[Federal Register Volume 66, Number 51 (Thursday, March 15, 2001)]
[Proposed Rules]
[Pages 15049-15055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6401]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 2001-14]
RIN 1550-AB45


Capital: Qualifying Mortgage Loan, Interest Rate Risk Component, 
and Miscellaneous Changes

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is soliciting comment 
on a number of proposed changes to its capital regulations. These 
changes are designed to eliminate unnecessary capital burdens and to 
align OTS capital regulations more closely to those of the other 
banking regulators. Under the proposed rule, a

[[Page 15050]]

one- to four-family residential first mortgage loan may qualify for a 
50 percent risk weight if it meets certain criteria, including a loan-
to-value (LTV) ratio below 90 percent. Currently these loans must have 
an LTV ratio of 80 percent or less to qualify for the 50 percent risk 
weight. OTS also proposes to: Eliminate the requirement that a thrift 
must deduct from total capital that portion of a land loan or a 
nonresidential construction loan in excess of an 80 percent LTV ratio; 
eliminate the interest rate risk component of the risk-based capital 
regulations; increase the risk weight for high quality, stripped 
mortgage-related securities from 20 percent to 100 percent; modify the 
definition of OECD-based country; and make a technical change to 
conform its treatment of reserves for loan and lease losses to that of 
the other banking agencies.

DATES: Comments must be received on or before May 14, 2001.

ADDRESSES:
    Mail: Send comments to Manager, Dissemination Branch, Information 
Management and Services Division, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552, Attention Docket No. 2001-14.
    Delivery: Hand deliver comments to the Guard's Desk, East Lobby 
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, 
Attention Docket No. 2001-14.
    Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
7755, Attention Docket No. 2001-14; or (202) 906-6956 (if comments are 
over 25 pages).
    E-Mail: Send e-mails to ``public.info@ots.treas.gov">public.info@ots.treas.gov,'' Attention 
Docket No. 2001-14, and include your name and telephone number.
    Public Inspection: Interested persons may inspect comments at the 
Public Reference Room, 1700 G St. NW., from 10 a.m. until 4 p.m. on 
Tuesdays and Thursdays or obtain comments and/or an index of comments 
by facsimile by telephoning the Public Reference Room at (202) 906-5900 
from 9 a.m. until 5 on business days. Comments and the related index 
will also be posted on the OTS Internet Site at ``www.ots.treas.gov.''

FOR FURTHER INFORMATION CONTACT: Michael D. Solomon, Senior Program 
Manager for Capital Policy (202/906-5654); David Riley, Project Manager 
(202) 906-6669, Supervision Policy; or Teresa Scott, Counsel (Banking 
and Finance) (202) 906-6478, Regulations and Legislation Division, 
Office of the Chief Counsel, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    OTS is soliciting comment on a number of proposed changes to its 
capital regulations. These changes are designed to eliminate 
unnecessary capital burdens and to align OTS capital regulations more 
closely to those of the other banking regulators.

