional preemption position. These concerns are 
discussed in detail in the section-by-section analysis below in 
reference to Sec. 560.2.

B. Section-by-Section Analysis

1. Existing Lending and Investment Sections

Section 545.31  Election Regarding Classification of Loans or 
Investments

    OTS proposed retaining in modified form paragraph (a) of 
Sec. 545.31, which set forth OTS's general rule that where a loan or 
investment meets the requirements of more than one authorizing 
provision, the association may elect to place it in any applicable 
category. OTS received no comments on this paragraph, which is retained 
as proposed, in modified form, as new Sec. 560.31.
    OTS also proposed retaining paragraph (b) of Sec. 545.31, which 
provided that loan commitments are included in total assets and 
accounted for as an investment for purposes of determining applicable 
statutory or regulatory investment authority limitations only to the 
extent that funds are advanced and not repaid.3 OTS received no 
comments on this paragraph, which is retained as proposed as part of 
new Sec. 560.31(a).
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    \3\ Today's final rule carries forward this longstanding 
treatment of loan commitments for purposes of HOLA section 5(c) 
investment limitations. OTS notes, however, that contractual 
commitments to advance funds continue to be considered ``loans and 
extensions of credit'' under the loans-to-one borrower regulation 
(existing Sec. 563.93, now Sec. 560.93).
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    OTS proposed retaining paragraphs (c) and (d) of Sec. 545.31, which 
addressed respectively the treatment of loans sold to third parties for 
purposes of calculating percentage-of-assets investment limitations and 
treatment of loans secured by assignment of loans. OTS received no 
comments on these paragraphs, which are retained in new Sec. 560.31. 
One commenter addressing the treatment of commercial loans did suggest 
that OTS explicitly state that commercial loans sold or participated 
out do not count toward a thrift's 10 percent commercial loan limit. 
OTS believes that new Sec. 560.31(b), which provides that loans sold to 
a third party are only included in calculating a percentage-of-assets 
investment limitation to the extent that they are sold with recourse, 
addresses this point. In response to the commenter, OTS is adding the 
phrase ``or portions of loans'' to the regulation to clarify that any 
portion of participation loans sold without recourse need not be 
aggregated when calculating loans subject to any percentage-of-assets 
investment limit.
    The January proposal indicated that the definitions of ``real 
estate loan'' and ``loan commitment'' would be addressed in a later 
rulemaking that would review the overall structure of OTS's regulations 
and might move OTS regulatory definitions into a common part of the 
Code of Federal Regulations (CFR) (the Regulatory Structure 
rulemaking). In order to avoid confusion pending that rulemaking, 
however, OTS has decided to incorporate these definitions, 
substantially unchanged, into a new ``Definitions'' section, 
Sec. 560.3. The future Regulatory Structure rulemaking may review these 
definitions to determine if they should be modified, removed, or 
relocated to another location in the regulations.

[[Page 50954]]

Section 545.32  Real Estate Loans

    Consistent with its regulatory streamlining efforts, OTS proposed 
deleting paragraph (a) of Sec. 545.32 and moving its statutory 
reference into the new lending and investment powers chart. Paragraph 
(a) reiterated the Home Owners' Loan Act's (HOLA's) general grant of 
authority for federal savings associations to make or invest in 
residential (home) or nonresidential real estate loans 4 and 
explicitly authorized federal savings associations to ``originate, 
invest in, sell, purchase, service, participate or otherwise deal in 
(including brokerage and warehousing) [real estate] loans.'' One 
commenter did suggest that OTS clarify that deletion of paragraph (a) 
is not intended to eliminate any of the activities in which federal 
savings associations may engage with respect to real estate loans. OTS 
is deleting paragraph (a) as proposed. However, OTS wishes to emphasize 
that it does not intend any change in federal thrifts' authority to 
conduct these activities. OTS is moving the statutory reference in 
paragraph (a) into the new lending and investment powers chart at 
Sec. 560.30.
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    \4\ 12 U.S.C. 1464(c)(1)(B), (c)(2)(B).
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    OTS also proposed to delete paragraphs (b)(1) and (b)(2) of 
Sec. 545.32, because these sections duplicated more comprehensive 
interagency-developed real estate lending standards and appraisal 
standards set forth at 12 CFR 563.100-563.101 and 12 CFR Part 564, 
respectively. OTS received no comments on these paragraphs and is 
deleting them as proposed. As part of today's rulemaking, the real 
estate lending standards are being moved into Part 560 as new 
Sec. 560.100-560.101.
    OTS also proposed deleting paragraphs (b) (3), (4), (5), and (6) of 
Sec. 545.32. These paragraphs discussed 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. OTS believes that the authority to 
adjust, amortize, establish escrow accounts for, and charge fees for 
loans properly falls within the scope of a federal savings 
association's statutory authority to originate loans pursuant to the 
HOLA,5 and these particular aspects of lending do not need to be 
specifically identified or restricted in the CFR. Although commenters 
generally supported elimination of these paragraphs, one commenter 
raised the concern that if OTS removed specific regulatory language 
referring to the authority of federal thrifts to adjust terms, 
amortize, charge certain fees, and establish escrow accounts for real 
estate loans, states may challenge whether OTS continues to occupy the 
field of federal thrift lending regulation and may attempt to impose 
their own lending regulations on thrifts. However, by removing these 
paragraphs, OTS does not intend any narrowing of federal thrifts' 
authority to conduct these activities, but rather to enhance 
associations' flexibility in lending. Each of these areas is 
specifically cited in the new Sec. 560.2 as an area in which state law 
is preempted. Whether OTS continues to have a specific regulation 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. 
Accordingly, OTS is deleting paragraphs (b) (3), (4), (5), and (6) as 
proposed.
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    \5\ 12 U.S.C. 1464(c)(1)(B), (c)(2)(B).
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    Paragraph (c) of Sec. 545.32 defined the phrase ``loan made on the 
security of real estate.'' In its proposal OTS sought comment on 
whether the current definition of secured real estate loan has provided 
adequate guidance for savings associations. One commenter indicated 
that the current definition does not adequately deal with situations 
involving state single action rules. OTS will consider this comment 
when the agency proceeds with the definitional portion of the 
Regulatory Structure rulemaking. In the interim, this definition is 
being included in Sec. 560.3, ``Definitions.''
    OTS proposed deleting paragraph (d) of Sec. 545.32, which addressed 
loan-to-value ratios, because it duplicates more comprehensive 
interagency real estate lending standards. Commenters supported 
elimination of this paragraph and OTS is deleting paragraph (d) as 
proposed.

Section 545.33  Home Loans

    In the proposal, OTS indicated that it was considering moving the 
introductory paragraph of Sec. 545.33 to a common definitional section 
of the regulations as part of the Regulatory Structure Proposal. OTS 
received no comments on this language, which generally describes home 
loans and will retain this paragraph as part of Sec. 560.3 
``Definitions,'' until its reconsideration during the definitional 
rulemaking.
    OTS proposed to delete paragraph (a) of Sec. 545.33. This section 
described the authority of federal savings associations to amortize 
home loans. One commenter did raise a concern that deletion of this 
section could throw into question federal preemption of state laws 
prohibiting balloon payments. As discussed under Sec. 545.32(b) (3)-
(6), the authority to amortize home loans properly falls within the 
scope of savings associations' statutory authority to originate loans 
and does not need to be specifically identified in the CFR. New 
Sec. 560.2 specifically confirms that states cannot regulate how 
federal savings associations amortize their loans. Accordingly, OTS is 
deleting paragraph (a) as proposed.
    OTS proposed to delete paragraph (b), which addressed loan-to-value 
ratios (LTV) for home loans. Commenters agreed with OTS's view that the 
interagency real estate lending standards address the same issues in a 
more comprehensive and current manner and supported deletion of this 
paragraph. OTS is deleting paragraph (b) as proposed.
    One commenter did contend that some language in paragraph (b) 
should be retained to make clear that home loans that comply at 
origination with the LTV ratios set forth in the interagency real 
estate lending standards but thereafter exceed them due to negative 
amortization should not require special recordkeeping or reporting to a 
thrift's board of directors. OTS has no requirement in either the real 
estate lending guidelines or its regulations that such loans be 
reported to a thrift's board and so removing this paragraph does not 
impose any new reporting requirements on thrifts.
    OTS proposed to delete paragraph (c), which set forth limitations 
on the adjustments that may be made to the terms of residential 
mortgages. It requires that adjustments to rates, payments, or loan 
balances be tied to a national or regional index beyond the control of 
the savings association or a formula or schedule set forth in the loan 
contract. These limitations on federal savings associations are 
generally much more restrictive than those applicable to state-
chartered lenders offering mortgages and have not been revised since 
1983, when adjustable rate mortgage (ARM) loans were still relatively 
new in the marketplace. Federal savings associations must also comply 
with the notice and disclosure requirements of current Sec. 563.99.
    OTS proposed to delete paragraph (c), including the external index 
requirement, to give thrifts and consumers greater flexibility in 
structuring ARM transactions. Most commenters supported the proposed 
deletion, agreeing that it would give thrifts additional flexibility to 
compete with other mortgage lenders not subject to similar 
requirements. These commenters also agreed that the competitive market 
place makes such

[[Page 50955]]

requirements unnecessary given the wide variety of possible sources for 
home mortgage loans. Commenters also confirmed that consumers have 
become familiar with ARM loans and receive detailed disclosures when 
requesting such loans. The majority of commenters addressing the issue 
concluded that as long as information about adjustments is clearly 
disclosed to purchasers, the terms of the ARM loan should be a matter 
of contract between the savings association and the purchaser.6
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    \6\ One commenter suggested removing all caps on ARM loans. The 
OTS notes that 12 U.S.C. 3806, which applies to all creditors, 
including savings associations, requires that all ARM loans, as 
defined in that section, include limitations on the maximum interest 
rate applicable during the loan term.
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    One commenter, a bank trade association, opposed the removal of 
this requirement, arguing that it would be inconsistent with the Office 
of the Comptroller's decision to retain such a requirement for national 
banks.7 Another commenter, a trade association representing 
savings associations and banks, suggested further study before removing 
the requirement. Both commenters suggested that consumers might be 
better protected by retaining this requirement. The second commenter 
emphasized the importance of adequate disclosure.
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    \7\ See 61 FR 11294, 11297 (March 20, 1996).
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    Upon review of the comments received, OTS has decided to adopt a 
new section, Sec. 560.35, ``Adjustments to Home Loans,'' requiring that 
a federal savings association generally use a national or regional 
index for ARM loans. Examples of such acceptable indices include the 
Eleventh District's Cost of Funds Index and indices tied to one-year 
Treasury bills. OTS has also decided, however, to give an association 
the flexibility to use alternative indices after notifying OTS. The 
notice should address how indices will be derived, how the association 
will ensure the indices' availability and verifiability, and how the 
indices will be disclosed to borrowers. Additionally, the notice should 
outline the internal controls and processes that the association will 
put in place to administer and monitor such indices. Once OTS has 
reviewed and not objected to an institution's internal procedures for 
the use of alternative indices, subsequent notices need only address 
how new indices are derived. If OTS does not object within 30 days, the 
association may proceed with using alternative indices. Use of 
alternative indices will also be reviewed as part of the agency's 
safety and soundness and compliance examinations.
    The foregoing changes do not affect the requirement that any index 
used must be readily available, independently verifiable, and 
adequately disclosed in accordance with the Truth in Lending Act, any 
applicable regulations, and new Sec. 560.210, which replaces existing 
Sec. 563.99. Associations still may use one or more indices or a 
formula or schedule set forth in the loan contract to adjust the 
interest rate, payments, or loan balance.
    OTS believes that this change will allow institutions potentially 
greater flexibility in structuring and managing their loan portfolios 
while allowing the agency the opportunity to review an association's 
proposed ARM loan program, structure, and safeguards to determine 
whether they would result in a suitable index to use for ARM 
transactions. Consumers will continue to have the protection of a 
verifiable and disclosed index and of OTS review. In response to the 
commenters who noted that the Office of the Comptroller of the Currency 
(OCC) has recently taken a different position on this issue, OTS notes 
that the external indices issue is more important for federal thrifts 
than it is for national banks. Unlike banks, thrifts are subject to the 
Qualified Thrift Lender (QTL) rule. That statutorily mandated rule, 12 
CFR 563.50-563.52, requires thrifts to hold an average of 65% or more 
of their assets in residential mortgage loans. Because national banks 
have no such requirement, they often originate such loans, but then 
sell them in the secondary mortgage market. They rarely would have the 
occasion to develop an alternative index because the secondary market 
usually requires the use of an outside index.
    Because thrifts must hold the majority of their assets in 
residential mortgages, they are more vulnerable to interest rate risk 
than national banks. Enabling thrifts to tie their yields on 1-4 family 
residential loans with the rates they pay on deposits would help 
thrifts to manage this risk and offset the competitive disadvantage 
resulting from the QTL rule.
    No commenters addressed the other requirements of Sec. 545.33(c) 
(4)-(5), which are being removed as proposed.
    OTS proposed to delete paragraph (d) of Sec. 545.33, which 
addressed loans on cooperatives. Commenters agreed with OTS's view that 
the interagency real estate lending standards address the same issues 
in a more comprehensive and flexible manner and that this paragraph was 
duplicative of those lending standards. OTS is deleting paragraph (d) 
as proposed.
    OTS proposed deleting paragraph (e) of Sec. 545.33, which addressed 
loans to facilitate trade-in or exchange, because the interagency real 
estate lending standards cover the same issues in a more comprehensive 
and flexible manner. Commenters supported deletion of this paragraph. 
OTS is deleting paragraph (e) as proposed.
    Paragraph (f) of Sec. 545.33 specifies which OTS regulations must 
be followed by state savings associations and certain other state 
lenders who elect to make loans under the Alternative Mortgage Parity 
Act.8 The Alternative Mortgage Parity Act preempts state laws that 
might otherwise limit certain state creditors' ability to offer 
alternative mortgage instruments if they comply with the OTS 
regulations identified in this paragraph. OTS proposed moving paragraph 
(f) in order to make it more accessible and easier to locate and to 
clarify that all OTS lending regulations apply to loans originated 
under the Parity Act. OTS received no comments on this proposed change. 
Accordingly, OTS is moving the provisions of this paragraph, as 
modified to reflect changes elsewhere in today's final rule, into new 
Sec. 560.220, as part of a subpart specifically dealing with 
alternative mortgages. The title of that subpart and Sec. 560.220, will 
highlight the content, making it easier for those unfamiliar with OTS's 
regulations to locate.
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    \8\ The Alternative Mortgage Parity Act, Pub. L. 97-320, Title 
VII (Parity Act), 12 U.S.C. 3801 et seq., authorizes certain housing 
creditors to make alternative mortgage transactions notwithstanding 
any contrary state law under certain conditions. Housing creditors 
that rely on the Parity Act and are not commercial banks or credit 
unions must comply with applicable OTS lending regulations.
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Section 545.34  Limitations for Home Loans Secured by Borrower-Occupied 
Property

    OTS proposed removing paragraph (a) of Sec. 545.34 and 
incorporating its provisions into the new consolidated lending 
preemption regulation at Sec. 560.2. Paragraph (a) confirmed that 
federal savings associations may 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.9 OTS received no comments on this proposed change, which 
is adopted as proposed.
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    \9\ 12 U.S.C. 1701j-3; 12 CFR Part 591.
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    Paragraphs (b) and (c) permitted federal savings associations to 
include provisions imposing late fees and prepayment penalties in loan 
contracts on home loans subject to certain conditions. OTS proposed 
removing these paragraphs and incorporating their limitations into new 
Sec. 560.34. The three commenters who discussed these

[[Page 50956]]

paragraphs supported this reorganization. Upon further review, however, 
OTS believes that separating these two paragraphs into two separate, 
more specifically identified, regulations will make them easier for 
users to locate. New Sec. 560.33 will cover late charges and new 
Sec. 560.34 will address prepayment penalties.
    Two commenters also suggested that OTS reduce or eliminate the 
required fifteen-day grace period for borrowers before imposition of a 
late charge. The commenters noted that only OTS, among federal bank 
regulators, has such a lengthy grace period, and suggested at least 
reducing the period to ten days to put savings associations on a more 
level playing field with other mortgage lenders. OTS believes that the 
fifteen-day grace period does not impose a hardship on institutions. 
OTS is retaining the fifteen-day grace period in the final rule.
    One commenter also suggested that OTS delete the reference to 
``monthly'' billing in Sec. 545.34(b) (now incorporated into 
Sec. 560.33), inasmuch as some creditors offer bi-weekly or other 
mortgage plans. OTS is adopting this suggestion and deleting the word 
``monthly'' from the final rule in order to afford institutions and 
consumers more flexibility in structuring payment plans.

Section 545.35  Other Real Estate Loans

    Section 545.35 set forth federal savings associations' authority to 
lend and invest in nonresidential real estate subject to certain 
statutory and regulatory limitations. Paragraph (a) required compliance 
with real estate lending standards. Paragraph (b) reiterated the 
statutory limit of 400 percent of an association's total capital 
imposed on investments in nonresidential real estate. Pursuant to its 
streamlining efforts, OTS proposed to delete this section, incorporate 
the reference to federal savings associations' statutory authority to 
invest in nonresidential real estate into the lending and investment 
powers chart, and place related limitations into an accompanying 
endnote. OTS received no comments on Sec. 545.35 and is making the 
changes proposed.

Section 545.36  Loans To Acquire or To Improve Real Estate

    OTS proposed to delete Sec. 545.36, which set forth regulatory 
investment limitations pertaining to acquisition, development, and 
construction loans. The one commenter addressing this proposed change 
supported OTS's view that the interagency real estate lending standards 
and interagency safety and soundness standards dealt with the same 
issues in a more comprehensive and current manner. Accordingly, OTS is 
deleting this section as proposed. OTS intends to incorporate 
paragraphs (c) and (d) of Sec. 545.36 into the Handbook to provide 
guidance beyond that contained in the interagency real estate lending 
standards to thrifts making development loans.

Section 545.37  Combination Loans

    OTS is deleting Sec. 545.37 as proposed. This section allowed 
thrifts to combine sequentially different types of loans authorized by 
Part 545 and made at different stages of a project, with the term of 
each loan beginning at the end of the previous loan. This provision was 
useful when OTS regulations limited the number of years for which 
certain types of loans could be made. OTS removed those restrictions in 
1992. OTS believes this section is therefore no longer necessary. The 
sole commenter addressing this section supported its deletion.

Section 545.38  Insured and Guaranteed Loans

    Paragraphs (a) and (b) of Sec. 545.38 authorized federal thrifts to 
make insured and guaranteed residential real estate loans, 
notwithstanding other provisions of Part 545 but subject to certain 
limitations. OTS proposed deleting 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 have already been 
removed or are being deleted from Part 545 today. OTS received no 
comments on these proposed deletions, which are adopted as proposed.
    Paragraph (c) addressed nonresidential real estate loans that are 
guaranteed by the Economic Development Administration, the Farmers Home 
Administration, or the Small Business Administration. OTS proposed 
deleting this paragraph and incorporating the HOLA's statutory grant of 
authority for federal thrifts to make guaranteed nonresidential real 
estate loans in the endnotes to the lending and investment powers 
chart. The sole commenter addressing Sec. 545.38 supported deletion of 
the section as unnecessary and duplicative of the interagency real 
estate lending standards.
    Accordingly, OTS is deleting this paragraph as proposed and 
incorporating the statutory reference into the lending and investment 
powers chart.

Section 545.39  Loans Guaranteed Under the Foreign Assistance Act of 
1961

    OTS proposed deleting Sec. 545.39, which reiterated the HOLA's 
grant of authority 10 to federal thrifts to make loans guaranteed 
under the Foreign Assistance Act,11 and incorporating its 
provisions into the lending and investment powers chart. OTS received 
no comments on this section. OTS is incorporating the provisions of 
Sec. 545.39 into the lending and investment powers chart and endnotes 
and new Sec. 560.43.
---------------------------------------------------------------------------

    \10\ 12 U.S.C. 1464(c)(4)(C).
    \11\ 22 U.S.C. 2181, 2184.
---------------------------------------------------------------------------

Section 545.40  Loans on Low-Rent Housing

    OTS proposed to delete Sec. 545.40, which exempted 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. OTS believes that this section is 
unnecessary because the loan term and loan-to-value ratio limitations 
referred to in the section have already been or are now being removed 
from OTS regulations. The one commenter who addressed this section 
supported its elimination. Accordingly, OTS is deleting this section as 
proposed. By deleting this section, 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 those using OTS's 
regulations.

