[Federal Register Volume 67, Number 91 (Friday, May 10, 2002)]
[Rules and Regulations]
[Pages 31722-31727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11673]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 516 and 567

[No. 2002-19]
RIN 1550-AB45


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

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is making miscellaneous 
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 federal banking 
agencies. Under the final rule, a one-to four-family residential first 
mortgage loan will qualify for a 50 percent risk weight if it is 
underwritten in accordance with the prudent underwriting standards 
found in the Interagency Guidelines for Real Estate Lending, including 
standards relating to loan-to-value (LTV) ratios. The final rule also 
clarifies certain issues regarding the calculation of the LTV ratio.
    OTS also is eliminating 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; eliminating the 
interest rate risk component of the risk-based capital regulations; 
modifying the definition of OECD-based country; and making a technical 
change to conform its treatment of reserves for loan and lease losses 
to that of the other federal banking agencies.

DATES: Effective July 1, 2002.

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 A. 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

    On March 15, 2001, OTS published a notice of proposed rulemaking 
seeking comment on a number of changes to its capital regulations. 66 
FR 15049. These changes were designed to eliminate unnecessary burden 
and to align OTS capital regulations more closely to those of other 
federal banking agencies.\1\ These proposed changes comply with section 
303 of the Riegle Community Development and Regulatory Improvement Act 
of 1994 (CDRIA), which directs the banking agencies to make their 
regulations and guidance uniform, consistent with principles of safety 
and soundness, statutory law and policy, and the public interest.
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    \1\ The other federal banking agencies include 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).
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    Specifically, OTS proposed to change its definition of a qualifying 
mortgage loan. Under current rules, a one-to four-family residential 
first mortgage loan will qualify for a 50 percent risk weight if it has 
a LTV ratio of 80 percent or less and meets other criteria. OTS 
proposed to revise the LTV requirement to permit a loan to qualify for 
a 50 percent risk weight if it has a LTV ratio of less than 90 percent. 
OTS also proposed to: (1) Eliminate the requirement that a thrift must 
deduct from total capital that portion of a non-residential 
construction and land loan that exceeds an 80 percent LTV ratio; (2) 
eliminate the interest rate risk component of the capital rules; (3) 
increase the risk weight on high quality, stripped mortgage-related 
securities; (4) modify the definition of OECD-based country; and (5) 
make a technical change to the treatment of reserves for loan and 
leases losses.

II. Comment Discussion

    Eleven commenters responded to the proposed rule. The commenters 
included one savings and loan holding company, seven savings 
associations, and three trade associations. Generally, the commenters 
supported the proposed rule. These comments are discussed below.

A. One-to Four-Family Residential Mortgage Loans

    OTS and the other federal 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.\2\
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    \2\ 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 LTV ratio of 80 percent or less at 
origination to qualify for the 50 percent risk weight.\3\ All of the 
federal banking agencies, however, have indicated that prudent 
underwriting must include an appropriate LTV ratio,\4\ 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).\5\ These guidelines provide that an institution should 
establish internal LTV limits for real estate loans, including loans on 
one- to four-family residential properties. The guidelines do not 
establish a specific supervisory LTV limit for such loans. Rather the

[[Page 31723]]