II. Discussion of Proposed Changes

A. One- to Four-Family Residential Mortgage Loan

    OTS, the Office of the Comptroller of the Currency (OCC), the Board 
of Governors of the Federal Reserve System (FRB), and the Federal 
Deposit Insurance Corporation (FDIC) (the Banking Agencies) apply 
similar, but not identical, capital rules to one- to four-family 
residential first mortgage loans. Each agency provides that a one- to 
four-family residential first mortgage loan may receive a 50 percent 
risk weight if the loan meets certain specified criteria. To be 
eligible to receive the 50 percent risk weight, each agency requires 
that the loan may not be more than 90 days delinquent and must be 
prudently underwritten.\1\
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    \1\ 12 CFR part 3, App. A., Sec. 3(a)(3)(iii)(OCC): 12 CFR part 
208, App. A., Sec. III. C.3.(FRB); 12 CFR part 325, App. A., Sec. 
II.C. (FDIC); 12 CFR 567.1 (OTS).
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    Only OTS rules specifically require that a one- to four-family 
residential loan must have a loan to value (LTV) ratio of 80 percent or 
less at origination in order to qualify for the 50 percent risk 
weight.\2\ All of the Banking Agencies, however, have indicated that 
prudent underwriting must include an appropriate LTV ratio,\3\ and have 
clarified that a loan secured by a one- to four-family residential 
property will have an appropriate LTV ratio if the loan complies with 
the Interagency Guidelines for Real Estate Lending (Interagency Lending 
Guidelines).\4\ While the Interagency Lending Guidelines do not 
establish a specific supervisory LTV limit for a one- to four-family 
residential property, the guidelines state that an institution should 
require appropriate credit enhancements (e.g., mortgage insurance) for 
a loan with an LTV that equals or exceeds 90 percent at origination.
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    \2\ See definition of qualifying mortgage loans at Sec. 567.1.
    \3\ 64 FR 10194, 10196, fn. 6 (Mar. 2, 1999).
    \4\ Id. The Interagency Guidelines for Real Estate Lending are 
located at 12 CFR part 34, subpart D (OCC); 12 CFR part 208, subpart 
E (FRB); 12 CFR part 365 (FDIC); and 12 CFR 560.100-101 (OTS).
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    In today's rulemaking, OTS is proposing to revise its definition of 
qualifying mortgage loan to permit loans with LTV ratios below 90 
percent to qualify for the 50 percent risk weight. OTS believes that 
the 80 percent or less LTV requirement may no longer be appropriate for 
the reasons stated below.
    First, this change would conform OTS capital requirements more 
closely to the rules and guidance of the other Banking Agencies as 
directed by section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (CDRIA).\5\ That section requires 
OTS and the Banking Agencies to make their regulations and guidance 
uniform, consistent with the principles of safety and soundness, 
statutory law and policy, and the public interest. This proposed change 
would also make the capital rules more consistent with interagency 
supervisory guidance on high LTV loans. In the Interagency Guidance on 
High Loan-to-Value Residential Real Estate Lending issued October 13, 
1999 (Interagency LTV Guidance),\6\ the Banking Agencies defined a high 
LTV loan as an extension of credit secured by liens or interests in an 
owner-occupied, one- to four-family residential property that equals or 
exceeds 90 percent of the real estate's appraised value, unless the 
loan has appropriate credit support.
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    \5\ 12 U.S.C. 4803(a).
    \6\ OTS Thrift Bulletin 72a.
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    Unlike the other Banking Agencies, however, OTS proposes to 
continue to include an express LTV requirement in the definition of 
qualifying mortgage loan. The LTV ratio has played, and will continue 
to play, an important role in determining mortgage loan risk. Because 
thrifts have a greater concentration in home mortgage lending, OTS 
believes that greater regulatory clarity is helpful.
    Second, OTS research suggests that one- to four-family residential 
loans are generally subject to a disproportionately high capital 
burden, relative to other types of loans.\7\ OTS's review of charge-off 
and delinquency rates \8\ for various categories of loans (one- to 
four-family residential loans, multi-family loans,

[[Page 15051]]