Section 545.41  Community Development Loans and Investments

    OTS proposed to delete Sec. 545.41 because it simply reiterated the 
HOLA's grant of authority to federal savings associations to make 
direct community development loans and investments, subject to an 
overall five percent of assets limitation.12 OTS received no 
comments on this proposed change. OTS is deleting this section as 
proposed and incorporating the statutory authority reference into the 
lending and investment powers chart.
---------------------------------------------------------------------------

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

Section 545.42  Home Improvement Loans

    Section 545.42 reiterated the HOLA's grant of authority to federal 
thrifts to make home improvement loans subject to prudent lending 
standards.13 OTS

[[Page 50957]]

proposed deleting this section and incorporating the reference to 
federal thrifts' statutory authority to make home improvement loans 
into the lending and investment powers chart. OTS received no comments 
on Sec. 545.42 and is making the proposed changes.
---------------------------------------------------------------------------

    \13\ 12 U.S.C. 1464(c)(1)(J).
---------------------------------------------------------------------------

Section 545.43  State Housing Corporation Investment-Insured

    OTS proposed to delete Sec. 545.43 because it reiterated the HOLA's 
grant of authority to federal thrifts to invest in state housing 
corporation loans 14 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.15 OTS received no comments on this 
section. OTS is deleting Sec. 545.43, as proposed, including the 30 
percent of assets limitation. The reference to the HOLA's grant of 
authority to federal thrifts to invest in state housing corporation 
loans has been incorporated into the lending and investment powers 
chart.
---------------------------------------------------------------------------

    \14\ 12 U.S.C. 1464(c)(1)(P).
    \15\ Section 563.95, as discussed later, is being modified and 
moved into new Part 560.
---------------------------------------------------------------------------

Section 545.44  Mortgage Transactions With the Federal Home Loan 
Mortgage Corporation

    Section 545.44 provided, in accordance with HOLA section 5(c)(1)(E) 
and the Federal Home Loan Mortgage Corporation Act, that federal 
thrifts may enter into or perform mortgage transactions with Freddie 
Mac. It did not impose any additional regulatory restrictions. OTS 
proposed to delete this section as an unnecessary reiteration of 
statutory authority and of savings associations' inherent power to 
enter into business contracts. The sole commenter addressing 
Sec. 545.44 supported its deletion as unnecessary. OTS is deleting 
Sec. 545.44 as proposed. HOLA section 5(c)(1)(E) is now referenced in 
the lending and investment powers chart.

Section 545.45  Manufactured Home Financing

    OTS proposed to delete paragraph (a) of Sec. 545.45, which 
contained definitions relating to manufactured home financing. The 
proposed deletion of other paragraphs of this section made these 
definitions unnecessary. OTS received no comments on this paragraph and 
is deleting it as proposed.
    OTS proposed to delete paragraph (b) of Sec. 545.45, which 
reiterated the HOLA's grant of authority to federal thrifts to invest 
in or make manufactured home loans.16 The two commenters 
addressing this section supported these streamlining efforts, and OTS 
is deleting paragraph (b) as proposed. OTS is incorporating the 
statutory reference to federal thrifts' authority to invest in 
manufactured home loans into the lending and investment powers chart.
---------------------------------------------------------------------------

    \16\ 12 U.S.C. 1464(c)(1)(J).
---------------------------------------------------------------------------

    Paragraphs (c) and (d) of Sec. 545.45 addressed inventory financing 
and retail financing for manufactured home chattel paper and 
established term and loan-to-value limits for such loans. OTS proposed 
deleting these paragraphs because they describe underwriting standards 
for manufactured homes that are more suitable as guidance. The two 
commenters addressing these paragraphs supported removing loan-to-value 
and maximum term limits on manufactured homes to eliminate 
micromanagement of the lending process. Accordingly, OTS is deleting 
these paragraphs as proposed.
    However, the commenters disagreed as to the extent to which these 
paragraphs should be transferred to the Handbook. One commenter 
suggested that underwriting guidance in the Handbook pay particular 
attention to the unique risk characteristics associated with 
manufactured home financing. The second commenter believed that 
limitations in the Handbook would not necessarily produce better 
manufactured home loan performance but rather would only limit credit 
availability for low and medium income borrowers and leave thrifts at a 
competitive disadvantage with regard to other types of institutions. 
This commenter contended that a prudent underwriting program that 
balanced creditworthiness and payment capacity of a borrower along with 
product parameters, pricing differentials, and reserve requirements 
provided a better means for managing risk than a program containing 
strict limits on particular factors.17 OTS will review these 
suggestions prior to issuing any guidance regarding mobile home 
lending.
---------------------------------------------------------------------------

    \17\ This commenter also suggested expanding the definition of 
residential property in existing Sec. 563.101 (now Sec. 560.101) of 
the interagency real estate lending standards to include 
manufactured homes placed on real property regardless of whether the 
home is permanently affixed as determined by state law. The OTS 
believes that modifying the substance of that section, which was 
developed on an interagency basis, is not within the scope of this 
rulemaking and defers consideration of this suggestion until a later 
date.
---------------------------------------------------------------------------

    OTS proposed to delete paragraph (e) of Sec. 545.45, which provided 
that a federal thrift's sale of manufactured home chattel paper must be 
sold without recourse. Since that paragraph was first adopted, OTS has 
adopted a capital regulation that requires thrifts to hold appropriate 
levels of capital against all sales with recourse.18 OTS received 
no comments on this proposed change and is deleting paragraph (e) as 
proposed.
---------------------------------------------------------------------------

    \18\ See 12 CFR 567.1(kk), 567.6(a)(2)(i)(C).
---------------------------------------------------------------------------

Section 545.46  Commercial Loans

    OTS proposed to delete paragraph (a) of Sec. 545.46, which simply 
reiterated the HOLA's grant of authority to federal thrifts to invest 
in and make commercial loans not to exceed 10 percent of their 
assets.19 OTS also proposed to incorporate the authority and 
statutory limitation in paragraph (a) into the lending and investment 
powers chart. Commenters generally supported these proposed changes, 
which are adopted as proposed.
---------------------------------------------------------------------------

    \19\ 12 U.S.C. 1464(c)(2)(A). The language in Sec. 545.46(a) 
regarding pre-1984 investment limits is obsolete and has been 
deleted.
---------------------------------------------------------------------------

    OTS also proposed deleting paragraph (b), which defined commercial 
loans to include commercial overdrafts related to demand accounts and 
commercial unsecured loans by service corporations. OTS proposed to 
incorporate paragraph (b)(1) (commercial overdrafts) into an endnote to 
the lending and investment powers chart. OTS received no comments on 
this proposed change, which is adopted as proposed.
    OTS also proposed to remove the requirement that commercial loans 
made at the service corporation level be aggregated with the 10 percent 
of assets limit on commercial lending. Commenters generally agreed with 
OTS's view that the statutory maximum aggregate 3 percent of assets 
that federal savings associations may invest in service corporations 
20 generally provides a sufficient safeguard for savings 
associations investing in service corporations engaged in commercial 
lending as it does for all other types of activities conducted in 
service corporations. Under the current regulations, 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 authority, while other service corporation investments are 
not.21 Most commenters agreed with

[[Page 50958]]

OTS that such a distinction is not warranted and that such loans should 
no longer be subject to the 10 percent of assets limitation on 
commercial lending set forth in HOLA section 5(c)(2)(A).
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 1464(c)(4)(B).
    \21\ 12 CFR 545.74(c)(1)(1996). For purposes of some other 
regulations, such as loans to one borrower (12 CFR 563.93, to be 
recodified at 12 CFR 560.93) 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. 
This final rule does not affect those regulatory provisions.
---------------------------------------------------------------------------

    These commenters also agreed that by removing this aggregation 
requirement federal thrifts will be afforded modest additional 
flexibility to expand their commercial lending. This incremental 
enhancement of thrifts' lending authority will benefit both thrifts and 
their customers, without endangering safety and soundness or thrifts' 
primary mission of providing mortgage lending.
    One bank trade association commenter did express a concern that 
removing the requirement to aggregate commercial loans made by a 
service corporation with its parent's loans might circumvent the HOLA 
ceiling on commercial loans. However, the HOLA does not require that a 
service corporation's commercial loans be aggregated with its parent's 
loans for purposes of statutory percentage-of-assets limitations on 
general investment authority. Service corporations do not fall within 
the definition of savings association for purposes of applying HOLA's 
investments limits. As noted above, the HOLA imposes an aggregate limit 
on investments in service corporations of 3 percent of assets, but does 
not impose sublimits on service corporation investments. The FHLBB's 
original inclusion of a service corporation's commercial loans within 
its parent savings association's commercial lending authority was done 
in 1983 when commercial lending was a new activity for savings 
associations. Given the levels of capital now required for such loans 
and OTS's experience in regulating this activity, OTS believes that 
allowing this modest increase in commercial lending authority is 
appropriate. OTS therefore will follow the plain statutory language of 
HOLA sections 5(c)(2)(A) and 5(c)(4)(B), which do not require 
aggregation of a service corporation's commercial loans with those made 
by its parent.

Section 545.47  Overdraft Loans

    OTS proposed to delete Sec. 545.47, because it simply reiterated 
the HOLA's grant of authority to federal thrifts to make loans 
specifically related to transaction accounts, including overdraft 
loans. OTS also proposed to incorporate the reference to federal 
thrifts' statutory authority to make overdraft loans into the lending 
and investment powers chart accompanied by an endnote specifying that 
commercial overdraft loans formerly covered by Sec. 545.46 remain 
subject to the same commercial lending limits. OTS received no comment 
on these proposed changes, which are adopted as proposed.

Section 545.48  Letters of Credit

    Section 545.48 authorized 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 loans, and this express 
authorization to make loans necessarily includes within it the 
authority to make loan commitments and issue letters of credit. For 
ease of reference, OTS proposed to reference the authority of federal 
thrifts to issue letters of credit in the lending and investment powers 
chart. OTS also proposed to incorporate the substance of Sec. 545.48(a) 
into new Sec. 560.120 as prudent standards for the issuance of letters 
of credit. OTS solicited 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 two commenters to address this section both supported OTS's 
efforts to update Sec. 545.48 to reflect current market standards and 
industry usage for letters of credit. Both commenters also supported 
OTS's adoption of regulatory requirements for the issuance of letters 
of credit for all savings associations in order to provide uniform 
standards for all thrifts. While applauding OTS's efforts to modernize 
its letters of credit regulation, however, one commenter contended that 
the specific language of the proposed rule was not crafted to address 
some of the regulatory issues raised by contemporary letters of credit 
practice. This commenter suggested that OTS review the most recent 
interpretive ruling on letters of credit issued by the OCC, which was 
published after OTS issued its notice of proposed rulemaking.22
---------------------------------------------------------------------------

    \22\ See Interpretive Ruling: Independent Undertakings To Pay 
Against Documents (12 CFR 7.1016) (61 FR 4849, 4852-3, 4865, 
February 9, 1996, effective April 1, 1996).
---------------------------------------------------------------------------

    Having reviewed the OCC's interpretive ruling, OTS has determined 
to substantially adopt the approach taken by the OCC with respect to 
the regulation of letters of credit. OTS believes that the OCC ruling 
incorporates many of the modern market standards and industry usage 
applicable to letters of credit. Furthermore, by substantially adopting 
the OCC's approach, OTS is acting consistent with Section 303 of the 
CDRIA, which encourages the federal banking agencies to move towards 
greater uniformity in regulations on common supervisory issues.
    In its February 9, 1996 ruling, the OCC treats letters of credit 
and independent undertakings as equivalent transactions for regulatory 
purposes. The OCC uses the term ``independent undertakings'' to 
encompass letters of credit as well as all such unilateral commitments 
under which a bank's obligation to honor its commitment is dependent 
solely on the proper presentation of specified documents regardless of 
extrinsic factors (except fraud, forgery, or an overriding public 
policy issue).23 As the OCC points out, the term ``independent 
undertakings'' is used by the United Nations Commission on 
International Trade Law to cover a broad array of transactions 
including commercial letters of credit, standby letters of credit, and 
other undertakings that are functionally identical or equivalent to 
letters of credit.24
---------------------------------------------------------------------------

    \23\ See Notice of Proposed Rulemaking: Interpretive Rulings, 60 
FR 11924, 11926 (March 3, 1995).
    \24\ 61 FR at 4852.
---------------------------------------------------------------------------

    The new Sec. 560.120 states that a thrift may issue and commit to 
issue letters of credit. The new section also allows thrifts to issue 
and commit to other independent undertakings approved by OTS. OTS also 
believes that, in the thrift context, the broad scope of the term 
``independent undertaking'' and its recent evolution require closer 
supervision of such transactions when they fall outside the more 
traditional activities generally known as letters of credit. National 
banks have traditionally been more involved in international banking 
transactions and may be more familiar than most thrifts with 
nontraditional activities that fall within the term ``independent 
undertakings''. OTS believes that allowing thrifts to issue independent 
undertakings of a type specifically approved by OTS strikes the 
appropriate balance between giving thrifts greater flexibility to 
potentially engage in new types of transactions while at the same time 
ensuring that thrifts have properly evaluated the risks posed by a 
particular transaction consistent with prudent banking practice. OTS 
anticipates that its approval may take the form of legal opinions, 
general guidance, or case-by-case approvals, depending upon how the 
undertakings are presented to the agency.

[[Page 50959]]

    Paragraph (a) of the new Sec. 560.120 explains that a savings 
association may issue and commit to issue a letter of credit or other 
approved independent undertaking. Paragraph (a) also provides a non-
exclusive list of sample laws and rules of practice 25 and 
explains that non-documentary conditions on the thrift's undertaking 
are not relevant to the thrift's obligation to honor its commitment.
---------------------------------------------------------------------------

    \25\ See footnote to the new Sec. 560.120(a).
---------------------------------------------------------------------------

    Paragraph (b) of the final rule requires that thrifts evaluate 
certain safety and soundness factors when issuing letters of credit and 
approved independent undertakings. Paragraph (b) also requires that 
thrifts possess the operational expertise commensurate with the 
sophistication of their letter of credit and independent undertaking 
activities. The final rule also permits a thrift to issue a letter of 
credit or other approved undertaking without an express expiration 
date, provided that the thrift retains the right not to renew the 
transaction and to cancel the transaction upon notice to the parties.
    OTS also proposed to delete paragraph (b) of Sec. 545.48, which 
addressed the treatment of funds advanced under a letter of credit 
without compensation from the account party, because it duplicates 
Sec. 545.31(b), which OTS proposes to incorporate into Sec. 560.31(a). 
OTS received no comment on this proposed deletion, which is adopted as 
proposed.
    Because issuing a letter of credit is not in and of itself a loan 
or investment, the reference to letters of credit has been removed from 
the lending and investment powers chart. When a savings association 
advances funds under the terms of a letter of credit or independent 
undertaking, those funds will then constitute a loan and will be 
counted toward the appropriate HOLA section 5(c) investment category.

Section 545.49  Loans on Securities

    OTS proposed to delete Sec. 545.49, which simply reiterated the 
HOLA's 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.26 OTS also proposed to incorporate a reference to 
thrifts' statutory authority to invest in such loans secured by U.S. 
government or agency-backed obligations into the lending and investment 
powers chart. The agency also proposed to remove as unnecessary the 
introductory paragraph limiting permissible investments in agencies or 
instrumentalities of the United States to those entities named in 
Sec. 566.1(g)(3). OTS received no comments on this section and 
accordingly deletes this section as proposed.
---------------------------------------------------------------------------

    \26\ 12 U.S.C. 1464(c)(1)(L).
---------------------------------------------------------------------------

Section 545.50  Consumer Loans

    Section 545.50 reiterates the HOLA's grant of authority to federal 
thrifts to make consumer loans subject to a 35 percent of assets 
limit.27 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.28 
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.
---------------------------------------------------------------------------

    \27\ 12 U.S.C. 1464(c)(2)(D).
    \28\ Id.
---------------------------------------------------------------------------

    OTS proposed to delete paragraph (a) of 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 
lending and investment powers chart. OTS also proposed to include an 
endnote incorporating the provisions of paragraph (c) of Sec. 545.50, 
which addressed loans to dealers in consumer goods. Commenters were 
generally supportive of these changes and OTS is making the proposed 
changes.
    OTS also solicited comment on how the definition of consumer loan 
set forth in paragraph (b) of Sec. 545.50 could be clarified and 
coordinated with other OTS regulations that address consumer credit. 
Several commenters pointed out the inconsistency between paragraph 
(b)'s definition of ``consumer loan,'' which expressly excludes credit 
cards, and Sec. 561.12, which defines ``consumer credit'' to include 
credit cards. OTS recognizes the ambiguity that arises from the use of 
these similar, but not identical, terms in different regulatory 
provisions. For purposes of HOLA investment limits and Part 560, the 
term ``consumer loan'' will continue to be defined in the Definitions 
section, new Sec. 560.3, as it has been in Sec. 545.50. As part of a 
later Regulatory Structure rulemaking, OTS will consider how best to 
minimize or eliminate the potential for confusion presented by 
differing definitions of similar terms.
    Under current OTS 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. Section 545.51, 
discussed below, governs credit card activity of federal savings 
associations and imposes no percentage of assets limits on credit 
cards. This approach mirrors the HOLA. HOLA section 5(b)(4) authorizes 
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 thrifts to invest 
in credit cards. The statutory provision authorizing credit cards 
contains no percentage of assets limit. The legislative history does 
not provide any clear guidance regarding whether any linkage was 
intended. The sole commenter addressing this issue agreed with OTS's 
position that the plain language of the HOLA imposes no percentage of 
assets limit on credit card operations.
    The final rule carries forward the structure of OTS's existing 
regulations. Under the final rule, ``consumer loan'' will continue to 
be defined in a manner that excludes credit card loans. Thus, credit 
card loans are not subject to the 35 percent of assets limit on 
consumer loans. However, the regulation notes, at endnote 5 to 
Sec. 560.30, that OTS may impose a case-by-case limit on this or any 
type of lending activity if the association's concentration in such 
investments presents a safety and soundness concern.

Section 545.51  Credit Cards

    OTS proposed to delete paragraph (a) of Sec. 545.51, which 
reiterated the HOLA's grant of statutory authority to federal thrifts 
to engage in credit card operations.29 OTS proposed to incorporate 
a reference to federal savings associations' statutory authority to 
engage in credit card operations into the lending and investment powers 
chart. OTS received no comments on this paragraph and adopts these 
changes as proposed.
---------------------------------------------------------------------------

    \29\ 12 U.S.C. 1464(b)(4).
---------------------------------------------------------------------------

    OTS also proposed to delete paragraph (b) of Sec. 545.51, which 
addressed the confidentiality of personal security identifiers in 
conjunction with credit card operations, because it is redundant with 
the provisions of the Electronic Funds Transfer Act and Regulation 
E.30 The one commenter addressing this paragraph supported this 
reasoning. OTS is deleting this paragraph as proposed.
---------------------------------------------------------------------------

    \30\ See 15 U.S.C. 1693 et seq. and 12 CFR Part 205 
respectively.
---------------------------------------------------------------------------

Section 545.52  Loans on Savings Accounts

    OTS proposed to delete Sec. 545.52, which reiterated the HOLA's 
grant of authority to federal thrifts to make loans

[[Page 50960]]

on the security of savings accounts and sets forth regulatory limits on 
such loans.31 OTS proposed to incorporate the reference to federal 
thrifts' statutory authority to make loans on savings accounts into the 
lending and investment powers chart and retain the limitation on such 
loans to the withdrawal amount of the savings account as an endnote to 
the chart. OTS received no comments on this section and the proposed 
changes to Sec. 545.52 are adopted as proposed.
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1464(c)(1)(A).
---------------------------------------------------------------------------

Section 545.53  Finance Leasing

    Paragraph (a) of Sec. 545.53 authorized federal thrifts to engage 
in various leasing activities that are the functional equivalent of 
lending, subject to certain regulatory limitations.32 OTS proposed 
to reference federal thrifts' finance leasing authority in the proposed 
lending and investment powers chart, with an endnote cross-referencing 
applicable regulatory limitations. OTS received no comment on this 
proposed change, which is adopted as proposed.
---------------------------------------------------------------------------

    \32\  Section 545.53 cited 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' finance leasing authority.
---------------------------------------------------------------------------

    OTS also proposed to consolidate the finance leasing requirements 
of Sec. 545.53 with the general leasing requirements of Sec. 545.78 
into one streamlined section, new Sec. 560.41. In connection with this 
consolidation, OTS proposed to delete the term limits for finance 
leases and to increase the minimum residual value requirement for 
finance leases from 20 to 25 percent. The one commenter addressing 
these proposed changes supported the proposed consolidation and agreed 
with OTS's reasoning that institutions should be free to establish 
their own term limits based on prudent underwriting criteria and market 
conditions. The commenter also supported the increase in residual value 
requirement because it enhanced the flexibility of thrifts' leasing 
operations. Because of the complexity of leasing activities, this 
commenter also suggested that OTS provide clear underwriting guidance 
for various types of leasing activities in the Handbook as well as 
additional examiner training on leasing arrangements. A second 
commenter requested a clearer definition of ``full-payout lease'' in 
Sec. 560.41(c).
    In this final rule, OTS is consolidating its leasing regulations 
into the newly adopted Sec. 560.41. The section has been revised to 
clarify its scope and definitions. OTS is also eliminating the term 
limits and increasing the minimum residual value requirement for 
finance leases to 25 percent. OTS notes that the OCC allows national 
banks to make finance leases with a residual value of 25 percent of the 
original cost of the property to the lessor.33 OTS plans to add 
underwriting guidance to the Handbook addressing leasing arrangements.
---------------------------------------------------------------------------

    \33\ The OCC has recently proposed amendments to its leasing 
regulation at 60 FR 46246 (September 6, 1995).
---------------------------------------------------------------------------

    OTS is also consolidating the salvage powers provisions in 
Sec. 545.53 into the new Sec. 560.41. Paragraph (e) of that new section 
outlines a thrift's salvage powers on all types of leases.

