[Federal Register Volume 74, Number 223 (Friday, November 20, 2009)]
[Rules and Regulations]
[Pages 60137-60143]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-27776]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID OCC-2009-0018]
RIN 1557-AD25

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1361]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AD42

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. OTS-2009-0020]
RIN 1550-AC34


Risk-Based Capital Guidelines; Capital Adequacy Guidelines; 
Capital Maintenance; Capital--Residential Mortgage Loans Modified 
Pursuant to the Home Affordable Mortgage Program

AGENCY: Office of the Comptroller of the Currency, Department of the 
Treasury; Board of Governors of the Federal Reserve System; Federal 
Deposit Insurance Corporation; and Office of Thrift Supervision, 
Department of the Treasury (the agencies).

ACTION: Final rule.

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SUMMARY: The agencies have adopted a final rule to allow banks, savings 
associations, and bank holding companies (collectively, banking 
organizations) to risk weight for purposes of the agencies' capital 
guidelines mortgage loans modified pursuant to the Home Affordable 
Mortgage Program (Program) implemented by the U.S. Department of the 
Treasury (Treasury) with the same risk weight assigned to the loan 
prior to the modification so long as the loan continues to meet other 
applicable prudential criteria.

DATES: The final rule becomes effective December 21, 2009.

FOR FURTHER INFORMATION CONTACT:
    OCC: Margot Schwadron, Senior Risk Expert, Capital Policy Division, 
(202) 874-6022, or Carl Kaminski, Senior Attorney, or Ron Shimabukuro, 
Senior Counsel, Legislative and Regulatory Activities Division, (202) 
874-5090, Office of the Comptroller of the Currency, 250 E Street, SW., 
Washington, DC 20219.
    Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or 
William Tiernay, Senior Supervisory Financial Analyst, (202) 872-7579, 
Division of Banking Supervision and Regulation; or April Snyder, 
Counsel, (202) 452-3099, or Benjamin W. McDonough, Counsel, (202) 452-
2036, Legal Division. For the hearing impaired only, Telecommunication 
Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Ryan Sheller, Senior Capital Markets Specialist, (202) 898-
6614, Capital Markets Branch, Division of Supervision and Consumer 
Protection; or Mark Handzlik, Senior Attorney, (202) 898-3990, or 
Michael Phillips, Counsel, (202) 898-3581, Supervision Branch, Legal 
Division.
    OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478, 
Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906-6639, 
Legislation and Regulation Division, Office of Thrift Supervision, 1700 
G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

    Under the agencies' general risk-based capital rules, loans that 
are fully secured by first liens on one-to-four family residential 
properties, that are either owner-occupied or rented, and that meet 
certain prudential criteria (qualifying mortgage loans) are risk-
weighted at 50 percent.\1\ If a banking organization holds both a 
first-lien and a junior-lien mortgage on the same property, and no 
other party holds an intervening lien, the loans are treated as a 
single loan secured by a first-lien mortgage and risk-weighted at 50 
percent if the two loans, when aggregated, meet the conditions to be a 
qualifying mortgage loan. Other junior-lien mortgage loans are risk-
weighted at 100 percent.\2\
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    \1\ See 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC); 
12 CFR parts 208 and 225.
    \2\ See 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC); 
12 CFR parts 208 and 225, Appendix A, section III.C.4. (Board); 12 
CFR part 325, Appendix A, section II.C. (FDIC); and 12 CFR 
567.6(1)(iv) (OTS).
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    In general, to qualify for a 50 percent risk weight, a mortgage 
loan must have been made in accordance with prudent underwriting 
standards and may not be 90 days or more past due. Mortgage loans that 
do not qualify for a 50 percent risk weight are assigned a 100 percent 
risk weight. Each agency has additional provisions that address the 
risk weighting of mortgage loans. Under the OCC's general risk-based 
capital rules for national banks, to receive a 50 percent risk weight, 
a mortgage loan must ``not [be] on nonaccrual or restructured.'' \3\ 
Under the Board's general risk-based capital rules for bank holding 
companies and state member banks, mortgage loans must be ``performing 
in accordance with their original terms'' and not carried in nonaccrual 
status in order to receive a 50 percent risk weight.\4\ Generally, 
mortgage loans that have been modified are considered to have been 
restructured (OCC), or are not considered to be performing in 
accordance with their original terms (Board). Therefore, under the 
OCC's and Board's general risk-based capital rules, such loans 
generally must be risk weighted at 100 percent. Under the FDIC's 
general risk-based capital rules, a state nonmember bank may assign a 
50 percent risk weight to any modified mortgage loan, so long as the 
loan, as modified, is not 90 days or more past due or in nonaccrual 
status and meets other applicable criteria for a 50 percent risk 
weight.\5\ Under the OTS's general risk-based capital rules, a savings 
association may assign a 50 percent risk weight to any modified 
residential mortgage loan, so long as the loan, as modified, is not 90 
days or more past due and meets other applicable criteria for a 50 
percent risk weight.\6\
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    \3\ 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC).
    \4\ 12 CFR parts 208 and 225, Appendix A, section III.C.3. 
(Board).
    \5\ 12 CFR Part 325, Appendix A, section II.C. (FDIC).
    \6\ 12 CFR 567.1, 12 CFR 567.6(a)(1)(iii) (OTS).
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    On June 30, 2009, the agencies published in the Federal Register an 
interim final rule (interim rule) to allow banking organizations to 
risk weight mortgage loans modified under the Program using the same 
risk weight assigned to the loan prior to the modification, so long as 
the loan continues to meet other applicable