other real estate loans, consumer loans, agricultural loans, commercial 
and industrial loans) disclosed that one- to four-family residential 
loans carry substantially less risk than other loan types, relative to 
their respective risk weights. Based on this research, OTS believes it 
may prudently expand the class of one- to four-family residential 
mortgages that qualify for the 50 percent risk weight.\9\ By including 
loans with LTV ratios below 90 percent within the definition of 
qualifying mortgage loan, OTS would reduce the disparity of the risk 
weights among these loans and expand the availability of residential 
mortgage products.
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    \7\ See OTS Research Working Paper titled, ``Basel Buckets and 
Loan Losses: Absolute and Relative Loan Underperformance at Banks 
and Thrifts,'' available on the OTS website at www.ots.treas.gov.
    \8\ The charge off rate is charge offs net of recoveries for 
each loan type divided by the total loan balance of that type of 
loan. The delinquency rate is the sum of loans more than 90 days 
past due for each loan type, divided by the total loan balance for 
that type of loan. Our review of charge-off data, which co-mingled 
expected and unexpected losses, covered the period from 1984 to 
1999. While risk-based capital is primarily for unexpected losses, 
average (historical) losses are not irrelevant. For example, capital 
levels can be modeled based on dispersion of expected (historical) 
losses.
    \9\ In the past, some institutions have over-invested in fixed-
rate one- to four-family mortgage loans, which created interest rate 
risk problems. However, as discussed below, improved supervisory 
tools for interest rate risk analysis, industry awareness of 
interest rate risk, and improved interest rate risk management have 
mitigated this concern.
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    In addition to the revised LTV criterion, OTS is proposing a 
clarifying change to its definition of qualifying mortgage loan. Under 
the current rule, a qualifying mortgage loan must have a documented LTV 
ratio not exceeding 80 percent at origination. The proposed rule would 
clarify that mortgage loans that did not meet the LTV ratio at 
origination but are subsequently paid down to the appropriate LTV ratio 
may become qualifying mortgage loans, if they meet all other 
requirements.
    OTS solicits comment on all aspects of the proposed definition of 
qualifying mortgage loan. Specifically, OTS asks commenters to address 
the following questions:
     Is the revised LTV standard appropriate? Under the 
proposed rule, a mortgage loan with an LTV that is precisely 90 percent 
would not be a qualifying mortgage loan. Is this treatment appropriate?
     Should OTS delete the explicit LTV standard from the 
definition?
     Should OTS impose a standard other than the LTV ratio to 
determine whether a mortgage loan should be accorded a 50 percent risk 
weight?
     Under the current capital rule, a mortgage loan may 
satisfy the LTV requirement if an issuer approved by Fannie Mae or 
Freddie Mac provides an appropriate level of private mortgage 
insurance. Should OTS also permit other forms of credit enhancement 
(i.e., cash collateral or bond collateral) in determining whether a 
loan meets the LTV requirement under the capital rules? If so, what 
types of credit enhancement should be permitted? Specifically, should 
OTS allow other types of guarantees issued by third parties, such as 
irrevocable standby letters of credit? If so, please address how OTS 
may ensure the quality of these guarantees, particularly where the 
guarantor may be an affiliate of the institution.
     Should OTS permit a savings association to review 
periodically a loan on residential real property with an appreciating 
value to determine if the loan meets the LTV requirements for a lower 
risk-weight category? Similarly, should the OTS require a savings 
association to reevaluate a loan on residential real property with a 
declining value to determine whether the loan continues to meet the 
definition of a qualifying mortgage loan? Also should a minimum time 
elapse before an institution may use a revaluation to compute LTV?
    In addition to these matters, OTS has received several inquiries 
concerning the treatment of a mortgage loan that meets the prescribed 
LTV requirement on the date of its origination, but subsequently 
negatively amortizes to a higher LTV ratio. Some have argued that the 
current definition of qualifying mortgage loan merely requires a loan 
to meet the LTV requirement at its origination. OTS disagrees with this 
interpretation. Savings associations must maintain capital commensurate 
with the risk of the loan throughout the life of the loan. Accordingly, 
OTS proposes to clarify this matter in the proposed rule. Thus, the 
proposed rule would provide that a loan that has amortized above the 
LTV limit is not a qualifying mortgage loan and will not be accorded a 
50 percent risk weight. OTS expects thrifts to review periodically 
loans structured with negative amortization features and loans that 
have the potential for negative amortization to ensure that the 
required LTV ratios are met. Thrifts must reassign a 100 percent risk 
weight to loans that amortize to an LTV ratio of 90 percent or more.
    OTS solicits comment on whether the definition of qualifying 
mortgage loan in the final rule should include some types of loans that 
negatively amortize to an LTV of 90 percent or more. Some negatively 
amortizing loans may not result in additional credit risk. For example, 
a loan may negatively amortize solely because the interest rate 
changes. Under certain Adjustable Rate Mortgages (ARMs), the interest 
rate on the loan may be adjusted more frequently than the amount of the 
monthly payment. (For example, the interest rate on the loan is 
adjusted monthly, but the payment amount changes only every 6 months.) 
Negative amortization will occur when the interest rate increases and 
the monthly payment is not sufficient to cover the interest due. This 
type of loan may be less risky than comparable ARM loans because the 
borrower is less likely to be shocked by sudden payment increases.
    On the other hand, other loan products are designed to negatively 
amortize whether or not interest rates increase. This could occur where 
a savings association holds a graduated payment mortgage (GPM). A GPM 
will have monthly payments that start out at a low level (ordinarily a 
lower level than for conventional mortgages) and gradually rise above 
the level where a conventional mortgage would have been written. Both 
the graduation rate and the interest rate on the principal amount may 
be fixed throughout the life of the loan. Because the initial payments 
may not be sufficient to cover the set interest rate on the loan, a GPM 
may negatively amortize. These types of loans appear to create 
additional credit risk because of several factors:

--They permit a borrower to qualify for a higher loan amount than he or 
she would qualify for under a comparable fixed mortgage,
--The loan is automatically subject to negative amortization early in 
the loan term, at a time when LTV is highest, and
--The borrower may be subject to significant payment increases, 
especially early in the loan term.