Section 545.72  Government Obligations

    Section 545.72 reiterated the HOLA's grant of authority to federal 
thrifts to invest in obligations of any state, territory, or political 
subdivision thereof.34 OTS proposed to delete this section and 
incorporate the reference to federal thrifts' statutory authority to 
invest in government obligations into the lending and investment powers 
chart. OTS also proposed incorporating the provisions of Sec. 545.72(a) 
regarding investments in obligations meeting investment grade 
requirements into a new Sec. 560.42 entitled ``State and local 
government obligations.'' The lending and investment powers chart would 
cite the new Sec. 560.42 in its endnotes. OTS received no comments on 
these proposed changes, which are adopted as proposed.
---------------------------------------------------------------------------

    \34\  12 U.S.C. 1464(c)(1)(H).
---------------------------------------------------------------------------

    In order to encourage additional sound community-related 
investments, OTS also proposed modifying regulatory restrictions in 
Sec. 545.72(b) before their incorporation into the new Sec. 560.42. OTS 
proposed to clarify 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, OTS also proposed to allow savings 
associations to invest additional amounts in such obligations, without 
geographic restrictions, if the obligation is specifically approved for 
investment by OTS.
    The two commenters addressing this section supported OTS's 
reasoning that this change would afford savings associations additional 
flexibility to invest in government obligations without any threat to 
the associations' safety and soundness. One commenter noted that the 
obligations of local municipalities often are rated noninvestment grade 
or are unrated, yet these communities could benefit from local savings 
associations' increased investment in municipal bonds. Both commenters 
believed that thrifts with strong capital, sound underwriting 
standards, and broadly diversified investment portfolios should have 
the discretion to invest in government obligations. One commenter 
argued that OTS should not require prior approval before an association 
is permitted to invest in government obligations in a locality in which 
the association does not have a home or branch office. OTS, however, 
believes that such prior approval is appropriate because the purchase 
of noninvestment grade or unrated obligations is potentially risky, and 
associations should be prepared to demonstrate that their decision to 
invest in such obligations does not pose any threat to the 
association's safety or soundness.
    OTS believes that the proposed changes will give savings 
associations additional flexibility while still allowing the agency to 
monitor the risks presented by investments in government obligations. 
The proposed rule gives thrifts the option to invest in unrated 
government securities, exceed the 1 percent of assets limit for unrated 
securities of localities where the thrift has an office, or invest in 
obligations in localities where they do not have an office if the 
thrifts obtain prior OTS approval. Accordingly, OTS adopts the proposed 
modifications to paragraphs (a) and (b) of Sec. 545.72 and incorporates 
those modified provisions into the new Sec. 560.42.
    OTS also proposed to remove the restriction on gold-related 
obligations contained in paragraph (c) of Sec. 545.72 as obsolete. OTS 
received no comment on the proposed deletion, which is adopted as 
proposed.

Section 545.73  Inter-American Savings and Loan Bank

    Section 545.73 reiterated federal savings associations' 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 investment.35 OTS proposed 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. OTS received no comment 
on these proposed changes, which are adopted as proposed.
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    \35\ 12 U.S.C. 1464(c)(4)(C).

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[[Page 50961]]

Section 545.74  Service Corporations

    OTS proposed, as discussed under Sec. 545.46 above, to no longer 
aggregate commercial loans made by a savings association's service 
corporation with commercial loans made by the savings association 
itself for purposes of the statutory 10 percent of assets limitation. 
The agency proposed a conforming change to Sec. 545.74(c)(1)(vi), where 
this regulatory aggregation is repeated. The remaining provisions of 
Sec. 545.74 are currently under separate review as part of the agency's 
reinvention of its subsidiaries regulations.36 The one commenter 
specifically addressing the conforming change to Sec. 545.74 supported 
excluding any commercial loan booked by a service corporation from the 
10 percent commercial loan limit for federal savings associations. The 
commenter noted, as did the OTS proposal, that this modification would 
make the treatment of commercial loans owned by service corporations 
consistent with the treatment of noncommercial loans owned by service 
corporations. Accordingly, OTS has modified this paragraph as proposed.
---------------------------------------------------------------------------

    \36\ See Notice of Proposed Rulemaking, Subsidiaries and Equity 
Investments, 61 FR 29976 (June 13, 1996).
---------------------------------------------------------------------------

Section 545.75  Commercial Paper and Corporate Debt Securities

    Section 545.75(a) reiterated the HOLA's grant of authority to 
federal thrifts to invest in commercial paper and corporate debt 
securities.37 OTS proposed to delete this paragraph and to 
reference federal thrifts' statutory authority to invest in commercial 
paper and corporate debt securities in the lending and investment 
powers chart. The agency also proposed to retain the limitations on 
these investments contained in paragraphs (b) and (c) and to move them 
into the new Sec. 560.40 on commercial paper and corporate debt 
securities in Part 560.38
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 1464(c)(2)(D).
    \38\ The agency also solicited comment on whether these 
provisions should, alternatively, be removed from the regulations 
and incorporated as guidance in the Handbook.
---------------------------------------------------------------------------

    The only commenter to address this section questioned why paragraph 
(b) requires a thrift's investments in commercial paper and corporate 
debt securities to be denominated in dollars. OTS agrees with this 
commenter's position that the HOLA, 12 U.S.C. 1464(c)(2)(D), does not 
require such denomination, and previous OTS opinions have stated that 
such investments are permissible as long as foreign currency risks are 
properly hedged. Accordingly, OTS adopts Sec. 560.40 as proposed with 
the modification that commercial paper and corporate debt securities 
are no longer required to be denominated in dollars.
    OTS also proposed to delete paragraph (d) of Sec. 545.75 as no 
longer having any practical application for thrifts in light of 
Sec. 28(d) of the Federal Deposit Insurance Act 39 (FDIA). 
Paragraph (d) authorized 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 Sec. 28(d) of the 
FDIA, which prohibits investments by thrifts in unrated corporate 
bonds. Although OTS solicited comment as to whether there was any 
scenario under which an investment authorized by paragraph (d) would 
not violate Sec. 28(d) of the FDIA, OTS received no responsive 
comments. Because OTS believes that paragraph (d) has no practical 
application for thrifts, it is deleting paragraph (d) as proposed.
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 1831e(d).
---------------------------------------------------------------------------

Section 545.78  Leasing

    Paragraph (a) of Sec. 545.78 reiterated the HOLA's grant of 
authority to federal thrifts to invest in tangible personal property 
for leasing purposes.40 OTS proposed to incorporate a reference to 
this statutory authority into the proposed lending and investment 
powers chart. As already discussed under Sec. 545.53 earlier, OTS also 
proposed to consolidate the general leasing restrictions applicable to 
federal savings associations in Sec. 545.78 with the finance leasing 
restrictions in Sec. 545.53 into a new Sec. 560.41. The one commenter 
addressing these proposed changes supported the consolidation, and OTS 
is adopting these changes as proposed.
---------------------------------------------------------------------------

    \40\ 12 U.S.C. 1464(c)(2)(C).
---------------------------------------------------------------------------

    OTS also proposed to delete paragraph (b) of Sec. 545.78, which 
imposes a maximum 70 percent residual value limit for general leasing 
activities. OTS believes that such an underwriting restriction may be 
unduly restrictive if applied in all cases and that such lease 
underwriting considerations are better addressed within each 
association's prudent leasing policies, which will be subject to review 
by OTS examiners. Furthermore, OTS plans to provide underwriting 
guidance on leases in its Handbook. The one commenter addressing this 
section supported the proposed deletion because it would give 
additional flexibility to thrifts in structuring lease arrangements. 
The commenter also suggested that additional underwriting guidance be 
included in the Handbook because of the complexity of leasing 
activities.
    OTS is deleting the maximum 70 percent residual value limit as 
proposed and replacing that requirement with more flexible underwriting 
guidance in the Handbook. As discussed earlier under Sec. 545.53, the 
new Sec. 560.41 addresses both general leasing and finance leasing 
authority.

Section 556.2  Power To Engage in Escrow Business

    Section 556.2 addressed federal thrifts' power to engage in the 
escrow business. OTS proposed to delete this policy statement, because 
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. See 
discussion above with regard to Sec. 545.32(b)(6). Although one 
commenter supported the proposed elimination of this section as 
unnecessary, a second commenter raised a concern that elimination of 
this section might raise preemption concerns. For the reasons discussed 
above with regard to Sec. 545.32(b)(6), OTS believes that a thrift's 
power to establish escrow accounts does not need to be specifically 
identified in the CFR. Furthermore the new preemption regulation at 
Sec. 560.2 specifically cites escrow accounts as an area in which state 
law is preempted. Accordingly, OTS is deleting Sec. 556.2, as proposed.

Section 556.3  Real Estate

    Section 556.3(a) addressed the treatment of motels as either 
improved nonresidential real estate or combination home and business 
property for real estate categorization purposes. OTS proposed to 
delete this paragraph and incorporate it into guidance. Section 
556.3(b) permitted federal thrifts to purchase paving certificates that 
constitute a lien on property securing an association's loan. OTS 
proposed to delete this section and transfer the language of the policy 
statement to the Handbook. OTS received no comment on these proposed 
deletions, which are adopted as proposed.

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

    Section 556.10 reiterated federal thrifts' authority to make 
mortgage loans insured by the Federal Housing Administration and 
secured by first liens on improved real estate and discussed the 
treatment and documentary evidence of such loans after disposal by the 
Secretary of

[[Page 50962]]

Housing and Urban Development. OTS proposed to delete this policy 
statement and move it to guidance in the Handbook. OTS received no 
comment on this proposed deletion, which is adopted as proposed.

Section 563.93  Lending Limitations

    Section 563.93 contained lending limits on all loans and extensions 
of credit made by all savings associations and their subsidiaries. This 
section and its accompanying Appendix are being redesignated and moved 
unchanged into new Part 560 as Sec. 560.93, for ease of reference.

Section 563.95  Investment in State Housing Corporations

    Section 563.95 covered investments in or loans to state housing 
corporations by all savings associations. It imposed certain 
conditions, including percentage-of-asset limitations, depending on the 
type of loan or investment and the savings association's capital level. 
OTS proposed to modify and update this section and move it into a new 
Sec. 560.121 in new Part 560.
    Paragraph (a) dealt with loans to, and investments in obligations 
of, state housing corporations that are secured, directly or 
indirectly, by first liens on federally insured improved real estate. 
OTS proposed to remove percentage-of-asset investment limitations in 
this paragraph (a). Commenters supported OTS's reasoning that removing 
the percentage-of-assets limit would allow thrifts to exercise business 
judgment in determining the amount they wished to invest in such loans 
and obligations, subject, as always, to overall safety and soundness 
considerations.
    OTS proposed 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 proposed 
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, OTS proposed 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, OTS proposed to revise the aggregate limit on such investments 
to equal a thrift's total capital under 12 CFR Part 567 (rather than 
its general reserves, surplus, and undivided profits) and to move this 
requirement into a new paragraph (b)(2). Finally, the agency proposed 
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 required an institution to invest in four state housing 
corporations any time it wished to invest in one.
    Commenters believed that revisions to restrictions on investments 
in state housing corporations would encourage institutions to make 
additional sound community related investments. Savings associations' 
increased participation in community-related investments could 
potentially benefit communities and their affordable housing programs 
without undermining thrifts' safety and soundness. Commenters also 
agreed that elimination of the 25 percent limit on investments to a 
single state housing corporation should cause no problem because 
thrifts will be protected by the cap on aggregate investments and by 
examiners' asset concentration review. One commenter urged OTS to go 
further and make additional revisions, such as allowing thrifts to 
invest in obligations of state housing corporations throughout the 
country, not just where the thrift has a home or branch office. This 
commenter also suggested removing the aggregate cap on total 
investments, subject to OTS approval, under certain circumstances. OTS, 
however, believes that the proposed regulatory language strikes the 
appropriate balance between giving thrifts additional flexibility with 
respect to investment in state housing corporations and ensuring safe 
and sound operations. Accordingly, OTS adopts the proposed revisions to 
paragraphs (a) and (b) of Sec. 563.95 and incorporates those revisions 
into the new Sec. 560.121.
    The agency also proposed 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.41 Although OTS solicited comment as to whether there was 
any scenario under which paragraph (c) was still relevant, no 
commenters responded to this request. OTS deletes paragraph (c) of 
Sec. 563.95 as proposed.
---------------------------------------------------------------------------

    \41\ 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 proposed 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 in a state housing 
corporation, to obtain the corporation's agreement to make information 
available to OTS upon request. OTS received no comment on this 
provision which is adopted as proposed.

Section 563.97  Loans in Excess of 90 Percent of Value

    OTS proposed to delete Sec. 563.97, which authorized 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. Commenters agreed that the 
interagency real estate lending standards address the same issue in a 
more comprehensive manner. OTS is deleting Sec. 563.97 as proposed.

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

    Section 563.99 defined fixed and adjustable-rate mortgage loans and 
required thrifts to make certain disclosures to applicants of 
adjustable-rate mortgage loans. In order to establish parity in 
coverage with other lenders, OTS proposed to add a new paragraph (g) to 
exclude from Sec. 563.99's coverage adjustable-rate loans that are 
primarily for a business, commercial, or agricultural purpose, 
consistent with the Federal Reserve Board's (FRB) Truth in Lending 
regulation, Regulation Z.42
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    \42\  Regulation Z exempts from its disclosure requirements 
extensions of credit primarily for business, commercial, or 
agricultural purposes. See 12 CFR 226.3(a)(1).
---------------------------------------------------------------------------

    Commenters generally favored making Sec. 563.99's coverage 
consistent with that of Regulation Z. Section 563.99 covered 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 primarily for personal, family, or household 
purposes.43 As the regulations interacted, certain transactions 
were encompassed by Sec. 563.99 but not by Regulation Z. By adopting 
the proposed changes to Sec. 563.99, OTS will be minimizing the 
differences between that section and Regulation Z. For example, a 
savings

[[Page 50963]]

association that makes a business purpose ARM loan secured by a home 
will no longer be subject to the disclosure requirements set forth at 
Sec. 563.99; nor would any disclosures be required under Regulation Z.
---------------------------------------------------------------------------

    \43\ 12 CFR 226.1(c)(1)(iv).
---------------------------------------------------------------------------

    Several commenters recommended deleting the disclosure portions of 
Sec. 563.99 in their entirety because those provisions were duplicative 
of Regulation Z. Commenters argued that two sets of disclosure 
regulations confused lenders and required them to search two places to 
figure out applicable regulatory requirements. OTS will undertake a 
comprehensive review of Sec. 563.99 in conjunction with the FRB's 
review of Regulation Z pursuant to section 303 of the CDRIA.44 
Pending that review, Sec. 563.99 is being redesignated as Sec. 560.210, 
so that all lending regulations will be grouped together in Part 560. 
The only changes being made to Sec. 563.99 are changing its title to be 
more descriptive of its content, adding a new paragraph (g), as 
discussed above, and removing paragraph (a)(2), which defined ``fixed 
rate mortgage loan,'' a term not used in the regulation. OTS does note 
that the disclosure requirements of current Sec. 563.99 and Regulation 
Z 45 are substantially similar.
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    \44\ Pursuant to section 303(b) of the CDRIA, the FRB is 
required to review its regulations with respect to disclosures 
pursuant to the Truth In Lending Act with regard to adjustable-rate 
mortgages in order to simplify the disclosures, if necessary, and 
make the disclosures more meaningful and comprehensible to 
consumers. 12 U.S.C. 4803.
    \45\ See 12 CFR 226.19(b), 226.20(c).
---------------------------------------------------------------------------

Section 563.100-563.101  Real Estate Lending Standards

    These sections prescribed 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.46 
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. OTS did not propose changes to 
these sections, but indicated its intent to redesignate and move them 
substantially unchanged into a new Part 560. OTS received no comment on 
these proposed redesignations and is redesignating them as 
Secs. 560.100-560.101 in the final rule issued today. The Appendix 
containing the guidelines is also being redesignated.
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    \46\  Appendix A to the real estate lending standards at current 
Secs. 563.100-101.
---------------------------------------------------------------------------

Section 563.160  Classification of Certain Assets

    Section 563.160 required thrifts to classify their own assets and 
establish valuation allowances. OTS proposed to delete this section in 
its entirety.47 The one commenter addressing this section favored 
its deletion and suggested placing classification guidance in the 
Handbook. This commenter noted that the section's deletion would be 
consistent with the stance of the other banking agencies which set 
forth their asset classification systems as supervisory guidance, not 
as regulations.
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    \47\ OTS had 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 Handbook. 58 FR 38730 (July 20, 1993). Commenters supported such 
deletions. The OTS proposed deleting paragraph (f) as part of its 
regulatory review proposal, 60 FR 44442 (August 28, 1995), and 
received no unfavorable comments.
---------------------------------------------------------------------------

    Upon further consideration, OTS has decided to retain a short 
classification regulation simply stating that a savings association 
must have an internal system to classify assets and must establish 
appropriate valuation allowances or charge-offs, as appropriate. OTS 
believes that retaining a short classification regulation at new 
Sec. 560.160 will ensure that a thrift's board of directors takes 
responsibility for monitoring its classification system. OTS will 
transfer more detailed guidance concerning asset classification to the 
Handbook consistent with the supervisory guidance of the other federal 
banking agencies.