[[Page 60138]]

prudential criteria.\7\ In many circumstances, this means that an 
eligible mortgage loan modified in accordance with the Program will 
continue to receive a 50 percent risk weight for purposes of the 
agencies' general risk-based capital guidelines. The agencies are now 
adopting the interim rule as a final rule (final rule) with changes 
that clarify the regulatory capital treatment of mortgage loans during 
the Program's trial modification period (trial period). The revisions 
provided under the final rule relative to the FDIC's and OTS' general 
risk-based capital rules are clarifying in nature.
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    \7\ 74 FR 31160 (June 30, 2009); 74 FR 34499 (July 16, 2009) 
(OCC technical correction).
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Home Affordable Mortgage Program

    On March 4, 2009, Treasury announced guidelines under the Program 
to promote sustainable loan modifications for homeowners at risk of 
losing their homes due to foreclosure.\8\ The Program provides a 
detailed framework for servicers to modify mortgages on owner-occupied 
residential properties and offers financial incentives to lenders and 
servicers that participate in the Program.\9\ The Program also provides 
financial incentives for homeowners whose mortgages are modified 
pursuant to Program guidelines to remain current on their mortgages 
after modification.\10\ Taken together, these incentives are intended 
to help responsible homeowners remain in their homes and avoid 
foreclosure, which is in turn intended to help ease the current 
downward pressures on house prices and the costs that families, 
communities, and the economy incur from unnecessary foreclosures.
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    \8\ Further details about the Program, including Program terms 
and borrower eligibility criteria, are available at http://www.makinghomeaffordable.gov.
    \9\ For ease of reference, the term ``servicer'' refers both to 
servicers that service loans held by other entities and to lenders 
who service loans that they hold themselves. The term ``lender'' 
refers to the beneficial owner or owners of the mortgage.
    \10\ A separate aspect of the Program, the Home Affordable 
Refinance Program, also provides incentives for refinancing certain 
mortgage loans owned or guaranteed by Fannie Mae or Freddie Mac. 
This final rule does not apply to mortgage loans refinanced under 
the Home Affordable Refinance Program.
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    Under the Program, Treasury has partnered with lenders and loan 
servicers to offer at-risk homeowners loan modifications under which 
the homeowners may obtain more affordable monthly mortgage payments. 
The Program applies to a spectrum of outstanding loans, some of which 
meet all of the prudential criteria under the agencies' general risk-
based capital rules and receive a 50 percent risk weight and some of 
which otherwise receive a 100 percent risk weight under the agencies' 
general risk-based capital rules.\11\ Servicers who elect to 
participate in the Program are required to apply the Program guidelines 
to all eligible loans \12\ unless explicitly prohibited by the 
governing pooling and servicing agreement and/or other lender servicing 
agreements. If a mortgage loan qualifies for modification under the 
Program, the Program guidelines require the lender to first reduce 
payments on eligible first-lien loans to an amount representing no 
greater than a 38 percent initial front-end debt-to-income ratio.\13\ 
Treasury then will match further reductions in monthly payments with 
the lender dollar-for-dollar to achieve a 31 percent front-end debt-to-
income ratio on the first-lien mortgage.\14\ Borrowers whose back-end 
debt-to-income ratio exceeds 55 percent must agree to work with a 
foreclosure prevention counselor approved by the Department of Housing 
and Urban Development.\15\
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    \11\ See 12 CFR Part 3, Appendix A, sections 3(a)(3)(iii) and 
3(a)(4) (OCC); 12 CFR parts 208 and 225, Appendix A, sections 
III.C.3. and III.C.4. (Board); 12 CFR part 325, Appendix A, section 
II.C. (FDIC); and 12 CFR 567.1 and 567.6 (OTS).
    \12\ For a mortgage to be eligible for the Program, the property 
securing the mortgage loan must be a one-to-four family owner-
occupied property that is the primary residence of the mortgagee. 
The property cannot be vacant or condemned, and the mortgage must 
have an unpaid principal balance (prior to capitalization of 
arrearages) at or below the Fannie Mae conforming loan limit for the 
type of property.
    \13\ A front-end debt-to-income ratio measures how much of the 
borrower's gross (pretax) monthly income is represented by the 
borrower's required payment on the first-lien mortgage, including 
real estate taxes and insurance.
    \14\ To qualify for the Treasury match, servicers must follow an 
established sequence of actions (capitalize arrearages, reduce 
interest rate, extend term or amortization period, and then defer 
principal) to reduce the front-end debt-to-income ratio on the loan 