guidelines state that an institution should require appropriate credit 
enhancements (e.g., private mortgage insurance or readily marketable 
collateral) for a loan with an LTV that equals or exceeds 90 percent at 
origination. In addition, a loan that does not comply with this 
standard is permissible if the loan is supported by other credit 
factors, is an excluded transaction, or is a prudently underwritten 
exception to the lender's policies.\6\
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    \3\ See definition of qualifying mortgage loans at Sec. 567.1.
    \4\ 64 FR 10194, 10196, fn. 6 (Mar. 2, 1999).
    \5\ 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).
    \6\ Under the guidelines, the aggregate amount of all loans in 
excess of the supervisory LTV limits and all loans made pursuant to 
exceptions to the general lending policy is limited to 100 percent 
of total capital.
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    OTS proposed to revise its definition of qualifying mortgage loan. 
Specifically, OTS proposed to raise the current LTV limit from below 80 
percent to below 90 percent and to continue to include an express LTV 
requirement. OTS requested comment whether it should retain an explicit 
LTV requirement or conform its rule more closely to those of the other 
banking agencies.
1. Should OTS Include an Explicit LTV Standard in its Definition of 
Qualifying Mortgage Loan?
    Seven commenters discussed whether OTS should retain the explicit 
LTV requirement in the final rule. Three commenters supported the 
retention of an explicit LTV standard. Those commenters argued that 
thrifts' high concentration of mortgage loans justifies a treatment 
that is substantially similar but more sharply defined than the 
treatment of mortgage lending at other depository institutions. 
Moreover, the commenters asserted that an explicit standard provides a 
clear, non-judgmental definition of a qualifying mortgage loan and 
limits the potential for confusion between the institution and its 
examiners. Four commenters urged OTS to delete the explicit LTV 
requirement. They argued that an explicit standard in unnecessary, and 
that the change would put thrifts on an equal footing with banks and 
conform OTS rules to the rules of other banking agencies.
    The final rule deletes the explicit LTV requirement for qualifying 
mortgage loans. Although the LTV ratio is a meaningful measure (among 
others) of credit risk, OTS has concluded that the Interagency Lending 
Guidelines on LTV ratios sufficiently address the credit risks of 
residential mortgage lending. In addition, an explicit standard may 
competitively disadvantage thrifts since banks have been subject to a 
more flexible standard. Further, deleting the explicit requirement will 
align OTS regulations more closely to those of the other banking 
agencies and, is thus, more consistent with section 303 of CDRIA.
    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'' review of charge-off and 
delinquency rates \8\ for various categories of loans (one- to four-
family residential loans, multi-family loans, 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. In this rule, OTS intends to reduce the 
disparity of the risk weights among these loans and expand the 
availability of residential mortgage products.\9\
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    \7\ See OTS Research Working Paper titled ``Based 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 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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    Accordingly, the final rule provides that a qualifying mortgage 
loan must be underwritten in accordance with prudent underwriting 
standards, including standards relating the ratio of the loan amount to 
the value of the property. The rule will specifically cross-reference 
the Interagency Lending Guidelines in the Appendix to 12 CFR 
560.101.\10\
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    \10\ In addition, OTS will continue to apply factors described 
in the Interagency Expanded Guidance for Subprime Lending Programs 
when determining the level of capital necessary to support subprime 
lending programs. (OTS CEO Letter No. 137 (February 2, 2001)).
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2. What Types of Credit Enhancement Should OTS Consider in Determining 
Whether a Loan Meets the LTV Requirement Under the Capital Rules?
    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. OTS specifically 
asked whether it should permit other forms of credit enhancement in 
determining whether a loan meets the LTV requirement under the capital 
rules.
    Nine commenters addressed this issue. Seven commenters agreed that 
OTS should permit additional forms of credit enhancement. These 
commenters noted that the Interagency Lending Guidelines permit other 
forms of credit enhancement. One commentator argued that savings 
associations are treated less favorably than other banking entities 
because OTS current rules differ from the guidelines.
    Two commenters opposed additional credit enhancements. One 
maintained additional credit enhancements would raise questions 
regarding the financial soundness of any guarantor, the type of credit 
coverage that is supplied, and the overall credit risk to the banking 
industry. The other commenter contended that high LTV loans carry 
substantial risk and that losses could occur not only on single loans 
but also catastrophically throughout a loan portfolio.
    The final rule relies on the Interagency Lending Guidelines, which 
permit institutions to consider various types of credit enhancements 
when determining whether a one-to four-family residential property 
loans has an appropriate LTV ratio. Such appropriate credit 
enhancements include private mortgage insurance and readily marketable 
collateral.\11\
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    \11\ Readily marketable collateral is defined as ``insured 
deposits, financial instruments, and bullion in which the lender has 
a perfected security interest. Financial instruments and bullion 
must be salable under ordinary circumstances with reasonable 
promptness at a fair market value determined by uotations based on 
actual transactions, on an auction or similarly available daily bid 
and ask price market. Readily marketable collateral should be 
appropriate discounted by the lender consistent with the lender's 
usual practices for making loans secured by such collateral.'' See 
Appendix to 12 CFR 560.101.
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    OTS believes that the definition of readily marketable collateral 
in the Interagency Lending Guidelines adequately addresses potential 
safety and soundness concerns by requiring a perfected security 
interest and by requiring appropriate discounts from market value in 
determining the value of readily marketable collateral's value. OTS 
will, as a part of the examination process, review an institution's use 
of credit enhancements to ensure that any private mortgage insurance 
and readily marketable collateral provide protection against loss 
equivalent to that provided by residential real estate collateral.