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

    Paragraph (a) of Sec. 563.170 authorizes OTS to examine thrifts 
consistent with OTS policies and to annually assess thrifts for the 
costs of such examinations based on the thrifts' assets. OTS proposed 
to retain this paragraph. The agency received no comment on this 
section, which is retained as proposed in its current location.
    Paragraph (b) authorizes 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. OTS proposed 
to retain this paragraph. The agency received no comment on this 
section, which is also retained as proposed.
    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. 
OTS proposed to retain this 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), however, set forth a list of specific loan 
documents that, at a minimum, thrifts must maintain to comply with 
Sec. 563.170(c). OTS proposed replacing the specific documentation 
requirements listed in paragraphs (c) (1)-(9) with more general 
documentation standards in a new Sec. 560.170 in Part 560. These 
proposed standards were drawn from the interagency Standards for Safety 
and Soundness regulations and attached Guidelines Establishing 
Standards for Safety and Soundness.48 These guidelines set forth 
loan documentation and credit underwriting requirements to which all 
federal insured depository institutions are expected to adhere. These 
underwriting and documentation standards minimize the need for OTS to 
have a regulation mandating specific documentation requirements.49
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    \48\ 12 CFR Part 570 and Appendix A thereto, 60 FR 35674 (July 
10, 1995).
    \49\ Guidelines appended to the interagency real estate lending 
standards also state that an institution should establish loan 
administration procedures that address documentation. See 12 CFR 
Part 563, Subpart D, Appendix A (redesignated in this rulemaking as 
Appendix to Sec. 560.101).
---------------------------------------------------------------------------

    Commenters unanimously supported OTS's proposal to eliminate the 
detailed list of documents required in paragraphs (c) (1)-(9). 
Commenters agreed with OTS's reasoning that although the documents 
listed were generally appropriate for prudent lending, a rigid 
requirement that all documents be present for each loan was too 
restrictive and did not necessarily address all safety and soundness 
concerns. Commenters believed that elimination of the specific document 
list would give lenders more flexibility to tailor loan documentation 
to various types of loans and to determine which particular documents 
would be most appropriate for a specific loan.
    For example, previously Sec. 563.170(c)(1)(v) required 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 previously required) and a satisfactory credit report, 
rather than a financial statement. For commercial borrowers, 
verification by

[[Page 50964]]

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. The more flexible language 
of new Sec. 560.170 will allow thrifts to obtain documentation that 
best satisfies safety and soundness concerns raised in a particular 
transaction, while at the same time relieving thrifts of the burden of 
technical compliance with a document checklist that may not necessarily 
be relevant to prudent lending.
    Commenters also agreed that deleting paragraphs (c) (1)-(9) would 
relieve savings associations of documentation requirements that exceed 
those for banks and other financial institutions as well as enable 
savings associations to take better advantage of technological 
marketplace advances such as telephone and computerized home banking. 
New Sec. 560.170 will allow savings associations to participate in 
telephone and computerized home banking without running afoul of paper 
driven-requirements. Accordingly OTS adopts the changes to 
Sec. 563.170(c) as proposed.
    In its proposal, OTS also considered transferring the current 
document list in paragraphs (c) (1)-(5), and (7) to the Handbook to be 
used as a checklist of records generally maintained by prudent lenders 
to support a loan. Several commenters raised concerns regarding the 
language of the guidance that would be included in the Handbook. One 
commenter urged that if OTS includes a document list in the Handbook, 
the agency should also clearly state that the list is intended only as 
guidance and not as rigid minimum requirements for safety and 
soundness. The commenter suggested inserting language to the effect 
that the lender (based on borrower creditworthiness, the specific 
program and product offering, pricing, project delinquency, loss 
profile, and title and appraisal information) should have the 
discretion not to require certain documents in any given situation. 
Another commenter recommended deletion of the requirement that loan 
documents identify a purpose for the loan because lines of credit are 
now used for any purpose, the identification of which is not necessary 
to proper underwriting. The interagency guidelines establishing 
standards for safety and soundness do state that a lender should 
identify the purpose of a loan.50 However, OTS will review these 
comments prior to issuing any loan documentation guidance to be 
included in the Handbook.
---------------------------------------------------------------------------

    \50\ 60 FR at 35679.
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    Paragraph (c)(10) of Sec. 563.170 exempted certain small business 
loans from the documentation requirements set forth in paragraphs (c) 
(1)-(7). OTS proposed to delete paragraph (c)(10) inasmuch as the 
streamlining of the requirements currently located in paragraphs (c) 
(1)-(7) eliminates the need for this exemption. OTS received no comment 
on this paragraph, which is deleted as proposed.
    OTS proposed to retain paragraph (d) of Sec. 563.170, which 
addresses changes in the location of accounting or control records. One 
commenter questioned whether advances in computer technology rendered 
this paragraph obsolete since computerized accounting and control 
records could be accessed at many locations. Although OTS recognizes 
that computerized records may be read from computer terminals in many 
locations, OTS believes that the agency may need to know the location 
of the server where computer records are physically stored for 
examination purposes. Accordingly, OTS is retaining this paragraph as 
proposed.
    OTS proposed to retain paragraph (e), which addresses use of data 
processing services for maintenance of records. One commenter suggested 
that all but the last sentence of this paragraph could be eliminated 
inasmuch as maintenance of records by means of data processing services 
has become the norm and requiring a thrift to notify the Region in 
which its principal office is located of such maintenance creates 
unnecessary paperwork. Although OTS agrees that thrifts routinely 
maintain records by means of data processing services, the agency 
believes that this paragraph serves the purpose of requiring 
institutions to identify the particular records to be maintained by a 
data processing service and the location where such records are 
maintained. This information may be critical to an examination or 
enforcement inquiry. Accordingly, OTS is retaining this paragraph as 
proposed.
    To summarize, Sec. 563.170 is being modified as proposed, by 
removing the specific loan documentation requirements of paragraphs (c) 
(1) through (10) and by retaining the remainder of the regulation. The 
specific loan documentation requirements have been replaced by more 
general lending documentation requirements in new Sec. 560.170.

Section 563.172  Reevaluation of Real Estate Owned

    Section 563.172 required 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. In its proposal OTS discussed deleting this section because 
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. Two commenters supported 
elimination of this section to give lenders more flexibility with 
regard to the timing of an appraisal for property soon to become REO. 
Commenters agreed, however, that it is sound policy to require an 
appraisal for REO. Upon consideration, OTS has decided to retain this 
regulation to specify when, at a minimum, safety and soundness require 
an appraisal of REO. Accordingly, it is incorporating Sec. 563.172 
unchanged into the new Part 560 as new Sec. 560.172.

Section 571.8  Investment in State Housing Corporations

    Section 571.8 limited savings associations' investment authority in 
state housing corporations to certain public and private corporations 
and agencies. OTS proposed to delete this policy statement as an 
unnecessary limitation on the definition of state housing corporation. 
The one commenter to address this section supported its deletion. OTS 
is deleting Sec. 571.8 as proposed.

Section 571.13  Participation Interests in Pools of Loans

    Section 571.13 addressed 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 indicated that 
compliance with the documentation requirements of Sec. 563.170 may be 
impracticable for such transactions. OTS proposed to delete this 
section inasmuch as the proposed revision of Sec. 563.170(c) would 
eliminate the need for this policy statement. OTS received no comment 
on this section, which is deleted as proposed. OTS plans to transfer 
the documentation guidance for purchases of participation interests in 
pools of loans to the Handbook.

Section 571.20  Payment for Appraisals

    OTS proposed to delete Sec. 571.20, which addressed payment by 
savings associations for appraisals obtained as part of an OTS 
examination. OTS received no comment on this section, which is deleted 
as proposed. OTS expects to transfer this policy statement to the 
Handbook.

[[Page 50965]]

Section 571.22  Most Favored Lender Status
    Section 571.22 implemented 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 for the state's most 
favored lender. OTS proposed to move Sec. 571.22 into new 
Sec. 560.2(d)(1) and requested comment on whether certain provisions in 
Sec. 571.22 should be modified. Because HOLA section 4(g) and this 
regulation apply to all savings associations, however, Sec. 571.22 is 
being moved to a new Sec. 560.110, ``Most Favored Lender, Usury 
Preemption'' in Subpart B of Part 560, which applies to all savings 
associations. Changes to the text of the regulation are discussed under 
Sec. 560.110 below.
2. New Part 560--Lending and Investment
    OTS proposed to adopt a new Part 560, Lending and Investment, that 
would ultimately include all of the agency's lending and investment 
regulations except for Appraisals (Part 564) and subsidiary-related 
investments (currently proposed to be located in new Part 559). 
Commenters generally agreed with OTS's view 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. Accordingly, OTS is adopting new Part 560 as discussed 
below.

Section 560.1  General

    This section sets out the basic statutory authority for lending and 
indicates which regulations in this part will apply only to federal 
savings associations and which regulations apply 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. OTS received no comment on this section, which is 
adopted as proposed, with minor clarifications.

Section 560.2  Applicability of Law

    This section sets forth OTS's longstanding position, as developed 
in case law and legal opinions by both OTS and its predecessor, the 
FHLBB, and as reflected in Sec. 545.2, on the federal preemption of 
state laws affecting the lending activities of federal savings 
associations. Because the agency proposed to move its lending 
regulations out of Part 545 and, thus, separate them from its general 
preemption regulation, Sec. 545.2, and because the agency proposed to 
remove many of the details of the lending regulations that had been 
previously cited in preemption opinions, OTS also proposed new 
Sec. 560.2 to confirm and carry forward its existing preemption 
position.

    It is well established that state laws can be preempted not only by 
federal statutes, but also by federal regulations promulgated pursuant 
to authority delegated by Congress.\51\ In this regard, the Supreme 
Court has recognized that Congress gave the regulator of federal 
savings associations broad preemptive authority:
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    \51\ Fidelity Federal Savings & Loan Association v. de la 
Cuesta, 458 U.S. 141, 153-154 (1982).

    Congress enacted the HOLA [as] ``a radical and comprehensive 
response to the inadequacies of the existing state systems * * *.'' 
Thus, in section 5(a) of the [HOLA], Congress gave the [FHLBB and 
now the OTS] plenary authority to issue regulations * * * 
``providing for the * * * incorporation, examination, operation, and 
---------------------------------------------------------------------------
regulation of [federal savings] associations * * *.''

    Congress directed that, in regulating federal [savings 
associations], the [FHLBB and OTS should] consider ``the best 
practices of local mutual thrift and home financing institutions in 
the United States,'' which were at the time all state-chartered. By 
so stating, Congress plainly envisioned that federal savings 
[associations] would be governed by what the [FHLBB and now OTS]--
not any particular state--deemed to be the best practices, and 
approved the [FHLBB's and OTS's] promulgation of regulations 
superseding state law * * *.52
---------------------------------------------------------------------------

    \52\ Id. at 160-167 (citations omitted).

    Consistent with the foregoing, courts have long recognized that 
federal savings associations organized under the HOLA are uniquely 
federalized financial institutions--even more so than national 
banks.53 Prior to enactment of the HOLA, `` `the states had 
developed a hodgepodge of savings and loan laws and regulations, and 
Congress hoped the [the FHLBB, and now OTS] rules would set an example 
for uniform and sound savings and loan regulation.' '' 54
---------------------------------------------------------------------------

    \53\ People v. Coast Federal Savings & Loan Association, 98 F. 
Supp. 311, 319 (S.D. Calf. 1951).
    \54\ Conference of Federal Savings and Loan Associations v. 
Stein, 604 F.2d 1256 (9th Cir. 1979) (citation omitted).

    Thus, OTS is authorized to promulgate regulations that preempt 
state laws affecting the operations of federal savings associations 
when deemed appropriate to: (i) Facilitate the safe and sound operation 
of federal savings associations, (ii) enable federal savings 
associations to conduct their operations in accordance with the best 
practices of thrift institutions in the United States, or (iii) further 
other purposes of the HOLA. Because lending lies at the heart of the 
business of a federal thrift, OTS and its predecessor, the FHLBB, have 
long taken the position that the federal lending laws and regulations 
occupy the entire field of lending regulation for federal savings 
associations, leaving no room for state regulation. For these purposes, 
the field of lending regulation has been defined to encompass all laws 
affecting lending by federal thrifts, except certain specified areas 
such as basic real property, contract, commercial, tort, and criminal 
law.
    As a result, instead of being subject to a hodgepodge of 
conflicting and overlapping state lending requirements, federal thrifts 
are free to originate loans under a single set of uniform federal laws 
and regulations. This furthers both the ``best practices'' and safety 
and soundness objectives of the HOLA by enabling federal thrifts to 
deliver low-cost credit to the public free from undue regulatory 
duplication and burden. At the same time, the interests of borrowers 
are protected by the elaborate network of federal borrower-protection 
statutes applicable to federal thrifts, including the Truth in Lending 
Act, the Real Estate Settlement Procedures Act, the Equal Credit 
Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure 
Act, the Fair Credit Reporting Act, the Consumer Leasing Act, the Fair 
Debt Collection Practices Act, the Community Reinvestment Act, and the 
Federal Trade Commission Act.55 In addition, in those instances

[[Page 50966]]

where OTS has detected a gap in the federal protections provided to 
borrowers, the agency has promulgated regulations imposing additional 
consumer protection requirements on federal thrifts.56
    \55\ Several of these statutes contain provisions that expressly 
disclaim any intent to preempt non-conflicting state statutes 
falling in the same subject area. E.g., 12 U.S.C. 2616 (Real Estate 
Settlement Procedures Act); and 15 U.S.C. 1610 (Truth in Lending 
Act). The fact that one or several federal statutes do not preempt 
certain types of state laws, however, does not preclude the 
possibility that other federal statutes or regulations might do so 
under more defined or specific circumstances. In this regard, it is 
important to note that the above-referenced federal statutes that 
contain preemption disclaimers apply to all types of lenders 
(including state-chartered lenders), not just federal savings 
associations. The fact that Congress did not wish to preempt the 
application of state laws to this general universe of lenders 
(including lenders chartered and regulated by the very states whose 
laws would be preempted), does not preclude the possibility that 
Congress may have elsewhere evidenced a specific intent to preempt, 
or permit a federal regulator to preempt, the application of state 
laws to a particular category of lender--in this case, federal 
savings associations. This is precisely the conclusion reached by 
the court in First Federal Savings & Loan Association v. Greenwald, 
591 F.2d 417 (1st Cir. 1979). There, the court held that OTS's 
predecessor, the FHLBB, was authorized by Congress in the HOLA to 
preempt state lending laws even when they fall in areas covered by 
the preemption disclaimer in the Real Estate Settlement Procedures 
Act. We believe the court's holding reflects a correct understanding 
of the interplay between the HOLA and the above-referenced statutes, 
as evidenced by the legislative history of the HOLA. See, e.g., 124 
Cong. Rec. 33848 (Statement of Rep. Minish); 124 Cong. Rec. 36148 
(1978) (colloquy between Sen. Proxmire and Sen. Brooke confirming 
that federal thrifts are not subject to state truth in lending 
requirements); 124 Cong. Rec. 33848-33849 (statement of Rep. St 
Germain to the same effect); and 126 Cong. Rec. 6981 (1980) 
(colloquy between Rep. St Germain and Rep. Patterson confirming that 
thrifts, unlike national banks, are not subject to state lending 
laws).
    \56\ See, e.g., 12 CFR Part 535 (prohibited consumer credit 
practices) and new Secs. 560.33 (late charges), 560.34 
(prepayments), and 560.35 (adjustments to home loans).
---------------------------------------------------------------------------

    New Sec. 560.2 carries forward this approach to federal preemption. 
Although the final form of regulation is similar to what was proposed, 
some changes have been made in response to comments received. Several 
commenters expressed concern that the statement in proposed 
Sec. 560.2(a) that OTS intended to occupy the entire field of lending 
regulation for federal thrifts would not be sufficient to restrain 
state regulators from asserting jurisdiction, given that OTS was also 
proposing to remove some of its more detailed regulatory language 
specifically authorizing federal thrifts to engage in various lending-
related practices, e.g., advertising, charging certain fees, and 
establishing escrow accounts. One commenter suggested that OTS expand 
its noninclusive illustrative list of the types of state laws preempted 
to reference additional laws, such as those pertaining to private 
mortgage insurance or other credit enhancements, loan servicing, 
charging application and overlimit fees, establishing impound and 
similar accounts, using credit reports, and setting certain interest 
rate ceilings. Other commenters echoed these concerns.
    In response to commenters' concerns, OTS has made some changes to 
Sec. 560.2. Paragraph (a) still explicitly states the agency's intent 
to occupy the field of lending regulation for federal thrifts. However, 
the statutory bases and regulatory rationale for this occupation are 
more clearly articulated. In addition, to avoid any impression that the 
repeal of certain lending regulations is intended to abdicate portions 
of the lending field to state regulation, we have added an affirmation 
that, ``OTS intends to give federal savings associations maximum 
flexibility to exercise their lending powers in accordance with a 
uniform federal scheme of regulation.''
    Paragraph (b) contains an expanded list of examples of the types of 
state laws that are preempted. The introductory text in paragraph (b) 
continues to emphasize that the list is not intended to be exhaustive. 
Failure to mention a particular type of state law that affects lending 
should not be deemed to constitute evidence of an intent to permit 
state laws of that type to apply to federal thrifts. To the contrary, 
Sec. 560.2 is based on the premise that any state law that affects 
lending is preempted unless it clearly falls within the parameters of 
paragraph (c).
    Paragraph (b) also continues to contain an exception clause 
indicating that certain state laws that would not ordinarily apply to 
federal savings associations may nevertheless apply when an association 
elects to utilize a state's most favored lender usury rate. When 
utilizing a state's most favored lender rate, a federal savings 
association must comply with all laws of its ``location'' state that 
fall within the ambit of the term ``interest,'' as used in section 4(g) 
of the HOLA, as well as any other state laws ``material to the 
determination of the interest rate.'' For a fuller discussion of these 
issues, see the description below of new Sec. 560.110 (most favored 
lender).
    Paragraph (c) describes certain types of state laws that OTS does 
not intend to preempt. Several commenters urged deletion of this 
paragraph. Commenters expressed concern that states seeking to avoid 
federal preemption of their laws or regulations might attempt to 
characterize those laws as falling within paragraph (c). Commenters 
contended that the language used to describe the categories of non-
preempted laws was too broad and could create ambiguity about which 
state laws federal thrifts would be required to follow. For example, 
states might place laws purporting to regulate lending-related fees in 
the portions of state codes dealing with general contract or real 
property laws in an effort to avoid preemption.
    OTS believes that paragraph (c) should be retained in order to 
provide guidance regarding the scope of preemption intended by 
paragraph (a). OTS wants to make clear that it does not intend to 
preempt basic state laws such as state uniform commercial codes and 
state laws governing real property, contracts, torts, and crimes. To 
reduce the potential for misunderstanding, however, we have made 
several changes to paragraph (c). First, we have modified the 
regulatory language that precedes the list of state laws that are not 
preempted. The introductory language now indicates that laws falling in 
these areas are not preempted to the extent that they either: (i) Have 
only an incidental impact on lending; or (ii) are otherwise not 
contrary to the purposes expressed in paragraph (a) of the regulation. 
We also have added a provision to paragraph (c) disclaiming an intent 
to preempt other state laws that may affect lending, but that OTS, upon 
review, finds further a vital state interest and meet the foregoing 
two-part test.
    Adding this two-part test to the regulation will provide an 
interpretive standard for identifying state laws that may be designed 
to look like traditional property, contract, tort, or commercial laws, 
but in reality are aimed at other objectives, such as regulating the 
relationship between lenders and borrowers, protecting the safety and 
soundness of lenders, or pursuing other state policy objectives.
    When confronted with interpretive questions under Sec. 560.2, we 
anticipate that courts will, in accordance with well established 
principles of regulatory construction, look to the regulatory history 
of Sec. 560.2 for guidance. In this regard, OTS wishes to make clear 
that the purpose of paragraph (c) is to preserve the traditional 
infrastructure of basic state laws that undergird commercial 
transactions, not to open the door to state regulation of lending by 
federal savings associations. When analyzing the status of state laws 
under Sec. 560.2, the first step will be to determine whether the type 
of law in question is listed in paragraph (b). If so, the analysis will 
end there; the law is preempted. If the law is not covered by paragraph 
(b), the next question is whether the law affects lending. If it does, 
then, in accordance with paragraph (a), the presumption arises that the 
law is preempted. This presumption can be reversed only if the law can 
clearly be shown to fit within the confines of paragraph (c). For these 
purposes, paragraph (c) is intended to be interpreted narrowly. Any 
doubt

[[Page 50967]]

should be resolved in favor of preemption.
    As questions arise, OTS will issue interpretive guidance consistent 
with the foregoing. While recognizing that no regulation can anticipate 
and expressly resolve all questions, we believe that new Sec. 560.2 
provides thrifts with substantially more guidance than was available 
under Sec. 545.2, thereby enabling them to plan and operate their 
lending operations more efficiently. From time to time, OTS will 
review, update, and modify Sec. 560.2 to ensure that it reflects new 
developments and promotes ``best practices'' and safety and soundness.
    Paragraph (d) of proposed Sec. 560.2 was derived from former 
Sec. 571.22. It is being adopted as Sec. 560.110, incorporating the 
modifications described earlier under that section.

Section 560.3  Definitions

    This new section has been added to set forth in Part 560 lending-
related definitions formerly located in Part 545.

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

    This subpart contains lending and investment regulations directly 
applicable only to federal savings associations. These regulations are 
nonetheless relevant to state-chartered savings associations by virtue 
of Sec. 28 (a) and (b) of the FDIA and the Federal Deposit Insurance 
Corporation's regulations at 12 CFR 303.13, which look to the type and 
amount of activities permissible for federal savings associations as a 
baseline for activities permitted for state-chartered savings 
associations.

Section 560.30  General Lending and Investment Powers

    Proposed Sec. 560.30 took the form of a chart that listed many of 
the lending and investment powers granted to federal thrifts by the 
HOLA. It was 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.
    Commenters generally found the chart to be a very workable 
reference tool, particularly for percentage of assets limitations for 
specific types of loans and investments. Commenters believed that the 
chart form with its statutory cross references made it easier for the 
CFR user to locate statutory authority for various types of loans and 
investments. At least one commenter suggested that the chart would be 
more useful if it were more inclusive and listed additional statutory 
and regulatory lending and investment powers. Accordingly, OTS is 
adopting the lending and investment powers chart in the final rule in a 
more inclusive form with additional references to thrifts' statutory 
powers with regard to bankers' bank stock, business development credit 
corporations, unsecured construction loans, deposits, securities issued 
by the Federal government and government-sponsored enterprises, HUD-
insured or guaranteed investments, insured loans, liquidity 
investments, mortgage-backed securities, nonconforming loans, the 
National Housing Partnership Corporation and related partnerships and 
joint ventures, and small business-related securities.57 Other 
references in the chart on community development and letters of credit 
have been modified or removed so that the chart more clearly reflects 
lending and investment powers specifically authorized by the statute.
---------------------------------------------------------------------------

    \57\ As part of its subsidiaries and equity investment proposal, 
OTS has requested comment on other additions to this chart, 
affecting service corporations, certain open-end management 
investment companies, and small business investment companies. 61 FR 
at 29981.
---------------------------------------------------------------------------

Section 560.31  Election Regarding Categorization of Loans or 
Investments and Related Calculations

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

Section 560.33  Late Charges

    This section is derived from current Sec. 545.34(b). It has been 
modified as discussed under that section.

Section 560.34  Prepayments

    This section is derived from current Sec. 545.34(c). The first 
sentence of that section has been rewritten to make it easier to 
understand, but no substantive change is intended. Advanced payments of 
regular installments are not considered prepayments for purposes of 
this regulation, as compared to payments to reduce the principal 
balance due on a loan.