    OTS solicits comments on the following issues regarding negatively 
amortizing loans.
     Should loans that negatively amortize above the LTV limit 
be afforded 50 percent risk-weight treatment? If so, why?
     Should only some types of loans that amortize above the 
revised LTV limit be accorded 50 percent risk weight? Is it appropriate 
to distinguish between loans that are designed to negatively amortize 
and loans that negatively amortize solely as a result of changes in the 
interest rate? Should OTS distinguish between qualifying and 
nonqualifying negatively amortizing loans on some other basis?
     Identify specific types of negatively amortizing loan 
products that should be accorded a 50 percent risk weight. For example, 
how should OTS treat ``pick a payment'' loans? (These loans permit the 
borrower to periodically elect to make a monthly payment that is lower 
than the amount set on the payment schedule. These elections could 
cause the loan to negatively amortize.)

B. Land Loans and Nonresidential Construction Loans

    All of the Banking Agencies require depository institutions to 
apply a risk

[[Page 15052]]

weight of 100 percent to land loans and nonresidential construction 
loans.\10\ Only OTS, however, also requires savings associations to 
exclude from assets (and therefore from computations of total capital), 
that portion of a nonresidential construction or land loan that is 
above an 80 percent LTV ratio.\11\
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    \10\ 12 CFR part 3, App. A., Sec. 3(a)(4)(OCC): 12 CFR part 208, 
App. A., Sec. III. C.4.(FRB); 12 CFR part 325, App. A., Sec. II.C. 
(FDIC); 12 CFR 567.6(a)(1)(iv)(G) & (H) (OTS).
    \11\ Compare 12 CFR 567.5(c)(2)(3) with 12 CFR part 3, App. A., 
Sec. 2(c)(4)(OCC): 12 CFR part 208, App. A., Sec. II. B.(FRB); 12 
CFR part 325, App. A., Sec. I.B. (FDIC).
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    OTS first adopted the capital deduction for nonresidential 
construction and land loans with high LTV ratios in 1989. At that time, 
OTS experience indicated that these types of loans presented 
particularly high levels of risk.\12\ Since that time, however, OTS and 
the other Banking Agencies have issued guidelines specifically designed 
to address high LTV risk and concentrations of credit. For example, the 
Interagency Lending Guidelines place supervisory LTV limits on 
residential construction and land loans. Under the guidelines, LTVs 
should not exceed 65 percent for loans on raw land, 75 percent for 
loans for land development, 80 percent for commercial, multi-family and 
other nonresidential construction loans, and 85 percent for one-to four 
family construction loans.\13\ While the guidelines permit some loans 
in excess of the supervisory limits under certain conditions, loans in 
excess of the supervisory limits are subject to a concentration limit. 
Specifically, all loans in excess of the supervisory limits should not 
exceed 100 percent of the institution's total capital.\14\ The 
Interagency Lending Guidelines provide further guidance to institutions 
with regard to underwriting standards and loan portfolio management. 
OTS believes that this additional supervisory guidance adequately 
addresses the higher levels of risk in these loans. In light of this 
guidance, OTS concludes that the 100 percent risk weight sufficiently 
reflects the risks of these loans and that the additional direct 
deduction from capital is unnecessary.
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    \12\ 54 FR 46845, 46863 (Nov. 8, 1989).
    \13\ Appendix to 12 CFR 560.101 (Supervisory loan-to-value 
limits).
    \14\ Appendix to 12 CFR 560.101 (Loans in excess of the 
supervisory loan-to-value limits). The Home Owners' Loan Act also 
limits the amount that a thrift may lend. For example, federal 
savings associations are authorized to make nonresidential real 
property loans in an amount up to 400 percent of total capital (12 
U.S.C. 1464(c)(2)(B)), and to make additional commercial loans 
(which may or may not be secured by real estate) in an amount up to 
20 percent of total assets (12 U.S.C. 1464(c)(2)(C)).
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    Furthermore, OTS believes that the current capital treatment of 
nonresidential construction and land loans is overly burdensome when 
compared to the capital treatment of other types of loans of equal or 
greater risk. For example, an institution making a $90,000 loan on land 
appraised at $100,000 would be required to deduct $10,000 from total 
assets ($10,000 equals that portion of the $90,000 loan that is above 
the 80 percent LTV ratio). The remaining $80,000 would be risk weighted 
at 100 percent, resulting in a $6,400 risk-based capital charge. Thus, 
the effective capital charge for this $90,000 loan would be $16,400. By 
contrast, a $90,000 unsecured loan is risk weighted at 100 percent and 
would result in only a $7,200 capital charge.
    This proposed change would also conform OTS capital requirements 
more closely to the rules of the other Banking Agencies. Without the 
deduction from total capital, OTS capital treatment of nonresidential 
construction and land loans for savings associations would be identical 
to that of the other Banking Agencies for banks.