[[Page 31724]]

3. How Should Thrifts Calculate the LTV Ratio?
    Positively Amortizing Loans. Under the current rule, a qualifying 
mortgage loan must have a documented LTV ratio that does not exceed 80 
percent at origination. OTS proposed to clarify that a mortgage loan 
that is paid down to an appropriate LTV ratio after origination may 
become a qualifying mortgage loan, if it meets all other requirements. 
One commenter specifically supported this provision and no commenter 
opposed this clarification. Accordingly, OTS has included clarifying 
language in the final rule.
    Negatively Amortizing Loans. OTS proposed to clarify that a 
residential mortgage loan that negatively amortizes to a LTV ratio 
above 90 percent would not be accorded a 50 percent risk weight. OTS 
specifically requested comment whether this treatment is appropriate.
    Three commenters opined that loans that negatively amortize above a 
90 percent LTV ratio, for whatever reason, should be placed in the 100 
percent risk-weight category.\12\ Another commenter agreed that loans 
designed to negatively amortize as a routine and predictable matter 
loans pose extraordinary collateral risk that should be addressed by 
capital requirements at origination. This commenter, however, suggested 
that a loan should qualify for a lower risk weight if it negatively 
amortizes solely as a result of deferred or capitalized interest. The 
commenter reasoned that the somewhat higher credit risk was offset by 
the stabilizing effect on the borrower's ability to service the loan 
during limited periods of unusual interest rate stress.
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    \12\ One commenter agreed with this position, but would permit 
the lender to show that the actual LTV remained below 90 percent due 
to any market appreciation that is confirmed by an appropriate 
appraisal or other valuation. Reevaluation of loan collateral is 
discussed below.
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    One commenter noted that if an LTV rises above 90 percent because 
of borrower default, the capital requirement should be governed by the 
rules related to classified loans. Another commenter agreed that 
negatively amortizing loans should be addressed through increases to 
the loan loss reserves.
    OTS recognizes that some types of negatively amortizing loans may 
result in additional credit risk and others may not.\13\ In light of 
the differing credit risks posed by these negatively amortizing loan 
products, OTS declines to specifically address this point in its final 
rule. Instead, the final rule simply provides that a qualifying 
mortgage loan must maintain an appropriate LTV ratio based on the 
amortized principal balance of the loan. OTS expects thrifts to review 
loans structured with negative amortization features and loans that 
have the potential for negative amortization to ensure that LTV ratios 
commensurate with the risk of the loan are maintained. OTS plans a more 
comprehensive assessment of these issues and may issue supervisory 
guidance on this matter. In the interim, a savings association that 
categorizes substantial number of negatively amortizing loans in the 50 
percent risk weight will receive increased regulatory scrutiny to 
ensure that the savings association maintains capital commensurate with 
the risk of the loans.
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    \13\ The preamble to the proposed rule discusses the risks of 
varioius negative amortizing loan products. See 66 FR at 15051.
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    Reevaluation of loan collateral. OTS also specifically requested 
comment whether it should permit the reevaluation of collateral values 
in an appreciating market, or require reevaluations in a declining 
market in determining whether a loan meets the LTV standard.
    Six commenters specifically opposed any rule that would require a 
thrift to reevaluate collateral in a declining market. Three commenters 
argued that collateral deterioration is best addressed through the 
allowance for loan and lease losses, since these allowances are 
intended to capture subsequent changes in credit risk. Two commenters 
argued that a reevaluation requirement would be costly and would add 