Section 560.35  Adjustments to Home Loans

    This section is derived from current Sec. 545.33(c) and has been 
modified as discussed under that section.

Section 560.40  Commercial Paper and Corporate Debt Securities

    This section is derived from paragraphs (b) and (c) of current 
Sec. 545.75. It has been modified as discussed under that section.

Section 560.41  Leasing

    This section consolidates and reorganizes current Sec. 545.53 
(finance leasing) and Sec. 545.78 (general leasing authority), 
incorporating the modifications described under those sections. It has 
been reorganized to clarify the separate sources of authority and 
requirements that apply to these two types of leasing.

Section 560.42  State and Local Government Obligations

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

Section 560.43  Foreign Assistance Investments

    This 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 subpart contains 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.

Section 560.93  Lending Limitations

    This section, including its appendices, has been moved, with only 
technical conforming changes, from Sec. 563.93.

Section 560.100  Real Estate Lending Standards; Purpose and Scope

    This section has been transferred without change from Sec. 563.100.

Section 560.101  Real Estate Lending Standards

    This section and the accompanying appendix have been transferred 
with only technical and conforming changes, from Sec. 563.101 and Part 
563, Subpart D, Appendix A.

Section 560.110  Most Favored Lender Usury Preemption

    This section implements section 4(g) of the HOLA. Section 4(g) 
provides that, notwithstanding any contrary state law, savings 
associations may charge interest on any extension of credit at a rate 
equal to the greater of: (a) One percentage

[[Page 50968]]

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 for the state's 
most favored lender, i.e., the class of state lending institution 
authorized to charge the highest interest rate. Section 560.110 
replaces Sec. 571.22, which is being removed today.
    In its January proposal, OTS restated the text of Sec. 571.22, with 
several changes intended to eliminate unnecessary verbiage. However, 
OTS also solicited comment regarding whether paragraph (b) of the 
regulation should be modified to conform more closely to the OCC's most 
favored lender regulation.
    Paragraph (b) of Sec. 571.22 indicated that any savings association 
electing to make loans at the 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 interpretive regulation, which 
implements a parallel 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.58 OTS has 
previously opined that this standard is similar, though not identical, 
to OTS's ``substantive law'' standard.59 OTS specifically 
requested 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.''
---------------------------------------------------------------------------

    \58\ 12 CFR 7.7310 (revised and recodified at 12 CFR 7.4001, 61 
FR at 4869).
    \59\ OTS Op. Chief Counsel, Oct. 14, 1992.
---------------------------------------------------------------------------

    Two commenters responding to this inquiry supported adoption of the 
OCC's regulatory language. The commenters believed that the OCC 
language is more precise and its adoption would promote parity and 
uniformity in the agencies' interpretations of most favored lender 
questions consistent with section 303 of the CDRIA.
    A third commenter raised a concern that the OCC's provision 
(``material to the determination of the interest rate'') was narrower 
in scope than OTS's substantive law standard. This commenter noted that 
OTS currently interprets substantive state law requirements to include 
disclosure laws. The commenter reasoned that by complying with federal 
disclosure laws and disclosure laws in the state where it is located, a 
thrift need not comply with disclosure laws in states where it is not 
located but where borrowers reside. The commenter argued that this 
approach helps thrifts to make interstate loans more efficiently under 
a single set of disclosures that comply with federal law and the law of 
state where it is located without having to comply with a multiplicity 
of state specific disclosure requirements.
    Contrary to the commenter's concern, adopting the ``materiality'' 
standard will not subject federal thrifts to the disclosure laws of 
``non-location'' states. New Sec. 560.2(b)(9), discussed above, 
specifically indicates that state disclosure requirements do not apply 
to federal thrifts, except when required by Sec. 560.110. Nothing in 
Sec. 560.110 applies the disclosure laws of non-location states to 
federal savings associations. Under Sec. 560.110, only the disclosure 
laws of the location state will ever apply. If the ``substantive law'' 
standard were carried forward, the disclosure laws of the location 
state would apply every time a thrift made a loan under the most 
favored lender doctrine. By contrast, if the ``materiality'' standard 
is adopted, the disclosure laws of the location state will apply only 
in those rare instances where those laws are material to the 
determination of the interest rate. Thus, in the interest of reducing 
regulatory burden and establishing greater uniformity, OTS has decided 
to adopt the ``materiality'' standard.
    The debate about the ``materiality'' standard, however, raises a 
more general question about whether OTS should conform the entire text 
of its most favored lender regulation to the OCC regulation. In this 
regard, we note that the courts have recognized that, when enacting 
section 4(g) of the HOLA, Congress intended to give savings 
associations the same most favored lender status conferred upon 
national banks.60 Thus, OTS and its predecessor, the FHLBB, have 
long looked to the OCC regulation and other precedent interpreting the 
national bank most favored lender provision for guidance in 
interpreting section 4(g) and OTS's implementing regulation.61 But 
for the distinction discussed above regarding the ``materiality'' 
standard, differences between OTS and OCC regulations have been purely 
a matter of syntax, not substance.
---------------------------------------------------------------------------

    \60\ Gavey Properties/762 v. First Financial Savings & Loan, 845 
F.2d 519, 521 (5th Cir. 1988); and 12 CFR 571.22 (1996).
    \61\ See, e.g., OTS Op. Chief Counsel, Dec. 24, 1992, pp. 3-4.
---------------------------------------------------------------------------

    In February of this year, after OTS had issued its proposal, the 
OCC amended and updated its most favored lender regulation.62 The 
primary change was to add an express definition of the term 
``interest'' that was consistent with past precedent. The Supreme Court 
recently upheld this definition as a reasonable construction of the 
statutory most favored lender provision for national banks.63 
Under the OCC's amended regulation, the term ``interest'' is defined to 
include, without limitation, numerical periodic rates, late fees, not 
sufficient funds fees, overlimit fees, annual fees, cash advance fees, 
and membership fees.
---------------------------------------------------------------------------

    \62\ 61 FR at 4869.
    \63\ Smiley v. Citibank (South Dakota), N.A., 116 S. Ct. 1730 
(1996).
---------------------------------------------------------------------------

    Given the similarities between section 4(g) of the HOLA and the 
national bank most favored lender provision, OTS believes that the term 
``interest'' as it appears in section 4(g) and OTS's implementing 
regulation should be interpreted in a manner consistent with the OCC 
regulation and the Supreme Court's decision, even if the new OTS 
regulation did not expressly define the term.64
---------------------------------------------------------------------------

    \64\ This means, among other things, that when federal thrifts 
elect to make loans in reliance on the most favored lender rate of 
their location state, they must comply with any limits the location 
state imposes on the lending fees encompassed within the term 
``interest,'' notwithstanding Sec. 560.2(b)(5). In all other 
circumstances, state restrictions on loan-related fees are 
preempted, as provided in Sec. 560.2(b)(5).
---------------------------------------------------------------------------

    Therefore, rather than perpetuate nonsubstantive differences in 
syntax that could create confusion, OTS has decided to conform new 
Sec. 560.110 to the OCC regulation. We do not believe this results in 
any substantive change from former Sec. 571.22, except for adoption of 
the ``materiality'' standard, discussed above. Conforming to the OCC 
regulation is consistent with the commenters' view that the OCC's 
syntax is clearer and more precise, and with the congressional command 
to move toward greater banking agency uniformity.

Section 560.120  Letters of Credit and Other Independent Undertakings 
To Pay Against Documents

    This section is derived from current Sec. 545.48 and establishes 
standards for letters of credit for all savings associations, 
incorporating the modifications discussed under that section.

[[Page 50969]]

Section 560.121  Investments in State Housing Corporations

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

Section 560.160  Asset Classification

    This section requires each savings association to have an internal 
system to classify its assets and to establish appropriate valuations 
or charge-offs, as appropriate. It replaces the more detailed 
regulation found at current Sec. 563.160.

Section 560.170  Records for Lending Transactions

    This section contains general loan documentation requirements based 
on the interagency safety and soundness standards and guidelines found 
at 12 CFR Part 570. It replaces the specific loan documentation 
requirements previously found at Sec. 563.170(c) (1)-(10), and 
incorporates the modifications described earlier under that section.

Section 560.172  Reevaluation of Real Estate Owned

    This section has been transferred, without change, from 
Sec. 563.172.

Subpart C--Alternative Mortgage Transactions

    This subpart contains rules applicable to alternative mortgages 
originated by federal and state savings associations and certain other 
state lenders.

Section 560.210  Disclosures for Adjustable-Rate Mortgage Loans, 
Adjustment Notices, and Interest-Rate Caps

    This section has been transferred from Sec. 563.99. It has been 
amended as discussed under that section and to remove a definition, 
``fixed rate mortgage loan,'' that is no longer used in the regulation.

Section 560.220  Alternative Mortgage Parity Act

    This section (originally proposed as Sec. 560.210) is derived from 
current Sec. 545.33(f), ``Notice of housing creditors regarding 
alternative mortgage transactions'' and applies to state savings 
associations and certain other state-chartered lenders. OTS has 
observed that state housing creditors interested in engaging in 
alternative mortgage transactions could not easily locate 
Sec. 545.33(f). Placing these provisions into a subpart specifically 
dealing with alternative mortgages will make them more accessible. The 
section has been streamlined and modified to remove cross-references to 
repealed provisions and to clarify the scope of federal lending 
regulations applicable to state housing creditors electing to originate 
loans under the Parity Act. While the proposal indicated that all of 
new Part 560 would be considered appropriate and applicable to the 
exercise of the authority under the Parity Act, the final rule has been 
revised to identify the appropriate sections with greater specificity. 
One commenter suggested adding language to clarify that this section 
does not limit the preemption of the imposition of state licensing 
requirements on federal associations. Because of modifications made to 
the final preemption regulation at Sec. 560.2, OTS believes that the 
addition of this language is not necessary. States may not impose 
lending license requirements on federal thrifts.

III. Disposition of Existing Lending and Investment Regulations

----------------------------------------------------------------------------------------------------------------
          Original provision                     New provision                           Comment                
----------------------------------------------------------------------------------------------------------------
Sec.  545.31 (a),(b)..................  Secs.  560.31(a), 560.3........  Modified. Substance has been moved into
                                                                          Sec.  560.31(a); definitions have been
                                                                          moved into Sec.  560.3.               
Sec.  545.31 (c),(d)..................  Sec.  560.31 (b),(c)...........  Modified.                              
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).......................  Sec.  560.3....................  Substantially unchanged.               
Sec.  545.32(d).......................  ...............................  Removed.                               
Sec.  545.33 Introductory paragraph...  Sec.  560.3....................  Substantially unchanged.               
Sec.  545.33(a).......................  ...............................  Removed, included as area in which     
                                                                          state law is preempted under Sec.     
                                                                          560.2.                                
Sec.  545.33(b).......................  ...............................  Removed.                               
Sec.  545.33(c) (1)-(3)...............  Sec.  560.35...................  Modified.                              
Sec.  545.33(c) (4),(5)...............  ...............................  Removed.                               
Sec.  545.33 (d),(e)..................  ...............................  Removed.                               
Sec.  545.33(f).......................  Sec.  560.220..................  Modified.                              
Sec.  545.34(a).......................  Sec.  560.2....................  Modified and reorganized.              
Sec.  545.34(b).......................  Sec.  560.33...................  Modified.                              
Sec.  545.34(c).......................  Sec.  560.34...................  Modified.                              
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).......................  ...............................  Removed.                               
Sec.  545.45(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 paragraph  Sec.  560.30...................  Incorporated into lending and          
 and (b)(1).                                                              investment powers chart.              

[[Page 50970]]

                                                                                                                
Sec.  545.46(b)(2)....................  ...............................  Removed.                               
Sec.  545.47..........................  Sec.  560.30...................  Incorporated into lending and          
                                                                          investment powers chart.              
Sec.  545.48(a).......................  Sec.  560.120..................  Significantly changed.                 
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).......................  Sec.  560.3....................  Substantially unchanged.               
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.                              
Sec.  545.74 (c)(1)(vi)...............  ...............................  Modified.                              
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 Sec.      Significantly changed and incorporated 
                                         560.41..                         into 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.  563.93..........................  Sec.  560.93...................  Redesignated with no changes.          
Sec.  563.95..........................  Sec.  560.121..................  Significantly changed.                 
Sec.  563.97..........................  ...............................  Removed.                               
Sec.  563.99..........................  Sec.  560.210..................  Redesignated and modified by removing  
                                                                          paragraph (a)(2) and adding new       
                                                                          paragraph (g).                        
Sec.  563.100.........................  Sec.  560.100..................  Redesignated without change.           
Sec.  563.101.........................  Sec.  560.101..................  Redesignated without change.           
Sec.  563.160.........................  Sec.  560.160..................  Significantly changed.                 
Sec.  563.170 (a),(b).................  ...............................  Unchanged.                             
Sec.  563.170(c) introductory text....  ...............................  Modified.                              
Sec.  563.170 (c)(1)-(10).............  Sec.  560.170..................  Significantly changed.                 
Sec.  563.170 (d),(e).................  ...............................  Unchanged.                             
Sec.  563.172.........................  Sec.  560.172..................  Unchanged.                             
Sec.  571.8...........................  ...............................  Removed.                               
Sec.  571.13..........................  ...............................  To be incorporated into guidance.      
Sec.  571.20..........................  ...............................  To be incorporated into guidance.      
Sec.  571.22..........................  Sec.  560.110..................  Significantly changed.                 
----------------------------------------------------------------------------------------------------------------

IV. Administrative Procedure Act

    This final rule results from the notice of proposed rulemaking OTS 
published on January 17, 1996. In addition to the regulatory language 
proposed in that notice, OTS is today redesignating, without 
substantive change, other lending-related regulations previously 
located in Part 563 into new Part 560. Pursuant to section 553(b) of 
the Administrative Procedure Act, OTS hereby finds that good cause 
exists not to publish those provisions for public notice and comment. 
They are merely being renumbered and grouped with other lending-related 
regulations for the convenience of users, thus public notice and 
opportunity to comment are unnecessary.

V. Paperwork Reduction Act of 1995

    Respondents/recordkeepers are not required to respond to this 
collection of information unless it displays a currently valid OMB 
control number.
    The recordkeeping requirements contained in 12 CFR 560.170 and 
563.170 of this final rule have been submitted to and approved by the 
Office of Management and Budget under OMB Control No. 1550-0078 in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)).
    In response to comments received, OTS has decided to adopt 12 CFR 
560.35, which was not part of the proposal. The reporting requirements 
contained in this section have been submitted to the Office of 
Management and Budget for review.
    Comments on all aspects of these information collections should be 
sent to the Office of Management and Budget, Paperwork Reduction 
Project (1550), Washington, DC 20503 with copies to OTS, 1700 G Street, 
NW., Washington, DC 20552.
    The recordkeeping requirements in this final rule are found in 12 
CFR 560.35, 560.170, and 563.170. The reporting and recordkeeping 
requirements set forth in this final rule are needed by OTS in order to 
supervise savings associations and develop regulatory policy. The 
likely recordkeepers are OTS-regulated savings associations. Start-up 
costs to respondents: None.
    Records are to be maintained for the period of time respondent/
recordkeeper owns the loan plus three years.
    The burden estimates for new Sec. 560.35 are as follows:
    Estimated number of respondents: 120.
    Estimated average annual burden hours per respondent: 1.
    Estimated number of hours per response: 20 hours.

[[Page 50971]]

    Estimated number of total annual burden hours: 2,400 hours.
    Start-up costs to respondents: None.

VI. Executive Order 12866

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

VII. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities. The final rule does 
not impose any additional burdens or requirements upon small entities 
and reduces burdens on all savings associations. The regulations have 
been reorganized to group all lending regulations together in a single 
part, which will make the regulations easier to locate and use. A chart 
setting forth the lending and investment powers of savings 
associations, with accompanying statutory citations, will make it 
easier for small savings associations to determine the scope of their 
lending authority. Loan documentation requirements have been 
streamlined and should result in less paperwork for small associations 
holding low-dollar amount, non-complex, loans in their portfolios.

VIII. Unfunded Mandates Act of 1995

    OTS has determined that the requirements of this final 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.

IX. Effective Date

    Section 302 of CDRIA delays the effective date of regulations 
promulgated by the Federal banking agencies that impose additional 
reporting, disclosure, or new requirements to the first day of the 
first calendar quarter following publication of the final rule. OTS 
believes that CDRIA does not apply to this final rule because it 
imposes no new burden. It reduces regulatory burden in the lending and 
investment areas and provides added flexibility.

List of Subjects

12 CFR Part 545

    Accounting, Consumer protection, Credit, Electronic funds 
transfers, Investments, 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, Investments, Reporting 
and recordkeeping requirements, Savings associations, Securities, 
Surety bonds.

12 CFR Part 566

    Liquidity, Reporting and recordkeeping requirements, Savings 
associations.

12 CFR Part 571

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

12 CFR Part 590

    Banks, banking, Loan programs--housing and community development, 
Manufactured homes, Mortgages, Savings associations.

    Accordingly, and under the authority of 12 U.S.C. 1462a, the Office 
of Thrift Supervision amends 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.


Secs. 545.31-545.43, 545.45-545.53  [Removed]

    2. Sections 545.31 through 545.43 and 545.45 through 545.53 are 
removed.


Secs. 545.72-545.73  [Removed]

    3. Sections 545.72 and 545.73 are removed.


Sec. 545.74  [Amended]

    4. 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]

    5. Section 545.75 is removed.


Sec. 545.78  [Removed]

    6. Section 545.78 is removed.

PART 556--STATEMENTS OF POLICY

    7. 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]

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

PART 560--LENDING AND INVESTMENT

Sec.
560.1  General.
560.2  Applicability of law.
560.3  Definitions.
Subpart A--Lending and Investment Powers for Federal Savings 
Associations
560.30  General lending and investment powers.
560.31   Election regarding categorization of loans or investments 
and related calculations.
560.33  Late charges.
560.34  Prepayments.
560.35  Adjustments to 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
560.93  Lending limitations.
560.100  Real estate lending standards; purpose and scope.
560.101  Real estate lending standards.
560.110  Most favored lender usury preemption.
560.120  Letters of credit and other independent undertakings to pay 
against documents.
560.121  Investment in state housing corporations.
560.160  Asset classification.
560.170  Records for lending transactions.
560.172  Re-evaluation of real estate owned.

Subpart C--Alternative Mortgage Transactions

560.210  Disclosures for adjustable-rate mortgage loans, adjustment 
notices, and interest-rate caps.
560.220  Alternative Mortgage Parity Act.

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


Sec. 560.1  General.

    (a) Authority and scope. This part is being issued by OTS under its 
general rulemaking and supervisory authority

[[Page 50972]]

under the Home Owners' Loan Act (HOLA), 12 U.S.C. 1462 et seq. Subpart 
A of this part sets forth the lending and investment powers 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 addresses alternative 
mortgages and applies to all savings associations.
    (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, 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 the 
condition of its portfolio and the adequacy of any collateral securing 
its loans.


Sec. 560.2  Applicability of law.

    (a) Occupation of field. Pursuant to sections 4(a) and 5(a) of the 
HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to promulgate 
regulations that preempt state laws affecting the operations of federal 
savings associations when deemed appropriate to facilitate the safe and 
sound operation of federal savings associations, to enable federal 
savings associations to conduct their operations in accordance with the 
best practices of thrift institutions in the United States, or to 
further other purposes of the HOLA. To enhance safety and soundness and 
to enable federal savings associations to conduct their operations in 
accordance with best practices (by efficiently delivering low-cost 
credit to the public free from undue regulatory duplication and 
burden), OTS hereby occupies the entire field of lending regulation for 
federal savings associations. OTS intends to give federal savings 
associations maximum flexibility to exercise their lending powers in 
accordance with a uniform federal scheme of regulation. Accordingly, 
federal savings associations may extend credit as authorized under 
federal law, including this part, without regard to state laws 
purporting to regulate or otherwise affect their credit activities, 
except to the extent provided in paragraph (c) of this section or 
Sec. 560.110 of this part. For purposes of this section, ``state law'' 
includes any state statute, regulation, ruling, order or judicial 
decision.
    (b) Illustrative examples. Except as provided in Sec. 560.110 of 
this part, the types of state laws preempted by paragraph (a) of this 
section include, without limitation, state laws purporting to impose 
requirements regarding:
    (1) Licensing, registration, filings, or reports by creditors;
    (2) The ability of a creditor to require or obtain private mortgage 
insurance, insurance for other collateral, or other credit 
enhancements;
    (3) Loan-to-value ratios;
    (4) The terms of credit, including amortization of loans and the 
deferral and capitalization of interest and adjustments to the interest 
rate, balance, payments due, or term to maturity of the loan, including 
the circumstances under which a loan may be called due and payable upon 
the passage of time or a specified event external to the loan;
    (5) Loan-related fees, including without limitation, initial 
charges, late charges, prepayment penalties, servicing fees, and 
overlimit fees;
    (6) Escrow accounts, impound accounts, and similar accounts;
    (7) Security property, including leaseholds;
    (8) Access to and use of credit reports;
    (9) Disclosure and advertising, including laws requiring specific 
statements, information, or other content to be included in credit 
application forms, credit solicitations, billing statements, credit 
contracts, or other credit-related documents and laws requiring 
creditors to supply copies of credit reports to borrowers or 
applicants;
    (10) Processing, origination, servicing, sale or purchase of, or 
investment or participation in, mortgages;
    (11) Disbursements and repayments;
    (12) Usury and interest rate ceilings to the extent provided in 12 
U.S.C. 1735f-7a and part 590 of this chapter and 12 U.S.C. 1463(g) and 
Sec. 560.110 of this part; and
    (13) 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. State laws of the following 
types are not preempted to the extent that they only incidentally 
affect the lending operations of Federal savings associations or are 
otherwise consistent with the purposes of paragraph (a) of this 
section:
    (1) Contract and commercial law;
    (2) Real property law;
    (3) Homestead laws specified in 12 U.S.C. 1462a(f);
    (4) Tort law;
    (5) Criminal law; and
    (6) Any other law that OTS, upon review, finds:
    (i) Furthers a vital state interest; and
    (ii) Either has only an incidental effect on lending operations or 
is not otherwise contrary to the purposes expressed in paragraph (a) of 
this section.