C. Interest-Rate Risk Component

    Section 305 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA) requires OTS and the Banking Agencies 
to review their risk-based capital standards to ensure that those 
standards take adequate account of, among other things, interest rate 
risk.\15\ To fulfill this requirement, OTS issued a final rule in 1993 
adding an interest rate risk component (IRR component) to its risk-
based capital regulation at 12 CFR 567.7.\16\ This IRR component is an 
explicit capital deduction from total capital for the purposes of the 
risk-based capital requirement and is imposed on institutions with 
above-normal levels of interest rate risk. An institution's interest 
rate risk is measured by dividing the decline in net portfolio value 
that would result from a 200 basis point increase or decrease in 
interest rates by the present value of the institution's assets. The 
amount deducted from capital is equal to one-half the difference 
between the institution's measured interest rate risk and a ``normal'' 
measured interest rate risk (set at two percent), multiplied by the 
estimated market value of the institution's assets.\17\
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    \15\ 12 U.S.C. 1828 note.
    \16\ 58 FR 45799 (August 31, 1993).
    \17\ For example, if the decline in net portfolio value during a 
200 basis point shock in interest rates is $3 million and the 
present value of the institution's assets is $100 million, the 
institution's measured IRR is 3 percent. The amount to be deducted 
from capital is $0.5 million, calculated as one-half the difference 
between the institution's measured IRR of 3 percent and a ``normal'' 
measured IRR of 2 percent multiplied by the $100 million of the 
present value of the institution's assets.
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    When OTS adopted its final interest-rate-risk rule, the other 
Banking Agencies had not yet finalized their related rules. 
Accordingly, the OTS final rule stated that if the other Banking 
Agencies adopted an IRR component significantly different from the OTS 
requirement, OTS would review its requirement to determine whether any 
adjustment was needed in the interest of competitive equality. In fact, 
the other Banking Agencies never adopted an interest-rate-risk rule and 
the Acting OTS Director waived the effective date of the rule twice 
\18\; the OTS rule has never gone into effect.
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    \18\ CEO Letters from Jonathan L. Fiechter, Acting Director 
(Oct. 13, 1994 and Mar. 20, 1995).
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    In the years following the promulgation of the interest rate risk 
rule, OTS has gained considerable experience in the regulation of 
interest rate risk. Based on this experience, OTS issued Thrift 
Bulletin 13a (TB 13a) ``Management of Interest Rate Risk, Investment 
Securities, and Derivative Activities.'' TB 13a updated and superseded 
TB 13, which had been adopted in 1989 and which provided guidance on 
management of interest rate risk and the responsibilities of boards of 
directors in that area.\19\ TB 13a updated OTS minimum standards for 
thrift institutions' interest rate risk management practices with 
regard to board-approved risk limits and interest rate risk measurement 
systems.
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    \19\ 63 FR 66361 (Dec. 1, 1998).
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    OTS has also enhanced--and continues to upgrade--its interest rate 
risk model (IRR Model), which measures an institution's interest rate 
risk by focusing on changes in its net portfolio value brought about by 
changes in interest rates. The IRR Model provides OTS with a means of 
identifying institutions with high levels of interest rate risk 
exposure, improves the analysis of industry-wide interest rate risk, 
and facilitates dialogue between examiners and thrift managers by 
focusing on areas that warrant the most attention.
    Finally, OTS has in place regulations at Sec. 563.176 requiring the 
adoption of interest rate risk management procedures and Sec. 567.3, 
which includes interest rate risk among the factors to be considered in 
establishing individual minimum capital requirements.