needless complexity to thrift operations. If reevaluations are 
required, one commenter urged OTS to establish the original collateral 
value as the lowest value that may be used for LTV computation. The 
commenter argued that this position is consistent with other regulatory 
requirements.
    Three commenters urged OTS to permit a thrift to reevaluate 
collateral where there is market appreciation or where the borrower has 
made property improvements. One of these commenters, however, would 
permit the thrift to reevaluate for market appreciation only where the 
principal amount has increased and the increase would otherwise trigger 
a higher capital requirement. Another commenter would not permit 
reclassification for market appreciation under any circumstances. 
Finally, one commenter would permit a thrift to reevaluate collateral 
for appreciation or depreciation where the expected LTV ratio is close 
to 90 percent. The commenter suggested that OTS use the examination 
process to ensure that thrifts do not ignore declining values.
    OTS believes that further consideration is needed before it 
determines whether to revise its rules to permit or require 
recalculation of LTV ratios on the basis of changing market prices. OTS 
has reviewed the current practices of the other bank regulators and has 
found that there is no consistent interagency position on 
reevaluations. As a result, the final rule retains the current 
requirement that LTV ratios are calculated based upon the value of the 
collateral at origination.\14\
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    \14\ OTS may, on a case-by-case basis, look to the substance of 
a loan transaction and find that the asigned risk weight for a 
particular loan does not appropriately reflect the risk imposed on 
the savings association. Where apropriate, OTS may permit the 
association to assign a lower risk weight to a mortgage loan where 
there has been significant appreciation in market value or may 
require a savings association to apply a higher risk weight where 
there has been a significant decline in market value. See 66 FR 
59614, 59666 (Nov. 29, 2001) to be codified at 12 CFR 567.11(c)(2).
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4. Other Comments on LTV Issues
    One commenter addressed existing OTS rules regarding the 
computation of the LTV ratio where there are first and junior liens on 
the same property. Under current OTS rules, if a savings association 
holds first and junior liens on the same residential property, both 
loans are risk-weighted at 100 percent if the combined LTV ratio 
exceeds 80 percent. The commenter argued that the combined loans should 
receive a 100 percent risk weight only when the loans are originated 
simultaneously. It asserted that the two loans pose no greater risk 
than loans made on separate properties and that a savings association 
should not incur a higher capital charge on the first loan because of 
the junior loan.
    The banking agencies addressed this issue in the final rule on 
Risk-Based Capital Standards: Construction Loans on Presold Residential 
Properties; Junior Liens on One-to Four-Family Residential Properties; 
and Investments in Mutual Funds; Leverage Capital Standards: Tier 1 
Leverage Ratio.\15\ The agencies concluded that it was appropriate to 
combine first and junior liens when calculating the LTV ratio. The 
agencies noted that where an institution holds first and junior liens 
to a single borrower with no intervening liens, it has made the 
economic equivalent of a single extension of credit that is secured by 
the same collateral. The agencies were also concerned that institutions 
could use creative lending arrangements to reduce capital charges

[[Page 31725]]

without reducing risk. OTS sees no reason to depart from this position.
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    \15\ 64 FR 10194, 10195-96 (Mar. 2, 1999).
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    Another commenter encouraged OTS and the other banking agencies to 
lower the risk weights on various types of loans with low LTV ratios or 
other characteristics that might lessen risks. OTS is reviewing whether 
it has sufficient empirical data to support any of these changes and, 
if appropriate, may commence another rulemaking in this area.