Sec. 560.3  Definitions.

    For purposes of this part:
    Consumer loans include loans for personal, family, or household 
purposes and loans reasonably incident thereto, and may be made as 
either open-end or closed-end consumer credit, but do not include 
credit extended in connection with credit cards nor bona fide overdraft 
loans.
    Home loans include any loans made on the security of homes 
(including a unit of a condominium or cooperative), combinations of 
homes and business property, farm residences, and combinations of farm 
residences and commercial farm real estate.
    Loan commitment includes a loan in process, a letter of credit, or 
any other commitment to extend credit.
    Real estate loan includes any loan for which a Federal savings 
association relies substantially upon the real estate as the primary 
security for the loan. A loan is made on the security of real estate 
if:
    (1) The security property is real estate pursuant to the law of the 
state in which the property is located;
    (2) The security interest of the Federal savings association may be 
enforced as a real estate mortgage or its equivalent pursuant to the 
law of the state in which the property is located;
    (3) The security property is capable of separate appraisal; and
    (4) With regard to a security property that is a leasehold or other 
interest for a period of years, the term of the interest extends, or is 
subject to extension or renewal at the option of the Federal savings 
association for a term of at least five years following the maturity of 
the loan.

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


Sec. 560.30  General lending and investment powers.

    Pursuant to section 5(c) of the 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 the 
following loans, extensions of credit, and investments, subject to the 
limitations indicated and any such clarifying terms, conditions, or 
case-by-case limitations

[[Page 50973]]

as may be prescribed from time to time by the Office by opinion, policy 
directive, order, or regulation:

                   Lending and Investment Powers Chart                  
------------------------------------------------------------------------
                                                    Statutory Investment
                                                     Limitations (notes 
           Category                    HOLA          contain applicable 
                                  authorization          regulatory     
                                                        limitations)    
------------------------------------------------------------------------
Bankers' bank stock...........  5(c)(4)(E)         Same terms as        
                                                    applicable to       
                                                    national banks.     
Business development credit     5(c)(4)(A)         The lesser of .5% of 
 corporations.                                      total outstanding   
                                                    loans or $250,000.  
Commercial loans..............  5(c)(2)(A)         10% of total assets. 
Commercial paper and corporate  5(c)(2)(D)         Up to 30% of total   
 debt securities.                                   assets.\1\ \2\      
Community development loans     5(c)(3)(B)         5% of total assets,  
 and equity investments.                            provided equity     
                                                    investments do not  
                                                    exceed 2% of total  
                                                    assets.\3\          
Construction loans without      5(c)(3)(D)         In the aggregate, the
 security.                                          greater of total    
                                                    capital or 5% of    
                                                    total assets.       
Consumer loans................  5(c)(2)(D)         Up to 35% of total   
                                                    assets.\1\ \4\      
Credit cards..................  5(b)(4)            None.\5\             
Deposits in insured depository  5(c)(1)(G)         None.\5\             
 institutions.                                                          
Education loans...............  5(c)(3)(A)         5% of total assets.  
Federal government and          5(c)(1)(C)         None.\5\             
 government-sponsored           5(c)(1)(D)                              
 enterprise securities and      5(c)(1)(E)                              
 instruments.                   5(c)(1)(F)                              
Finance leasing...............  5(c)(1)(B)         Based on purpose and 
                                5(c)(2)(A)          property            
                                5(c)(2)(B)          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\         
HUD-insured or guaranteed       5(c)(1)(O)         None.\5\             
 investments.                                                           
Insured loans.................  5(c)(1)(I)         None.\5\             
                                5(c)(1)(K)                              
Liquidity investments.........  5(c)(1)(M)         None.\5\             
Loans secured by deposit        5(c)(1)(A)         None.\5\ \10\        
 accounts.                                                              
Loans to financial              5(c)(1)(L)         None.\5\ \11\        
 institutions, brokers, and                                             
 dealers.                                                               
Manufactured home loans.......  5(c)(1)(J)         None.\5\ \12\        
Mortgage-backed securities....  5(c)(1)(R)         None.\5\             
National Housing Partnership    5(c)(1)(N)         None.\5\             
 Corporation and related                                                
 partnerships and joint                                                 
 ventures.                                                              
Nonconforming loans...........  5(c)(3)(C)         5% of total assets.  
Nonresidential real property    5(c)(2)(B)         400% of total        
 loans.                                             capital.\13\        
Small-business-related          5(c)(1)(S)         None.\5\             
 securities.                                                            
State and local government      5(c)(1)(H)         None.\5\ \14\        
 obligations.                                                           
State housing corporations....  5(c)(1)(P)         None.\5\ \15\        
Transaction account loans,      5(c)(1)(A)         None.\5\ \16\        
 including overdrafts.                                                  
------------------------------------------------------------------------
Notes:                                                                  
\1\ For purposes of determining a Federal savings association's         
  percentage of 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 of  
  this part.                                                            
\3\ The 2% of assets limitation is a sublimit for investments within the
  overall 5% of assets limitation on community development loans and    
  investments. The qualitative standards for such loans and investments 
  are set forth in HOLA section 5(c)(3)(B), as explained in an opinion  
  of the OTS Chief Counsel dated May 10, 1995 (available upon request at
  the address set forth in Sec.  516.1(a) of this chapter).             
\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, 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 of this part.               
\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 of this part.          
\8\ A home (or residential) loan includes loans secured by 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 Secs.  560.33, 560.34 and 560.35 of this part.          
\10\ 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.                        
\11\ A Federal savings association may only invest in these loans if    
  they are 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, 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.                            
\12\ 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.                          

[[Page 50974]]

                                                                        
\13\ 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.                               
\14\ 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 of this part.         
\15\ A Federal savings association may invest in state housing          
  corporations subject to the provisions of Sec.  560.121 of this part. 
\16\ 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 HOLA, 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 for purposes of calculating compliance with HOLA section 
5(c)'s investment limitations only to the extent that funds have been 
advanced and not repaid pursuant to the commitment.
    (b) Loans or portions of loans sold to a third party shall be 
included in the calculation of a percentage-of-assets or percentage-of-
capital investment limitation only to the extent they are sold with 
recourse.
    (c) A Federal savings association may make a loan secured by an 
assignment of loans to the extent that it could, under applicable law 
and regulations, make or purchase the underlying assigned loans.


Sec. 560.33   Late charges.

    A Federal savings association may include in a home 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 
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.


Sec. 560.34   Prepayments.

    Any prepayment on a real estate loan must be applied directly to 
reduce the principal balance on the loan unless the loan contract or 
the borrower specifies otherwise. Subject to the terms of the loan 
contract, a Federal savings association may impose a fee for any 
prepayment of a loan.


Sec. 560.35   Adjustments to home loans.

    (a) For any home loan secured by borrower-occupied property, or 
property to be occupied by the borrower, adjustments to the interest 
rate, payment, balance, or term to maturity must comply with the 
limitations of this section and the disclosure and notice requirements 
of Sec. 560.210 of this part.
    (b) Adjustments to the interest rate shall correspond directly to 
the movement of an index satisfying the requirements of paragraph (d) 
of this section. A Federal savings association also may increase the 
interest rate pursuant to a formula or schedule that specifies the 
amount of the increase, the time at which it may be made, and which is 
set forth in the loan contract. A Federal savings association may 
decrease the interest rate at any time.
    (c) Adjustments to the payment and the loan balance that do not 
reflect an interest-rate adjustment may be made if:
    (1) The adjustments reflect a change in an index that may be used 
pursuant to paragraph (d) of this section;
    (2) In the case of a payment adjustment, the adjustment reflects a 
change in the loan balance or is made pursuant to a formula, or to a 
schedule specifying the percentage or dollar change in the payment as 
set forth in the loan contract; or
    (3) In the case of an open-end line-of-credit loan, the adjustment 
reflects an advance taken by the borrower under the line-of-credit and 
is permitted by the loan contract.
    (d)(1) Any index used must be readily available and independently 
verifiable. If set forth in the loan contract, an association may use 
any combination of indices, a moving average of index values, or more 
than one index during the term of a loan.
    (2) Except as provided in paragraph (d)(3) of this section, any 
index used must be a national or regional index.
    (3) A Federal savings association may use an index not satisfying 
the requirements of paragraph (d)(2) of this section 30 days after 
filing a notice in accordance with Sec. 516.1(c) of this chapter 
unless, within that 30-day period, OTS has notified the association 
that the notice presents supervisory concerns or raises significant 
issues of law or policy. If OTS does notify the association of such 
concerns or issues, the Federal savings association may not use such an 
index unless and until it applies for and receives OTS's prior written 
approval in accordance with Sec. 516.1(c) of this chapter.


Sec. 560.40   Commercial paper and corporate debt securities.

    Pursuant to HOLA section 5(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) As of the date of purchase, rated in either one of the two 
highest categories by at least two nationally recognized investment 
ratings services as shown by the most recently published rating made of 
such investments; or
    (ii) If unrated, guaranteed by a company having outstanding paper 
that is rated as provided in paragraph (a)(1)(i) of this section.
    (2) Corporate debt securities must be:
    (i) Securities that may be sold with reasonable promptness at a 
price that corresponds reasonably to their fair value; and
    (ii) 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

[[Page 50975]]

person or entity affiliated with such issuer, together with other 
loans, shall not exceed the general lending limitations contained in 
Sec. 560.93(c) of this part.
    (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) Permissible activities. Subject to the limitations of this 
section, a Federal savings association may engage in leasing 
activities. These activities include becoming the legal or beneficial 
owner of tangible personal property or real property for the purpose of 
leasing such property, obtaining an assignment of a lessor's interest 
in a lease of such property, and incurring obligations incidental to 
its position as the legal or beneficial owner and lessor of the leased 
property.
    (b) Definitions. For the purposes of this section:
    (1) 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:
    (i) The servicing, repair or maintenance of the leased property 
during the lease term;
    (ii) The purchasing of parts and accessories for the leased 
property, except 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 paragraph (c)(2)(i) of this section;
    (iii) The loan of replacement or substitute property while the 
leased property is being serviced;
    (iv) The purchasing of insurance for the lessee, except where the 
lessee has failed to discharge a contractual obligation to purchase or 
maintain insurance; or
    (v) The renewal of any license, registration, or 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.
    (2) 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. In general, a lease will qualify as a full-
payout lease if the scheduled payments provide at least 75% of the 
principal and interest payments that a lessor would receive if the 
finance lease were structured as a market-rate loan.
    (3) 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:
    (i) Rentals;
    (ii) Estimated tax benefits, if any; and
    (iii) The estimated residual value of the property at the 
expiration of the term of the lease.
    (c) Finance leasing--(1) Investment limits. A Federal savings 
association may exercise its authority under HOLA sections 5(c)(1)(B) 
(residential real estate loans), 5(c)(2)(A) (commercial, business, 
corporate or agricultural loans), 5(c)(2)(B) (nonresidential real 
estate loans), and 5(c)(2)(D) (consumer loans) by conducting leasing 
activities that are the functional equivalent of loans made under those 
HOLA sections. These activities are commonly referred to as financing 
leases. Such financing leases are subject to the same investment limits 
that apply to loans made under those sections. For example, a financing 
lease of tangible personal property made to a natural person for 
personal, family or household purposes is 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 is 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 is subject to all limitations applicable to the amount of 
a Federal savings association's investment in these types of real 
estate loans.
    (2) Functional equivalent of lending. To qualify as the functional 
equivalent of a loan:
    (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) The portion of the estimated residual value of the property 
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; and
    (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 re-
leasing must be reevaluated and recorded at the lower of fair market 
value or book value.
    (d) General leasing. 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 leasing that property. In contrast to 
financing leases, lease investments made under this authority need not 
be the functional equivalent of loans.
    (e) Leasing 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, it may:
    (1) As the owner and lessor, take 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, become the 
owner and lessor of the leased property pursuant to its contractual 
right, or take any reasonable and appropriate action to salvage or 
protect the value of the property or its interest arising under the 
lease; or
    (3) Include any provisions in a lease, or make any additional 
agreements, to protect its financial position or investment in the 
circumstances set forth in paragraphs (e)(1) and (e)(2) of this 
section.

[[Page 50976]]

Sec. 560.42   State and local government obligations.

    Pursuant to HOLA section 5(c)(1)(H), a Federal savings association 
may invest in obligations issued by any state, territory, possession, 
or political subdivision thereof, subject to the following conditions:
    (a) A Federal savings association may not invest more than 10% of 
its total capital in obligations of any one issuer, exclusive of 
general obligations of the issuer.
    (b) Except as provided in paragraph (c) of this section, the 
obligations must:
    (1) Continue to hold one of the four highest national investment 
grade ratings; or
    (2) 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:
    (1) 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; 
or
    (2) In any obligations approved by the Office.


Sec. 560.43  Foreign assistance investments.

    Pursuant to HOLA section 5(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 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), must not, as a result of such 
investment, exceed the lesser of one-quarter of 1% of its assets or 
$100,000.

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


Sec. 560.93  Lending limitations.

    (a) Scope. This section applies to all loans and extensions of 
credit made by a savings association and its subsidiaries. This section 
does not apply to loans made by a savings association to its 
subsidiaries or to its affiliates. The terms subsidiary and affiliate 
have the same meanings as those terms are defined in Sec. 563.41 of 
this chapter.
    (b) Definitions. In applying these lending limitations, savings 
associations shall apply the definitions and interpretations 
promulgated by the Office of the Comptroller of the Currency consistent 
with 12 U.S.C. 84. See 12 CFR part 32. In applying these definitions, 
pursuant to 12 U.S.C. 1464, savings associations shall use the terms 
savings association, savings associations, and savings association's in 
place of the terms national bank and bank, banks, and bank's, 
respectively. For purposes of this section:
    (1) The term one borrower has the same meaning as the term person 
set forth at 12 CFR part 32. It also includes, in addition to the 
definition cited therein, a financial institution as defined at 
Sec. 561.19 of this chapter.
    (2) The term company means a corporation, partnership, business 
trust, association, or similar organization and, unless specifically 
excluded, the term company includes a savings association and a bank.
    (3) Contractual commitment to advance funds has the meaning set 
forth in 12 CFR part 32.
    (4) Loans and extensions of credit has the meaning set forth in 12 
CFR part 32, and includes investments in commercial paper and corporate 
debt securities. The Office expressly reserves its authority to deem 
other arrangements that are, in substance, loans and extensions of 
credit to be encompassed by this term.
    (5) The term loans as used in the phrase Loans to one borrower to 
finance the sale of real property acquired in satisfaction of debts 
previously contracted for in good faith does not include an 
association's taking of a purchase money mortgage note from the 
purchaser provided that:
    (i) No new funds are advanced by the association to the borrower; 
and
    (ii) The association is not placed in a more detrimental position 
as a result of the sale.
    (6) The term fully phased-in capital standards means the capital 
standards that will be in effect at the expiration of all statutory and 
regulatory phase-in requirements set forth in 12 U.S.C. 1464(t) and 
Secs. 567.2, 567.5, and 567.9 of this chapter.
    (7) Readily marketable collateral has the meaning set forth in 12 
CFR part 32.
    (8) Residential housing units has the same meaning as the term 
residential real estate set forth in Sec. 541.23 of this chapter. The 
term to develop includes the various phases necessary to produce 
housing units as an end product, to include: acquisition, development 
and construction; development and construction; construction; 
rehabilitation; or conversion. The term domestic includes units within 
the fifty states, the District of Columbia, Puerto Rico, the Virgin 
Islands, Guam, and the Pacific Islands.
    (9) Single family dwelling unit has the meaning set forth in 
Sec. 541.20 of this chapter.
    (10) A standby letter of credit has the meaning set forth in 12 CFR 
part 32.
    (11) Unimpaired capital and unimpaired surplus means--
    (i) A savings association's core capital and supplementary capital 
included in its total capital under part 567 of this chapter; plus
    (ii) The balance of a savings association's allowance for loan and 
lease losses not included in supplementary capital under part 567 of 
this chapter; plus
    (iii) The amount of a savings association's loans to, investments 
in, and advances to subsidiaries not included in calculating core 
capital under part 567 of this chapter.
    (c) General limitation. Section 5200 of the Revised Statutes (12 
U.S.C. 84) shall apply to savings associations in the same manner and 
to the same extent as it applies to national banks. This statutory 
provision and lending limit regulations and interpretations promulgated 
by the Office of the Comptroller of the Currency pursuant to a 
rulemaking conducted in accordance with the provisions of the 
Administrative Procedure Act, 5 U.S.C. 553 et seq. (including the 
regulations appearing at 12 CFR part 32) shall apply to savings 
associations in the same manner and to the same extent as these 
provisions apply to national banks:
    (1) The total loans and extensions of credit by a savings 
association to one borrower outstanding at one time and not fully 
secured, as determined in the same manner as determined under 12

[[Page 50977]]

U.S.C. 84(a)(2), by collateral having a market value at least equal to 
the amount of the loan or extension of credit shall not exceed 15 
percent of the unimpaired capital and unimpaired surplus of the 
association.
    (2) The total loans and extensions of credit by a savings 
association to one borrower outstanding at one time and fully secured 
by readily marketable collateral having a market value, as determined 
by reliable and continuously available price quotations, at least equal 
to the amount of the funds outstanding shall not exceed 10 per centum 
of the unimpaired capital and unimpaired surplus of the association. 
This limitation shall be separate from and in addition to the 
limitation contained in paragraph (c)(1) of this section.
    (d) Exceptions to the general limitation--(1) $500,000 exception. 
If a savings association's aggregate lending limitation calculated 
under paragraphs (c)(1) and (c)(2) of this section is less than 
$500,000, notwithstanding this aggregate limitation in paragraphs 
(c)(1) and (c)(2) of this section, such savings association may have 
total loans and extensions of credit, for any purpose, to one borrower 
outstanding at one time not to exceed $500,000.
    (2) Statutory exceptions. The exceptions to the lending limits set 
forth in 12 U.S.C. 84 and 12 CFR part 32 are applicable to savings 
associations in the same manner and to the extent as they apply to 
national banks.
    (3) Loans to develop domestic residential housing units. Subject to 
paragraph (d)(4) of this section, a savings association may make loans 
to one borrower to develop domestic residential housing units, not to 
exceed the lesser of $30,000,000 or 30 percent of the savings 
association's unimpaired capital and unimpaired surplus, including all 
amounts loaned under the authority of the General Limitation set forth 
under paragraphs (c)(1) and (c)(2) of this section, provided that:
    (i) The final purchase price of each single family dwelling unit 
the development of which is financed under this paragraph (d)(3) does 
not exceed $500,000;
    (ii) The savings association is, and continues to be, in compliance 
with its fully phased-in capital standards, as defined in paragraph 
(b)(6) of this section;
    (iii) OTS permits, subject to conditions it may impose, the savings 
association to use the higher limit set forth under this paragraph 
(d)(3). A savings association that meets the requirements of paragraphs 
(d)(3) (i), (ii), (iv) and (v) of this section and that meets the 
requirements for ``expedited treatment'' under Sec. 516.3(a) of this 
chapter may use the higher limit set forth under this paragraph (d)(3) 
if the savings association has filed a notice with OTS that it intends 
to use the higher limit at least 30 days prior to the proposed use. A 
savings association that meets the requirements of paragraphs (d)(3) 
(i), (ii), (iv) and (v) of this section and that meets the requirements 
for ``standard treatment'' under Sec. 516.3(b) of this chapter may use 
the higher limit set forth under this paragraph (d)(3) if the savings 
association has filed a notice with OTS and an order has been issued 
permitting the savings association to use the higher limit;
    (iv) Loans made under this paragraph (d)(3) to all borrowers do 
not, in aggregate, exceed 150 percent of the savings association's 
unimpaired capital and unimpaired surplus; and
    (v) Such loans comply with the applicable loan-to-value 
requirements that apply to Federal savings associations.
    (4) The authority of a savings association to make a loan or 
extension of credit under the exception in paragraph (d)(3) of this 
section ceases immediately upon the association's failure to comply 
with any one of the requirements set forth in paragraph (d)(3) of this 
section or any condition(s) set forth in a Director's order under 
paragraph (d)(3)(iii) of this section.
    (5) Notwithstanding the limit set forth in paragraphs (c)(1) and 
(c)(2) of this section, a savings association may invest up to 10 
percent of unimpaired capital and unimpaired surplus in the obligations 
of one issuer evidenced by:
    (i) Commercial paper rated, as of the date of purchase, as shown by 
the most recently published rating by at least two nationally 
recognized investment rating services in the highest category; or
    (ii) Corporate debt securities that may be sold with reasonable 
promptness at a price that corresponds reasonably to their fair value, 
and that are rated in one of the two highest categories by a nationally 
recognized investment rating service in its most recently published 
ratings before the date of purchase of the security.
    (e) Loans to finance the sale of REO. A savings association's loans 
to one borrower to finance the sale of real property acquired in 
satisfaction of debts previously contracted for in good faith shall 
not, when aggregated with all other loans to such borrower, exceed the 
General Limitation in paragraph (c)(1) of this section.
    (f) Calculating compliance and recordkeeping. (1) The amount of an 
association's unimpaired capital and unimpaired surplus pursuant to 
paragraph (b)(11) of this section shall be calculated as of the 
association's most recent periodic report required to be filed with OTS 
prior to the date of granting or purchasing the loan or otherwise 
creating the obligation to repay funds, unless the association knows, 
or has reason to know, based on transactions or events actually 
completed, that such level has changed significantly, upward or 
downward, subsequent to filing of such report.
    (2) If a savings association or subsidiary thereof makes a loan or 
extension of credit to any one borrower, as defined in paragraph (b)(1) 
of this section, in an amount that, when added to the total balances of 
all outstanding loans owed to such association and its subsidiary by 
such borrower, exceeds the greater of $500,000 or 5 percent of 
unimpaired capital and unimpaired surplus, the records of such 
association or its subsidiary with respect to such loan shall include 
documentation showing that such loan was made within the limitations of 
paragraphs (c) and (d) of this section; for the purpose of such 
documentation such association or subsidiary may require, and may 
accept in good faith, a certification by the borrower identifying the 
persons, entities, and interests described in the definition of one 
borrower in paragraph (b)(1) of this section.
    (g) [Reserved]
    (h) More stringent restrictions. The Director may impose more 
stringent restrictions on a savings association's loans to one borrower 
if the Director determines that such restrictions are necessary to 
protect the safety and soundness of the savings association.