[[Page 15053]]

    In a 1998 final rulemaking on financial derivatives, a commenter 
urged OTS to delete the IRR component of the capital rule. OTS 
concluded that a review of retaining Sec. 567.7 might have merit, and 
indicated that it would initiate a separate rulemaking to evaluate the 
retention of this rule.\20\
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    \20\ 63 FR 66348, 66349 (Dec. 1, 1998).
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    OTS has reviewed the IRR component and has concluded that the 
explicit capital deduction under Sec. 567.7 is not necessary in light 
of the other tools that are currently available to measure and control 
interest rate risk. OTS believes the IRR model, the interest rate risk 
management procedures at Sec. 563.176, the individual minimum capital 
requirements at Sec. 567.3, and TB 13a provide a comprehensive interest 
rate risk program. This program provides adequate guidance to savings 
associations and generates sufficient information for OTS to monitor 
interest rate risk. OTS will continue to review and consider the 
adoption of other tools and methods to control and measure interest 
rate risk as these tools and methods are developed.
    OTS believes that the individual minimum capital requirement at 
Sec. 567.3 satisfies the FDICIA requirement that its risk-based capital 
standards take adequate account of interest rate risk. As noted above, 
this regulation permits OTS to impose an individual minimum capital 
requirement for institutions that exhibit a high degree of exposure to 
interest rate risk.\21\ This approach is substantively similar to the 
Banking Agencies' implementation of section 305 of the FDICIA.\22\
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    \21\ 12 CFR 567.3(b)(3).
    \22\ 12 CFR 3.10(e) (OCC); 12 CFR part 208, App.B., Sec. II.a 
(FRB); 12 CFR 325.3(a) (FDIC).
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    Accordingly, OTS proposes to delete Sec. 567.7. As a related 
matter, OTS is proposing a change to the risk weight for high quality, 
stripped, mortgage related securities (discussed below). It would also 
make a minor conforming change to Sec. 567.5, which defines total 
capital.

D. High Quality, Stripped, Mortgage-Related Securities

    Prior to 1993, OTS assigned high-quality, stripped, mortgage-
related securities to the 100 percent risk-weight category. When OTS 
adopted the IRR component in 1993, however, it reduced this risk weight 
to 20 percent.\23\ This change was justified because the bulk of the 
risk in these instruments is interest rate risk, which the agency 
anticipated would be addressed through the IRR component. In today's 
rulemaking, OTS has proposed to remove the interest rate risk 
component. Accordingly, OTS is reconsidering the appropriate risk 
weight for high quality, stripped, mortgage-related securities.
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    \23\ 58 FR 45799, 45801 (Aug. 31, 1993). See 12 CFR 
567.6(a)(1)(ii)(H).
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    The other Banking Agencies apply a 100 percent risk weight to all 
stripped, mortgage-related securities, regardless of the issuer or 
guarantor.\24\ To achieve greater uniformity between OTS and the 
Banking Agencies and to ensure that OTS risk-based capital regulations 
reflect the general level of risk commensurate with most of these 
securities, OTS proposes to apply a 100 percent risk weight to all 
stripped, mortgage-related securities, regardless of the issuer or 
guarantor. OTS requests comment on this change and on the following 
questions:
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    \24\ 12 CFR part 3, App. A., Sec. 3(a)(4)(iv) (OCC); 12 CFR part 
208, App. A., Sec. III.C.4.(FRB); 12 CFR part 325, App. A., Sec. 
II.C.4.(FDIC).
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     Is the 100 percent risk weight the appropriate risk 
category for this asset?
     Should interest-only, stripped, mortgage-related 
securities be treated differently for risk-weight purposes than 
principal-only, stripped, mortgage-related securities?
     Should risk weights be determined based upon the issuer or 
guarantor of the securities?