B. Land Loans and Non-Residential Construction Loans

    All of the banking agencies require depository institutions to risk 
weight land loans at 100 percent.\16\ 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.\17\ 
OTS proposed to eliminate this additional capital charge. The 
commenters addressing this provision supported the change. Accordingly, 
OTS adopts this aspect of the proposed rule without change.
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    \16\ 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).
    \17\ 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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    One commentator, however, suggested that OTS should also revise its 
rules to assign a 50 percent risk weight to loans secured by fully 
improved single family building lots with LTV ratios of 80 percent or 
less. These loans are considered to be improved property loans and are 
currently risk weighted at 100 percent.\18\ The commenter asserted that 
a lower risk weight is appropriate because finished lots are not 
subject to development risk. OTS views these loans differently than 
one-to four-family loans because they are not secured by the borrowers' 
own home. Often the borrower is a commercial entity. OTS declines to 
adopt the commenter's suggestion. Therefore, OTS, consistent with the 
other agencies, will continue to assign finished lots to the 100 
percent risk weight category.
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    \18\ See 12 CFR 560.101 and 123 CFR 561.26 (definition of land 
loan).
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C. Interest Rate Risk Component of Risk Based Capital

    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.\19\ 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.\20\ This IRR component is an 
explicit capital deduction from total capital 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.
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    \19\ 12 U.S.C. 1828 note.
    \20\ 58 FR 45799 (Aug. 31, 1993).
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    OTS concluded that the IRR component is not necessary in light of 
the other tools that are currently available to measure and control 
interest rate risk. OTS also concluded that the individual minimum 
capital provisions at Sec. 567.3 satisfy the FDICIA requirement that 
the risk-based capital standards must take adequate account of interest 
rate risk. All six commenters addressing this issue supported the 
removal of Sec. 567.7. Accordingly, OTS adopts this change.

D. High Quality, Stripped Mortgage-Related Securities

    OTS proposed to amend its capital rules to apply a 100 percent 
risk-weight to all stripped, mortgage-related securities. Two 
commenters supported this change. OTS finalized this revision in the 
final interagency rule on Recourse, Direct Credit Substitutes and 
Residual Interests in Asset Securitizations. 66 FR 59615, 59626 fn. 24 
(Nov. 29, 2001).

E. Definition of 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. OTS proposed to conform its definition of 
OECD-based country to the definitions of the other banking agencies. 
Specifically, OTS proposed to revise its definition to exclude 
countries that have rescheduled their external sovereign debt within 
the previous five years. No commenters addressed this proposed change. 
The final rule will incorporate the revised definition.

F. Allowance for Loan and Lease Losses

    Under current OTS capital rules, supplemental capital includes 
general valuation loan and lease loss allowances established under OTS 
regulations and memoranda to a maximum of 1.25 percent of risk-weighted 
assets. See 12 CFR 567.5(b)(4). OTS proposed a technical change to the 
term ``general valuation loan and lease loss allowances'' to 
``allowance for loan and lease losses'' to conform OTS's rule to the 
rules of the other banking agencies. No commenter discussed this 
proposed change. Accordingly, the final rule adopts the proposed 
change.

G. Other Changes

    OTS solicited comment on whether it should address and eliminate 
any other capital differences between OTS and the other banking 
agencies. No commenter addressed this issue.
    As a part of this final rule, however, OTS is making minor 
technical change to its application processing regulation at 12 CFR 
516.40 to reflect the recent realignment of its regional offices.

III. Executive Order 12866

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

IV. Regulatory Flexibility Act Analysis

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

V. 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 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.

[[Page 31726]]

List of Subjects

12 CFR Part 516

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Savings associations

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

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

PART 516--APPLICATION PROCESSING PROCEDURES

    1. The authority citation for part 516 continues to read as 
follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464, 2901 
et seq.