Appendix to Sec. 560.93--Interpretations

Section 560.93-100  Interrelation of General Limitation With 
Exception for Loans To Develop Domestic Residential Housing Units

    1. The Sec. 560.93(d)(3) exception for loans to one person to 
develop domestic residential housing units is characterized in the 
regulation as an ``alternative'' limit. This exceptional $30,000,000 
or 30 percent limitation does not operate in addition to the 15 
percent General Limitation or the 10 percent additional amount an 
association may loan to one borrower secured by readily marketable 
collateral, but serves as the uppermost limitation on a savings 
association's lending to any one person once an association employs 
this exception. An example will illustrate the Office's 
interpretation of the application of this rule:
    Example: Savings Associations A's lending limitation as 
calculated under the 15 percent General Limitation is $800,000. If 
Association A lends Y $800,000 for commercial purposes, Association 
A cannot lend Y an additional $1,600,000, or 30 percent of capital 
and surplus, to develop

[[Page 50978]]

residential housing units under the paragraph (d)(3) exception. The 
(d)(3) exception operates as the uppermost limitation on all lending 
to one borrower (for associations that may employ this exception) 
and includes any amounts loaned to the same borrower under the 
General Limitation. Association A, therefore, may lend only an 
additional $800,000 to Y, provided the paragraph (d)(3) 
prerequisites have been met. The amount loaned under the authority 
of the General Limitation ($800,000), when added to the amount 
loaned under the exception ($800,000), yields a sum that does not 
exceed the 30 percent uppermost limitation ($1,600,000).
    2. This result does not change even if the facts are altered to 
assume that some or all of the $800,000 amount of lending 
permissible under the General Limitation's 15 percent basket is not 
used, or is devoted to the development of domestic residential 
housing units.
    In other words, using the above example, if Association A lends 
Y $400,000 for commercial purposes and $300,000 for residential 
purposes--both of which would be permitted under the Association's 
$800,000 General Limitation--Association A's remaining permissible 
lending to Y would be: first, an additional $100,000 under the 
General Limitation, and then another $800,000 to develop domestic 
residential housing units if the Association meets the paragraph 
(d)(3) prerequisites. (The latter is $800,000 because in no event 
may the total lending to Y exceed 30 percent of unimpaired capital 
and unimpaired surplus). If Association A did not lend Y the 
remaining $100,000 permissible under the General Limitation, its 
permissible loans to develop domestic residential housing units 
under paragraph (d)(3) would be $900,000 instead of $800,000 (the 
total loans to Y would still equal $1,600,000).
    3. In short, under the paragraph (d)(3) exception, the 30 
percent or $30,000,000 limit will always operate as the uppermost 
limitation, unless of course the association does not avail itself 
of the exception and merely relies upon its General Limitation.

Section 560.93-101  Interrelationship Between the General 
Limitation and the 150 Percent Aggregate Limit on Loans to all 
Borrowers To Develop Domestic Residential Housing Units

    1. The Office has already received numerous questions regarding 
the allocation of loans between the different lending limit 
``baskets,'' i.e., the 15 percent General Limitation basket and the 
30 percent Residential Development basket. In general, the inquiries 
concern the manner in which an association may ``move'' a loan from 
the General Limitation basket to the Residential Development basket. 
The following example is intended to provide guidance:
    Example: Association A's General Limitation under section 
5(u)(1) is $15 million. In January, Association A makes a $10 
million loan to Borrower to develop domestic residential housing 
units. At the time the loan was made, Association A had not received 
approval under a Director order to avail itself of the residential 
development exception to lending limits. Therefore, the $10 million 
loan is made under Association A's General Limitation.
    2. In June, Association A receives authorization to lend under 
the Residential Development exception. In July, Association A lends 
$3 million to Borrower to develop domestic residential housing 
units. In August, Borrower seeks an additional $12 million 
commercial loan from Association A. Association A cannot make the 
loan to Borrower, however, because it already has an outstanding $10 
million loan to Borrower that counts against Association A's General 
Limitation of $15 million. Thus, Association A may lend only up to 
an additional $5 million to Borrower under the General Limitation.
    3. However, Association A may be able to reallocate the $10 
million loan it made to Borrower in January to its Residential 
Development basket provided that: (1) Association A has obtained 
authority under a Director's order to avail itself of the additional 
lending authority for residential development and maintains 
compliance with all prerequisites to such lending authority; (2) the 
original $10 million loan made in January constitutes a loan to 
develop domestic residential housing units as defined; and (3) the 
housing unit(s) constructed with the funds from the January loan 
remain in a stage of ``development'' at the time Association A 
reallocates the loan to the domestic residential housing basket. The 
project must be in a stage of acquisition, development, 
construction, rehabilitation, or conversion in order for the loan to 
be reallocated.
    4. If Association A is able to reallocate the $10 million loan 
made to Borrower in January to its Residential Development basket, 
it may make the $12 million commercial loan requested by Borrower in 
August. Once the January loan is reallocated to the Residential 
Development basket, however, the $10 million loan counts towards 
Association's 150 percent aggregate limitation on loans to all 
borrowers under the residential development basket (section 
5(u)(2)(A)(ii)(IV)).
    5. If Association A reallocates the January loan to its domestic 
residential housing basket and makes an additional $12 million 
commercial loan to Borrower, Association A's totals under the 
respective limitations would be: $12 million under the General 
Limitation; and $13 million under the Residential Development 
limitation. The full $13 million residential development loan counts 
toward Association A's aggregate 150 percent limitation.


Sec. 560.100  Real estate lending standards; purpose and scope.

    This section, and Sec. 560.101 of this subpart, issued pursuant to 
section 304 of the Federal Deposit Insurance Corporation Improvement 
Act of 1991, 12 U.S.C. 1828(o), prescribe standards for real estate 
lending to be used by savings associations and all their includable 
subsidiaries, as defined in 12 CFR 567.1(l), over which the savings 
associations exercise control, in adopting internal real estate lending 
policies.


Sec. 560.101  Real estate lending standards.

    (a) Each savings association shall adopt and maintain written 
policies that establish appropriate limits and standards for extensions 
of credit that are secured by liens on or interests in real estate, or 
that are made for the purpose of financing permanent improvements to 
real estate.
    (b) (1) Real estate lending policies adopted pursuant to this 
section must:
    (i) Be consistent with safe and sound banking practices;
    (ii) Be appropriate to the size of the institution and the nature 
and scope of its operations; and
    (iii) Be reviewed and approved by the savings association's board 
of directors at least annually.
    (2) The lending policies must establish:
    (i) Loan portfolio diversification standards;
    (ii) Prudent underwriting standards, including loan-to-value 
limits, that are clear and measurable;
    (iii) Loan administration procedures for the savings association's 
real estate portfolio; and
    (iv) Documentation, approval, and reporting requirements to monitor 
compliance with the savings association's real estate lending policies.
    (c) Each savings association must monitor conditions in the real 
estate market in its lending area to ensure that its real estate 
lending policies continue to be appropriate for current market 
conditions.
    (d) The real estate lending policies adopted pursuant to this 
section should reflect consideration of the Interagency Guidelines for 
Real Estate Lending Policies established by the Federal bank and thrift 
supervisory agencies.

Appendix to Sec. 560.101--Interagency Guidelines for Real Estate 
Lending Policies

    The agencies' regulations require that each insured depository 
institution adopt and maintain a written policy that establishes 
appropriate limits and standards for all extensions of credit that 
are secured by liens on or interests in real estate or made for the 
purpose of financing the construction of a building or other 
improvements.1 These guidelines are intended to assist 
institutions in the formulation and maintenance of a real estate 
lending policy that is appropriate to the size of the institution 
and the nature and

[[Page 50979]]

scope of its individual operations, as well as satisfies the 
requirements of the regulation.
---------------------------------------------------------------------------

    \1\  The agencies have adopted a uniform rule on real estate 
lending. See 12 CFR Part 365 (FDIC); 12 CFR Part 208, Subpart C 
(FRB); 12 CFR Part 34, Subpart D (OCC); and 12 CFR 560.100-560.101 
(OTS).
---------------------------------------------------------------------------

    Each institution's policies must be comprehensive, and 
consistent with safe and sound lending practices, and must ensure 
that the institution operates within limits and according to 
standards that are reviewed and approved at least annually by the 
board of directors. Real estate lending is an integral part of many 
institutions' business plans and, when undertaken in a prudent 
manner, will not be subject to examiner criticism.

Loan Portfolio Management Considerations

    The lending policy should contain a general outline of the scope 
and distribution of the institution's credit facilities and the 
manner in which real estate loans are made, serviced, and collected. 
In particular, the institution's policies on real estate lending 
should:
     Identify the geographic areas in which the institution 
will consider lending.
     Establish a loan portfolio diversification policy and 
set limits for real estate loans by type and geographic market 
(e.g., limits on higher risk loans).
     Identify appropriate terms and conditions by type of 
real estate loan.
     Establish loan origination and approval procedures, 
both generally and by size and type of loan.
     Establish prudent underwriting standards that are clear 
and measurable, including loan-to-value limits, that are consistent 
with these supervisory guidelines.
     Establish review and approval procedures for exception 
loans, including loans with loan-to-value percentages in excess of 
supervisory limits.
     Establish loan administration procedures, including 
documentation, disbursement, collateral inspection, collection, and 
loan review.
     Establish real estate appraisal and evaluation 
programs.
     Require that management monitor the loan portfolio and 
provide timely and adequate reports to the board of directors.
    The institution should consider both internal and external 
factors in the formulation of its loan policies and strategic plan. 
Factors that should be considered include:
     The size and financial condition of the institution.
     The expertise and size of the lending staff.
     The need to avoid undue concentrations of risk.
     Compliance with all real estate related laws and 
regulations, including the Community Reinvestment Act, anti-
discrimination laws, and for savings associations, the Qualified 
Thrift Lender test.
     Market conditions.
    The institution should monitor conditions in the real estate 
markets in its lending area so that it can react quickly to changes 
in market conditions that are relevant to its lending decisions. 
Market supply and demand factors that should be considered include:
     Demographic indicators, including population and 
employment trends.
     Zoning requirements.
     Current and projected vacancy, construction, and 
absorption rates.
     Current and projected lease terms, rental rates, and 
sales prices, including concessions.
     Current and projected operating expenses for different 
types of projects.
     Economic indicators, including trends and 
diversification of the lending area.
     Valuation trends, including discount and direct 
capitalization rates.

Underwriting Standards

    Prudently underwritten real estate loans should reflect all 
relevant credit factors, including:
     The capacity of the borrower, or income from the 
underlying property, to adequately service the debt.
     The value of the mortgaged property.
     The overall creditworthiness of the borrower.
     The level of equity invested in the property.
     Any secondary sources of repayment.
     Any additional collateral or credit enhancements (such 
as guarantees, mortgage insurance or takeout commitments).
    The lending policies should reflect the level of risk that is 
acceptable to the board of directors and provide clear and 
measurable underwriting standards that enable the institution's 
lending staff to evaluate these credit factors. The underwriting 
standards should address:
     The maximum loan amount by type of property.
     Maximum loan maturities by type of property.
     Amortization schedules.
     Pricing structure for different types of real estate 
loans.
     Loan-to-value limits by type of property.
    For development and construction projects, and completed 
commercial properties, the policy should also establish, 
commensurate with the size and type of the project or property:
     Requirements for feasibility studies and sensitivity 
and risk analyses (e.g., sensitivity of income projections to 
changes in economic variables such as interest rates, vacancy rates, 
or operating expenses).
     Minimum requirements for initial investment and 
maintenance of hard equity by the borrower (e.g., cash or 
unencumbered investment in the underlying property).
     Minimum standards for net worth, cash flow, and debt 
service coverage of the borrower or underlying property.
     Standards for the acceptability of and limits on non-
amortizing loans.
     Standards for the acceptability of and limits on the 
use of interest reserves.
     Pre-leasing and pre-sale requirements for income-
producing property.
     Pre-sale and minimum unit release requirements for non-
income-producing property loans.
     Limits on partial recourse or nonrecourse loans and 
requirements for guarantor support.
     Requirements for takeout commitments.
     Minimum covenants for loan agreements.

Loan Administration

    The institution should also establish loan administration 
procedures for its real estate portfolio that address:
     Documentation, including:
    Type and frequency of financial statements, including 
requirements for verification of information provided by the 
borrower;
    Type and frequency of collateral evaluations (appraisals and 
other estimates of value).
     Loan closing and disbursement.
     Payment processing.
     Escrow administration.
     Collateral administration.
     Loan payoffs.
     Collections and foreclosure, including:
    Delinquency follow-up procedures;
    Foreclosure timing;
    Extensions and other forms of forbearance;
    Acceptance of deeds in lieu of foreclosure.
     Claims processing (e.g., seeking recovery on a 
defaulted loan covered by a government guaranty or insurance 
program).
     Servicing and participation agreements.

Supervisory Loan-to-Value Limits

    Institutions should establish their own internal loan-to-value 
limits for real estate loans. These internal limits should not 
exceed the following supervisory limits:

------------------------------------------------------------------------
                                                               Loan-to- 
                       Loan category                         value limit
                                                               (percent)
------------------------------------------------------------------------
Raw land...................................................           65
Land development...........................................           75
Construction:                                                           
  Commercial, multifamily,\1\ and other nonresidential.....           80
  1- to 4-family residential...............................           85
  Improved property........................................           85
  Owner-occupied 1- to 4-family and home equity............     ( \2\ ) 
------------------------------------------------------------------------
\1\ Multifamily construction includes condominiums and cooperatives.    
\2\ A loan-to-value limit has not been established for permanent        
  mortgage or home equity loans on owner-occupied, 1- to 4-family       
  residential property. However, for any such loan with a loan-to-value 
  ratio that equals or exceeds 90 percent at origination, an institution
  should require appropriate credit enhancement in the form of either   
  mortgage insurance or readily marketable collateral.                  

    The supervisory loan-to-value limits should be applied to the 
underlying property that collateralizes the loan. For loans that 
fund multiple phases of the same real estate project (e.g., a loan 
for both land development and construction of an office building), 
the appropriate loan-to-value limit is the limit applicable to the 
final phase of the project funded by the loan; however, loan 
disbursements should not exceed actual development or construction 
outlays. In situations where a loan is fully cross-collateralized by 
two or more properties or is secured by a collateral pool of two or 
more properties, the appropriate maximum loan amount under 
supervisory loan-to-value limits is the sum of the value of each 
property, less senior liens, multiplied by the appropriate loan-to-
value limit for each

[[Page 50980]]

property. To ensure that collateral margins remain within the 
supervisory limits, lenders should redetermine conformity whenever 
collateral substitutions are made to the collateral pool.
    In establishing internal loan-to-value limits, each lender is 
expected to carefully consider the institution-specific and market 
factors listed under ``Loan Portfolio Management Considerations,'' 
as well as any other relevant factors, such as the particular 
subcategory or type of loan. For any subcategory of loans that 
exhibits greater credit risk than the overall category, a lender 
should consider the establishment of an internal loan-to-value limit 
for that subcategory that is lower than the limit for the overall 
category.
    The loan-to-value ratio is only one of several pertinent credit 
factors to be considered when underwriting a real estate loan. Other 
credit factors to be taken into account are highlighted in the 
``Underwriting Standards'' section above. Because of these other 
factors, the establishment of these supervisory limits should not be 
interpreted to mean that loans at these levels will automatically be 
considered sound.

Loans in Excess of the Supervisory Loan-to-Value Limits

    The agencies recognize that appropriate loan-to-value limits 
vary not only among categories of real estate loans but also among 
individual loans. Therefore, it may be appropriate in individual 
cases to originate or purchase loans with loan-to-value ratios in 
excess of the supervisory loan-to-value limits, based on the support 
provided by other credit factors. Such loans should be identified in 
the institutions' records, and their aggregate amount reported at 
least quarterly to the institution's board of directors. (See 
additional reporting requirements described under ``Exceptions to 
the General Policy.'') The aggregate amount of all loans in excess 
of the supervisory loan-to-value limits should not exceed 100 
percent of total capital.2 Moreover, within the aggregate 
limit, total loans for all commercial, agricultural, multifamily or 
other non-1-to- 4 family residential properties should not exceed 30 
percent of total capital. An institution will come under increased 
supervisory scrutiny as the total of such loans approaches these 
levels.
---------------------------------------------------------------------------

    \2\ For the state member banks, the term ``total capital'' means 
``total risk-based capital'' as defined in Appendix A to 12 CFR Part 
208. For insured state non-member banks, ``total capital'' refers to 
that term described in table I of Appendix A to 12 CFR Part 325. For 
national banks, the term ``total capital'' is defined at 12 CFR 
3.2(e). For savings associations, the term ``total capital'' is 
defined at 12 CFR 567.5(c).
---------------------------------------------------------------------------

    In determining the aggregate amount of such loans, institutions 
should: (a) Include all loans secured by the same property if any 
one of those loans exceeds the supervisory loan-to-value limits; and 
(b) include the recourse obligation of any such loan sold with 
recourse. Conversely, a loan should no longer be reported to the 
directors as part of aggregate totals when reduction in principal or 
senior liens, or additional contribution of collateral or equity 
(e.g., improvements to the real property securing the loan), bring 
the loan-to-value ratio into compliance with supervisory limits.