E. OECD-Based Country

    Under existing OTS regulations, certain assets that are supported 
by the credit standing of the central government of, public-sector 
entities in, or depository institutions incorporated in Organization 
for Economic Cooperation and Development (OECD) based countries, 
receive preferential capital risk weighting over similar entities in 
non OECD-based countries. For example, the portion of assets 
conditionally guaranteed by the central government of an OECD country 
receives a 20 percent risk weight. The portion of assets conditionally 
guaranteed by the central government of a non-OECD country receives a 
100 percent risk weight.\25\
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    \25\ 12 CFR 567.6(a)(1)(ii)(C) and 567.6(a)(1)(iv).
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    OTS regulations define ``OECD-based country'' as a member of the 
grouping of countries that are full members of the OECD, plus countries 
that have concluded special lending arrangements with the International 
Monetary Fund (IMF) associated with the IMF's General Arrangements to 
Borrow. OTS's definition for OECD-based country differs from the 
definitions used by the Banking Agencies. Specifically, OTS does not 
exclude countries that have rescheduled their external sovereign debt 
within the previous five years.\26\ Thus, OTS's definition applies the 
preferential risk weighting to a broader range of assets than the 
Banking Agencies' definitions.
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    \26\ Compare 12 CFR 567.1 with 12 CFR part 3, App. A., 
Sec.1(c)(17) (OCC); 12 CFR part 208, App. A., Sec.III.B.1.fn.22 
(FRB); and 12 CFR part 325, App. A., Sec. II.B.2.fn.12 (FDIC).
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    This difference arose in 1995 when the FRB, OCC, and FDIC issued a 
joint final rule modifying their risk-based capital guidelines.\27\ The 
Banking Agencies made this change to make their rules more consistent 
with the ``International Convergence of Capital Measurement and Capital 
Standards'' (Basle Accord). OTS did not join this rulemaking. To 
achieve greater uniformity between OTS and the Banking Agencies, and to 
make OTS rules more consistent with the Basle Accord, OTS proposes to 
revise its definition to exclude countries that have rescheduled 
external sovereign debt within the previous five years.\28\
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    \27\ 60 FR 66042 (Dec. 20, 1995).
    \28\ This change is also consistent section 5(t)(1)(C) of the 
HOLA and section 303 of CDRIA, which are discussed above.
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F. Allowance for Loan and Lease Losses

    Under current OTS capital rules, supplemental capital includes 
general valuation loan and lease loss allowances established pursuant 
to regulations and memoranda of OTS up to a maximum of 1.25 percent of 
risk-weighted assets. See 12 CFR 567.5(b)(4). OTS proposes to change 
the term ``general valuation loan and lease loss allowances'' to 
``allowance for loan and lease losses'' to conform OTS's rule to that 
of the other federal banking agencies. This proposed change is a 
technical change and should not effect the capital treatment of 
reserves for loan and lease losses. The Thrift Financial Report (TFR) 
and the instructions to the TFR use the term allowance for loan and 
lease losses in this context. See Schedule CCR and Instructions to 
CCR350 (Allowance for Loan and Lease Losses).

G. Other Changes

    One of the primary purposes of this rule is to align OTS capital 
rules for thrifts more closely to those of the other agencies for 
banks. OTS specifically requests comment whether it should address and 
eliminate any other capital differences between OTS rules and the rules 
of the other agencies.\29\
---------------------------------------------------------------------------

    \29\ For example, compare the OTS conversion factor matrix for 
derivative contracts at 12 CFR 567.6(a)(2)(v)(A)(2) with 12 CFR part 
3, App. A., Sec. 3(b)(5)(B)(i)(OCC matrix); 12 CFR part 208, App. 
A., Sec. III.E.2.c (FRB matrix); 12 CFR part 325, App. A., Sec. 
II.E.3. (FDIC matrix).

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[[Page 15054]]

III. Plain Language Requirement

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires OTS to 
use ``plain language'' in all proposed and final rules published after 
January 1, 2000. We invite your comments on how to make this proposed 
rule easier to understand. For example:
    (1) Have we organized the material to suit your needs?
    (2) Are the requirements in the rule clearly stated?
    (3) Does the rule contain technical language or jargon that isn't 
clear?
    (4) Would a different format (grouping and order of sections, use 
of headings, paragraphing) make the rule easier to understand?
    (5) Would more (but shorter) sections be better?
    (6) What else could we do to make the rule easier to understand?

IV. Executive Order 12866

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

V. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Director of OTS has certified that this proposed rule does not have a 
significant economic impact on a substantial number of small entities.

VI. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
Federal mandate that may result in expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. OTS has determined that the effect of 
this proposed rule will not result in expenditures by State, local, or 
tribal governments or by the private sector of $100 million or more. 
Accordingly, OTS has not prepared a budgetary impact statement or 
specifically addressed the regulatory alternatives considered.