    2. Section 516.40(a)(2) is revised to read as follows:


Sec. 516.40  Where do I file my application?

    (a) * * *
    (2) The addresses of each Regional Office and the states covered by 
each office are:

------------------------------------------------------------------------
             Region                 Office address       States served
------------------------------------------------------------------------
Northeast.......................  Office of Thrift    Connecticut,
                                   Supervision 10      Delaware, Maine,
                                   Exchange Place,     Massachusetts,
                                   18th Floor,         New Hampshire,
                                   Jersey City, New    New Jersey, New
                                   Jersey 07302.       York, Ohio,
                                                       Pennsylvania,
                                                       Rhode Island,
                                                       Vermont, West
                                                       Virignia
Southeast.......................  Office of Thrift    Alabana, District
                                   Supervision, 1475   of Columbia,
                                   Peachtree Street,   Florida, Georgia,
                                   N.E., Atlanta,      Illinois,
                                   Georgia 30309       Indiana,
                                   (Mail to: P.O.      Kentucky,
                                   Box 105217,         Maryland,
                                   Atlanta, Georiga    Michigan, North
                                   30348-5217).        Carolina, Puerto
                                                       Rico, South
                                                       Carolina,
                                                       Virginia, the
                                                       Virgin Islands
Midwest.........................  Office of Thrift    Arkansas, Iowa,
                                   Supervision, 225    Kansas,
                                   E. John Carpenter   Louisiana,
                                   Freeway, Suite      Minnesota,
                                   500, Irving,        Mississippi,
                                   Texas 75062-2326    Missouri,
                                   (Mail to: P.O.      Nebraska,
                                   Box 619027 Dallas/  Oklahoma,
                                   Ft. Worth, Texas    Tennessee, Texas,
                                   75261-9027.         Wisconsin
West............................  Office of Thrift    Alaska, Arizona,
                                   Supervision,        California,
                                   Pacific Plaza,      Colorado, Guam,
                                   2001 Junipero,      Hawaii, Idaho,
                                   Serra Boulevard,    Montana, Nevada,
                                   Suite 650, Daly     New Mexico, North
                                   City, California    Dakota, Northern
                                   94014-1976 (Mail    Mariana Islands,
                                   to: P.O. Box 7165   Oregon, South
                                   San Francisco,      Dakota, Utah,
                                   California 94120-   Washington,
                                   7165).              Wyoming
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* * * * *

PART 567--CAPITAL

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

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


    4. Section 567.1 is amended by revising the definitions of ``OECD-
based countries'' 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. (1) The term qualifying mortgage loan 
means a loan that:
    (i) Is fully secured by a first lien on a one-to four-family 
residential property;
    (ii) Is underwritten in accordance with prudent underwriting 
standards, including standards relating the ratio of the loan amount to 
the value of the property (LTV ratio). See Appendix to 12 CFR 560.101. 
A nonqualifying mortgage loan that is paid down to an appropriate LTV 
ratio (calculated using value at origination) may become a qualifying 
loan if it meets all other requirements of this definition;
    (iii) Maintains an appropriate LTV ratio based on the amortized 
principal balance of the loan; and
    (iv) Is performing and is not more than 90 days past due.
    (2) 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 LTV ratio and the appropriate risk 
weight under Sec. 567.6(a).
    (3) A loan to an individual borrower for the construction of the 
borrower's home may be included as a qualifying mortgage loan.
* * * * *

    5. 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 OTS regulations and memoranda to a 
maximum of 1.25 percent of risk-weighted assets.\7\
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    \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 assocation 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.
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* * * * *

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


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

    (a) * * *

[[Page 31727]]

    (1) * * *
    (iv) * * *
    (G) Land loans;
    (H) Nonresidential construction loans;
* * * * *


Sec. 567.7  [Removed]

    7. Section 567.7 is removed.

    Dated: May 6, 2002.

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-11673 Filed 5-9-02; 8:45 am]
BILLING CODE 6720-01-P