Excluded Transactions

    The agencies also recognize that there are a number of lending 
situations in which other factors significantly outweigh the need to 
apply the supervisory loan-to-value limits.
    These include:
     Loans guaranteed or insured by the U.S. government or 
its agencies, provided that the amount of the guaranty or insurance 
is at least equal to the portion of the loan that exceeds the 
supervisory loan-to-value limit.
     Loans backed by the full faith and credit of a state 
government, provided that the amount of the assurance is at least 
equal to the portion of the loan that exceeds the supervisory loan-
to-value limit.
     Loans guaranteed or insured by a state, municipal or 
local government, or an agency thereof, provided that the amount of 
the guaranty or insurance is at least equal to the portion of the 
loan that exceeds the supervisory loan-to-value limit, and provided 
that the lender has determined that the guarantor or insurer has the 
financial capacity and willingness to perform under the terms of the 
guaranty or insurance agreement.
     Loans that are to be sold promptly after origination, 
without recourse, to a financially responsible third party.
     Loans that are renewed, refinanced, or restructured 
without the advancement of new funds or an increase in the line of 
credit (except for reasonable closing costs), or loans that are 
renewed, refinanced, or restructured in connection with a workout 
situation, either with or without the advancement of new funds, 
where consistent with safe and sound banking practices and part of a 
clearly defined and well-documented program to achieve orderly 
liquidation of the debt, reduce risk of loss, or maximize recovery 
on the loan.
     Loans that facilitate the sale of real estate acquired 
by the lender in the ordinary course of collecting a debt previously 
contracted in good faith.
     Loans for which a lien on or interest in real property 
is taken as additional collateral through an abundance of caution by 
the lender (e.g., the institution takes a blanket lien on all or 
substantially all of the assets of the borrower, and the value of 
the real property is low relative to the aggregate value of all 
other collateral).
     Loans, such as working capital loans, where the lender 
does not rely principally on real estate as security and the 
extension of credit is not used to acquire, develop, or construct 
permanent improvements on real property.
     Loans for the purpose of financing permanent 
improvements to real property, but not secured by the property, if 
such security interest is not required by prudent underwriting 
practice.

Exceptions to the General Lending Policy

    Some provision should be made for the consideration of loan 
requests from creditworthy borrowers whose credit needs do not fit 
within the institution's general lending policy. An institution may 
provide for prudently underwritten exceptions to its lending 
policies, including loan-to-value limits, on a loan-by-loan basis. 
However, any exceptions from the supervisory loan-to-value limits 
should conform to the aggregate limits on such loans discussed 
above.
    The board of directors is responsible for establishing standards 
for the review and approval of exception loans. Each institution 
should establish an appropriate internal process for the review and 
approval of loans that do not conform to its own internal policy 
standards. The approval of any such loan should be supported by a 
written justification that clearly sets forth all of the relevant 
credit factors that support the underwriting decision. The 
justification and approval documents for such loans should be 
maintained as a part of the permanent loan file. Each institution 
should monitor compliance with its real estate lending policy and 
individually report exception loans of a significant size to its 
board of directors.

Supervisory Review of Real Estate Lending Policies and Practices

    The real estate lending policies of institutions will be 
evaluated by examiners during the course of their examinations to 
determine if the policies are consistent with safe and sound lending 
practices, these guidelines, and the requirements of the regulation. 
In evaluating the adequacy of the institution's real estate lending 
policies and practices, examiners will take into consideration the 
following factors:
     The nature and scope of the institution's real estate 
lending activities.
     The size and financial condition of the institution.
     The quality of the institution's management and 
internal controls.
     The expertise and size of the lending and loan 
administration staff.
     Market conditions.
    Lending policy exception reports will also be reviewed by 
examiners during the course of their examinations to determine 
whether the institutions' exceptions are adequately documented and 
appropriate in light of all of the relevant credit considerations. 
An excessive volume of exceptions to an institution's real estate 
lending policy may signal a weakening of its underwriting practices, 
or may suggest a need to revise the loan policy.

Definitions

    For the purposes of these Guidelines:
    Construction loan means an extension of credit for the purpose 
of erecting or rehabilitating buildings or other structures, 
including any infrastructure necessary for development.
    Extension of credit or loan means:
    (1) The total amount of any loan, line of credit, or other 
legally binding lending commitment with respect to real property; 
and
    (2) The total amount, based on the amount of consideration paid, 
of any loan, line of credit, or other legally binding lending 
commitment acquired by a lender by purchase, assignment, or 
otherwise.

[[Page 50981]]

    Improved property loan means an extension of credit secured by 
one of the following types of real property:
    (1) Farmland, ranchland or timberland committed to ongoing 
management and agricultural production;
    (2) 1- to 4-family residential property that is not owner-
occupied;
    (3) Residential property containing five or more individual 
dwelling units;
    (4) Completed commercial property; or
    (5) Other income-producing property that has been completed and 
is available for occupancy and use, except income-producing owner-
occupied 1- to 4-family residential property.
    Land development loan means an extension of credit for the 
purpose of improving unimproved real property prior to the erection 
of structures. The improvement of unimproved real property may 
include the laying or placement of sewers, water pipes, utility 
cables, streets, and other infrastructure necessary for future 
development.
    Loan origination means the time of inception of the obligation 
to extend credit (i.e., when the last event or prerequisite, 
controllable by the lender, occurs causing the lender to become 
legally bound to fund an extension of credit).
    Loan-to-value or loan-to-value ratio means the percentage or 
ratio that is derived at the time of loan origination by dividing an 
extension of credit by the total value of the property(ies) securing 
or being improved by the extension of credit plus the amount of any 
readily marketable collateral and other acceptable collateral that 
secures the extension of credit. The total amount of all senior 
liens on or interests in such property(ies) should be included in 
determining the loan-to-value ratio. When mortgage insurance or 
collateral is used in the calculation of the loan-to-value ratio, 
and such credit enhancement is later released or replaced, the loan-
to-value ratio should be recalculated.
    Other acceptable collateral means any collateral in which the 
lender has a perfected security interest, that has a quantifiable 
value, and is accepted by the lender in accordance with safe and 
sound lending practices. Other acceptable collateral should be 
appropriately discounted by the lender consistent with the lender's 
usual practices for making loans secured by such collateral. Other 
acceptable collateral includes, among other items, unconditional 
irrevocable standby letters of credit for the benefit of the lender.
    Owner-occupied, when used in conjunction with the term 1- to 4-
family residential property means that the owner of the underlying 
real property occupies at least one unit of the real property as a 
principal residence of the owner.
    Readily marketable collateral means insured deposits, financial 
instruments, and bullion in which the lender has a perfected 
interest. Financial instruments and bullion must be salable under 
ordinary circumstances with reasonable promptness at a fair market 
value determined by quotations based on actual transactions, on an 
auction or similarly available daily bid and ask price market. 
Readily marketable collateral should be appropriately discounted by 
the lender consistent with the lender's usual practices for making 
loans secured by such collateral.
    Value means an opinion or estimate, set forth in an appraisal or 
evaluation, whichever may be appropriate, of the market value of 
real property, prepared in accordance with the agency's appraisal 
regulations and guidance. For loans to purchase an existing 
property, the term ``value'' means the lesser of the actual 
acquisition cost or the estimate of value.
    1- to 4-family residential property means property containing 
fewer than five individual dwelling units, including manufactured 
homes permanently affixed to the underlying property (when deemed to 
be real property under state law).


Sec. 560.110  Most favored lender usury preemption.

    (a) Definition. The term ``interest'' as used in 12 U.S.C. 1463(g) 
includes any payment compensating a creditor or prospective creditor 
for an extension of credit, making available of a line of credit, or 
any default or breach by a borrower of a condition upon which credit 
was extended. It includes, among other things, the following fees 
connected with credit extension or availability: numerical periodic 
rates, late fees, not sufficient funds (NSF) fees, overlimit fees, 
annual fees, cash advance fees, and membership fees. It does not 
ordinarily include appraisal fees, premiums and commissions 
attributable to insurance guaranteeing repayment of any extension of 
credit, finders' fees, fees for document preparation or notarization, 
or fees incurred to obtain credit reports.
    (b) Authority. A savings association located in a state may charge 
interest at the maximum rate permitted to any state-chartered or 
licensed lending institution by the law of that state. If state law 
permits different interest charges on specified classes of loans, a 
federal savings association making such loans is subject only to the 
provisions of state law relating to that class of loans that are 
material to the determination of the permitted interest. For example, a 
federal savings association may lawfully charge the highest rate 
permitted to be charged by a state-licensed small loan company, without 
being so licensed, but subject to state law limitations on the size of 
loans made by small loan companies. Except as provided in this 
paragraph, the applicability of state law to Federal savings 
associations shall be determined in accordance with Sec. 560.2 of this 
part. State supervisors determine the degree to which state-chartered 
savings associations must comply with state laws other than those 
imposing restrictions on interest, as defined in paragraph (a) of this 
section.
    (c) Effect on state definitions of interest. The Federal definition 
of the term ``interest'' in paragraph (a) of this section does not 
change how interest is defined by the individual states (nor how the 
state definition of interest is used) solely for purposes of state law. 
For example, if late fees are not ``interest'' under state law where a 
savings association is located but state law permits its most favored 
lender to charge late fees, then a savings association located in that 
state may charge late fees to its intrastate customers. The savings 
association may also charge late fees to its interstate customers 
because the fees are interest under the Federal definition of interest 
and an allowable charge under state law where the savings association 
is located. However, the late fees would not be treated as interest for 
purposes of evaluating compliance with state usury limitations because 
state law excludes late fees when calculating the maximum interest that 
lending institutions may charge under those limitations.


Sec. 560.120  Letters of credit and other independent undertakings to 
pay against documents.

    (a) General authority. To the extent that it has legal authority to 
do so, a savings association may issue and commit to issue letters of 
credit within the scope of applicable laws or rules of practice 
recognized by law.1 It may also issue other independent 
undertakings within the scope of such laws or rules of practice 
recognized by law, that have been approved by OTS (approved 
undertaking). Under such letters of credit and approved undertakings, 
the savings association's obligation to honor depends upon the 
presentation of specified documents and not upon nondocumentary 
conditions or resolution of questions of fact or law at issue between 
the account party and the beneficiary. A savings association may also 
confirm or otherwise undertake to honor or purchase specified documents

[[Page 50982]]

upon their presentation under another person's independent undertaking 
within the scope of such laws or rules.
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    \1\ Samples of laws or rules of practice applicable to letters 
of credit and other independent undertakings include, but are not 
limited to: the applicable version of Article 5 of the Uniform 
Commercial Code (UCC) (1962, as amended 1990) or revised Article 5 
of the UCC (as amended 1995) (available from West Publishing Co., 1/
800/340-9378); the Uniform Customs and Practice for Documentary 
Credits (International Chamber of Commerce (ICC) Publication No. 
500) (available from ICC Publishing, Inc., 212/206-1150); the United 
Nations Commission on International Trade Law (UNCITRAL) Convention 
on Independent Guarantees and Standby Letters of Credit (adopted by 
UNCITRAL 1995) (available from UNCITRAL, 212/963-5353); and the 
Uniform Rules for Bank-to-Bank Reimbursements Under Documentary 
Credits (ICC Publication No. 525) (available from ICC Publishing, 
Inc., 212/206-1150); as any of the foregoing may be amended from 
time to time.
---------------------------------------------------------------------------

    (b) Safety and soundness considerations.--(1) Terms. As a matter of 
safe and sound banking practice, savings associations that issue 
letters of credit or approved undertakings should not be exposed to 
undue risk. At a minimum, savings associations should consider the 
following:
    (i) The independent character of the letter of credit or approved 
undertaking should be apparent from its terms (such as terms that 
subject it to laws or rules providing for its independent character);
    (ii) The letter of credit or approved undertaking should be limited 
in amount;
    (iii) The letter of credit or approved undertaking should:
    (A) Be limited in duration; or
    (B) Permit the savings association to terminate the letter of 
credit or approved undertaking, either on a periodic basis (consistent 
with the savings association's ability to make any necessary credit 
assessments) or at will upon either notice or payment to the 
beneficiary; or
    (C) Entitle the savings association to cash collateral from the 
account party on demand (with a right to accelerate the customer's 
obligations, as appropriate); and
    (iv) The savings association either should be fully collateralized 
or have a post-honor right of reimbursement from its customer or from 
another issuer of a letter of credit or an independent undertaking. 
Alternatively, if the savings association's undertaking is to purchase 
documents of title, securities, or other valuable documents, it should 
obtain a first priority right to realize on the documents if the 
savings association is not otherwise to be reimbursed.
    (2) Additional considerations in special circumstances. Certain 
letters of credit and approved undertakings require particular 
protections against credit, operational, and market risk:
    (i) In the event that the undertaking is to honor by delivery of an 
item of value other than money, the savings association should ensure 
that market fluctuations that affect the value of the item will not 
cause the savings association to assume undue market risk;
    (ii) In the event that an undertaking provides for renewal, the 
terms for renewal should be consistent with the savings association's 
ability to make any necessary credit assessments prior to renewal; and
    (iii) In the event that a savings association issues an undertaking 
for its own account, the underlying transaction for which it is issued 
must be within the savings association's authority and comply with any 
safety and soundness requirements applicable to that transaction.
    (3) Operational expertise. The savings association should possess 
operational expertise that is commensurate with the sophistication of 
its letter of credit or independent undertaking activities.
    (4) Documentation. The savings association must accurately reflect 
its letters of credit or approved undertakings in its records, 
including any acceptance or deferred payment or other absolute 
obligation arising out of its contingent undertaking.


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. 560.160  Asset classification.

    (a) (1) Each savings association shall evaluate and classify its 
assets on a regular basis in a manner consistent with, or reconcilable 
to, the asset classification system used by OTS in its Thrift 
Activities Handbook (Available at the address listed in Sec. 516.1 of 
this chapter).
    (2) In connection with the examination of a savings association or 
its affiliates, OTS examiners may identify problem assets and classify 
them, if appropriate. The association must recognize such examiner 
classifications in its subsequent reports to OTS.
    (b) Based on the evaluation and classification of its assets, each 
savings association shall establish adequate valuation allowances or 
charge-offs, as appropriate, consistent with generally accepted 
accounting principles and the practices of the federal banking 
agencies.


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 its loans.


Sec. 560.172  Re-evaluation of real estate owned.

    A savings association shall appraise each parcel of real estate 
owned at the earlier of in-substance foreclosure or at the time of the 
savings association's acquisition of such property, and at such times 
thereafter as dictated by prudent management policy; such appraisals 
shall be consistent with the requirements of part 564 of this chapter. 
The Regional Director or his or her designee may require subsequent 
appraisals if, in his or her discretion, such subsequent appraisal is 
necessary under the particular circumstances. The foregoing requirement 
shall not apply to any parcel of real estate that is sold and

[[Page 50983]]

reacquired less than 12 months subsequent to the most recent appraisal 
made pursuant to this part. A dated, signed copy of each report of 
appraisal made pursuant to any provisions of this part shall be 
retained in the savings association's records.

Subpart C--Alternative Mortgage Transactions


Sec. 560.210  Disclosures for adjustable-rate mortgage loans, 
adjustment notices, and interest-rate caps.

    (a) Definitions. For purposes of this section:
    (1) Adjustable-rate mortgage loan means a mortgage loan, secured by 
property occupied or to be occupied by the borrower, providing for 
adjustments to the interest rate which cause a change in balance, term 
to maturity, or payment levels other than those established by a fixed, 
predetermined schedule at the time of contracting for the loan.
    (2) [Reserved]
    (3) Applicant means a natural person (or persons) making a loan 
application.
    (4) Home means real estate as defined by Sec. 541.14 of this 
chapter, manufactured housing, combinations of homes and business 
property, and farm residences or combinations of farm residences and 
commercial farm real estate.
    (b) Initial disclosures for adjustable-rate mortgage loans. Savings 
associations offering adjustable-rate home loans, except open-end 
loans, with a term of more than one (1) year and secured by property 
occupied or to be occupied by the borrower, shall provide two types of 
written disclosure to prospective borrowers when an application form is 
provided or before the payment of a non-refundable fee, whichever is 
earlier:
    (1) The booklet titled Consumer Handbook on Adjustable Rate 
Mortgages published by the Office and the Federal Reserve Board, or a 
suitable substitute (Available at the address listed in Sec. 516.1 of 
this chapter.).
    (2) A loan program disclosure for each adjustable-rate home loan 
program in which the consumer expresses an interest. The following 
disclosures, as applicable, shall be provided: 2
---------------------------------------------------------------------------

    \2\ A sample disclosure form may be found in the Federal 
Register issue of May 23, 1988 (53 FR 18262) or may be obtained from 
the Office at the address listed in Sec. 516.1 of this chapter.
---------------------------------------------------------------------------

    (i) The fact that the interest rate, payment, or term of the loan 
can change.
    (ii) The index or formula used in making adjustments, and a source 
of information about the index or formula.
    (iii) An explanation of how the interest rate and payment will be 
determined, including an explanation of how the index is adjusted, such 
as by the use of a margin.
    (iv) A statement that the consumer should ask about the current 
margin value and current interest rate.
    (v) The fact that the interest rate will be discounted, and a 
statement that the consumer should ask about the amount of the interest 
rate discount.
    (vi) The frequency of interest rate and payment changes.
    (vii) Any rules relating to changes in the index, interest rate, 
payment amount, and outstanding loan balance including, for example, an 
explanation of interest rate or payment limitations, negative 
amortization, and interest rate carryover.
    (viii) An historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program. The example shall be based upon index values beginning in 1977 
and be updated annually until a 15-year history is shown. Thereafter, 
the example shall reflect the most recent 15 years of index values. The 
example shall reflect all significant loan program terms, such as 
negative amortization, interest rate carryover, interest rate 
discounts, and interest rate and payment limitations, that would have 
been affected by the index movement during the period.
    (ix) An explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed based on the most recent payment 
shown in the historical example.
    (x) The maximum interest rate and payment for a $10,000 loan 
originated at the most recent interest rate shown in the historical 
example assuming the maximum periodic increases in rates and payments 
under the program; and the initial interest rate and payment for that 
loan.
    (xi) The fact that the loan program contains a demand feature.
    (xii) The type of information that will be provided in notices of 
adjustments and the timing of such notices.
    (xiii) A statement that disclosure forms are available for the 
creditor's other variable-rate loan programs.
    (c) Adjustment notices. An adjustment to the interest rate with or 
without a corresponding adjustment to the payment in an adjustable-rate 
transaction subject to this section is an event requiring new 
disclosures to the consumer. At least once each year during which an 
interest rate adjustment is implemented without an accompanying payment 
change, and at least 25, but no more than 120, calendar days before a 
payment at a new level is due, the following written disclosures, as 
applicable, must be delivered or placed in the mail:
    (1) The current and prior interest rates.
    (2) The index values upon which the current and prior interest 
rates are based.
    (3) The extent to which the creditor has foregone any increase in 
the interest rate.
    (4) The contractual effects of the adjustment, including the 
payment due after the adjustment is made, and a statement of the loan 
balance.
    (5) The payment, if different from that referred to in paragraph 
(c)(4) of this section, that would be required to amortize fully the 
loan at the new interest rate over the remainder of the loan term.
    (d) [Reserved]
    (e) Maximum interest rate caps. All savings associations making 
adjustable-rate loans, originated on or after December 8, 1987, whether 
open-end or closed-end, shall comply with Regulation Z (12 CFR 226.30) 
by specifying in their credit contracts the maximum interest rate that 
may be imposed during the term of the obligation.
    (f) Exception. The disclosures in paragraph (b) of this section are 
not required in connection with the extension of consumer credit as 
defined in Sec. 561.12 of this chapter even if it is secured by a 
borrower-occupied home as long as the home is not the primary security 
for the loan.
    (g) Exempt transactions. This section does not apply to an 
extension of credit primarily for a business, commercial, or 
agricultural purpose.


Sec. 560.220  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 in 
this section, notwithstanding any state constitution, law, or 
regulation. In accordance with section 807(b) of Public Law 97-320, 12 
U.S.C. 3801 note, Secs. 560.33, 560.34, 560.35, and 560.210 of this 
part 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.

[[Page 50984]]

PART 563--OPERATIONS

    10. 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. 563.51  [Amended]

    11. Section 563.51(f)(1)(i) is amended by removing the phrase 
``Sec. 545.45(a)(1)'', and by adding in lieu thereof the phrase 
``Sec. 560.30''.

Subpart D of Part 563--[Removed and Reserved]

    12. Subpart D of part 563 is removed and reserved.


Sec. 563.160  [Removed]

    13. Section 563.160 is removed.
    14. 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.
* * * * *


Sec. 563.172  [Removed]

    15. Section 563.172 is removed.

PART 566--LIQUIDITY

    16. The authority citation for part 566 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1465, 1467a; 15 
U.S.C. 1691, 1691a.


Sec. 566.1  [Amended]

    17. Section 566.1(g)(6)(i) is amended by removing the phrase 
``Sec. 545.72(a)'', and by adding in lieu thereof the phrase 
``Sec. 560.42''.

PART 571--STATEMENTS OF POLICY

    18. 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]

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

PART 590--PREEMPTION OF STATE USURY LAWS

    20. The authority citation for part 590 continues to read as 
follows:

    Authority: 12 U.S.C. 1735f-7a.


Sec. 590.4  [Amended]

    21. Section 590.4(e)(1) is amended by removing the phrase 
``Sec. 545.33(f)'', and by adding in lieu thereof the phrase 
``Sec. 560.220''.

    Dated: September 11, 1996.

    By the Office of Thrift Supervision.
John F. Downey,
Executive Director, Supervision.
[FR Doc. 96-23726 Filed 9-27-96; 8:45 am]
BILLING CODE 6720-01 P