List of Subjects in 12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

    Accordingly, the Office of Thrift Supervision proposes to amend 
part 567, chapter V, title 12, Code of Federal Regulations as set forth 
below:

PART 567--CAPITAL

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

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

    2. Section 567.1 is amended by revising the definitions of ``OECD-
based country'' and ``qualifying mortgage loan'' as follows:


Sec. 567.1  Definitions.

* * * * *
    OECD-based country. The term OECD-based country means a member of 
that grouping of countries that are full members of the Organization 
for Economic Cooperation and Development (OECD) plus countries that 
have concluded special lending arrangements with the International 
Monetary Fund (IMF) associated with the IMF's General Arrangements to 
Borrow. This term excludes any country that has rescheduled its 
external sovereign debt within the previous five years. A rescheduling 
of external sovereign debt generally would include any renegotiation of 
terms arising from a country's inability or unwillingness to meet its 
external debt service obligations, but generally would not include 
renegotiations of debt in the normal course of business, such as a 
renegotiation to allow the borrower to take advantage of a decline in 
interest rates or other change in market conditions.
* * * * *
    Qualifying mortgage loan. The term qualifying mortgage loan means a 
one-to four-family residential first mortgage loan that is prudently 
underwritten, is performing, is not more than 90 days past due, and has 
a documented loan-to-value ratio below 90 percent at all times during 
the life of loan.
    (1) A loan meets the loan-to-value ratio requirement if the loan is 
paid down to a loan-to-value ratio under 90 percent and continues to 
maintain such a ratio during the remainder of its life.
    (2) A loan also meets the loan-to-value ratio requirement if the 
loan is insured to less than a 90 percent loan-to-value ratio by 
private mortgage insurance provided by an issuer approved by Fannie Mae 
or Freddie Mac.
    (3) If a savings association holds the first and junior lien(s) on 
a residential property and no other party holds an intervening lien, 
the transaction is treated as a single loan secured by a first lien for 
the purposes of determining the loan-to-value ratio and the appropriate 
risk weight under Sec. 567.6(a).
    (4) Loans to individual borrowers for the construction of their own 
homes may be included as qualifying mortgage loans.
* * * * *
    3. Section 567.5 is amended by: revising paragraph (b)(4) and 
footnote 7 to paragraph (b)(4) as set forth below; adding ``and'' to 
the end of paragraph (c)(2)(i); adding a period in place of ``, and'' 
at the end of paragraph (c)(2)(ii); and removing paragraphs (c)(2)(iii) 
and (c)(3).


Sec. 567.5  Components of capital.

* * * * *
    (b) * * *
    (4) Allowance for loan and lease losses. Allowance for loan and 
lease losses established under regulations and memoranda of the Office 
up to a maximum of 1.25 percent of risk-weighted assets.\7\

* * * * *
______________
    \7\ The amount of the allowance for loan and lease losses that 
may be included in capital is based on a percentage of risk-weighted 
assets. The gross sum of risk-weighted assets used in this 
calculation includes all risk-weighted assets, with the exception of 
assets required to be deducted under Sec. 567.6 in establishing 
risk-weighted assets. ``Excess reserves for loan and lease losses'' 
is defined as assets required to be deducted from capital under 
Sec. 567.5(a)(2). A savings association may deduct excess reserves 
for loan and lease losses from the gross sum of risk-weighted assets 
(i.e., risk-weighted assets including allowance for loan and lease 
losses) in computing the denominator of the risk-based capital 
standard. Thus, a savings association will exclude the same amount 
of excess allowance for loan and lease losses from both the 
numerator and the denominator of the risk-based capital ratio.

    4. Section 567.6 is amended by revising paragraphs (a)(1)(ii)(H), 
(a)(1)(iv)(G) and (a)(1)(iv)(H), to read as follows:


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

    (a) * * *
    (1) * * *
    (i) * * *
    (H) High quality mortgage-related securities, except those with 
residual characteristics or stripped mortgage-related securities.
* * * * *
    (iv) * * *
    (G) Land loans;
    (H) Nonresidential construction loans;
* * * * *


Sec. 567.7  [Removed]

    5. Section 567.7 is removed.

    Dated: March 2, 2001.


[[Page 15055]]


    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 01-6401 Filed 3-14-01; 8:45 am]
BILLING CODE 6720-01-P