from 38 percent to 31 percent. Servicers may reduce principal on the 
loan at any stage during the modification sequence to meet 
affordability targets.
    \15\ A back-end debt-to-income ratio measures how much of a 
borrower's gross (pretax) monthly income would go toward monthly 
mortgage and nonmortgage debt service obligations.
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    In addition to the incentives for lenders, servicers are eligible 
for other incentive payments to encourage participation in the Program. 
Servicers receive an up-front servicer incentive payment of $1,000 for 
each eligible first-lien modification. Lenders and servicers are 
eligible for one-time incentive payments of $1,500 and $500, 
respectively, for early modifications of first-lien mortgages--that is, 
modifications made while the borrower is still current on mortgage 
payments but at risk of imminent default. To encourage ongoing 
performance of modified loans, servicers also will receive ``Pay for 
Success'' incentive payments of up to $1,000 per year for up to three 
years for first-lien mortgages as long as borrowers remain in the 
Program. A borrower can likewise receive ``Pay for Performance 
Success'' incentive payments that reduce the principal balance on the 
borrower's first-lien mortgage up to $1,000 per year for up to five 
years if the borrower remains current on monthly payments on the 
modified first-lien mortgage. Lenders also may receive a home price 
depreciation reserve payment to offset certain losses if a modified 
loan subsequently defaults.
    For second-lien mortgages, lenders are eligible to receive 
incentive payments based on the difference between the interest rate on 
the modified first-lien mortgage and the reduced interest rate (either 
1 percent or 2 percent) on the second-lien mortgage following 
modification.\16\ Servicers may receive a one-time $500 incentive 
payment for successful second-lien modifications, as well as additional 
incentive payments of up to $250 per year for up to three years for 
second-lien mortgages as long as both the modified first-lien and 
second-lien mortgages remain current. A borrower also may receive 
incentive payments of up to $250 per year for a modified second-lien 
mortgage loan for up to five years for remaining current on the loan, 
which will be paid to reduce the unpaid principal of the first-lien 
mortgage. However, second-lien modification incentives only will be 
paid with respect to a given property if the first-lien mortgage on the 
property also is modified under the Program.\17\
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    \16\ Participating servicers are required to follow certain 
steps in modifying amortizing second-lien mortgages, including 
reducing the interest rate to 1 percent or 2 percent. Lenders may 
receive an incentive payment from Treasury equal to half of the 
difference between (i) the interest rate on the first lien as 
modified and (ii) 1 percent, subject to a floor.
    \17\ In some cases, servicers may choose to accept a lump-sum 
payment from Treasury to extinguish some or all of a second-lien 
mortgage under a pre-set formula.
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    Before a loan may be modified under the Program, a borrower must 
successfully complete a trial period of at least 90 days. During the 
trial period, a borrower makes payments on the eligible mortgage loan 
under modified terms. To complete the trial period successfully, the 
borrower must be current at the end of the trial period and provide 
certain information.\18\ The Program provides no incentive payments to 
the lender, servicer, or

[[Page 60139]]

borrower during the trial period and no payments if the borrower does 
not successfully complete the trial period.
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    \18\ Under the Program, borrowers in certain states with unique 
foreclosure law requirements (foreclosure restart states) will be 
considered to have failed the trial period if they are not current 
at the time the foreclosure sale is scheduled.
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Comments on the Interim Rule

    The agencies received six comments on the interim rule, one from a 
banking organization, four from trade groups representing the financial 
industry, and one from an individual. The commenters that addressed the 
interim final rule unanimously supported it, asserting that it is 
consistent with the important policy objectives of the Program and does 
not compromise the goals of safety and soundness. Commenters requested 
that the agencies clarify whether the rule's capital treatment is 
available for a mortgage loan that has been modified on a preliminary 
basis under the Program, but which still is within the trial period 
(and, thus, has not been permanently modified). Commenters also 
requested clarification regarding the circumstances under which a 
mortgage loan that was risk-weighted at 100 percent immediately prior 
to modification under the Program could receive a 50 percent risk 
weight. Some commenters suggested that such a loan should receive a 50 
percent risk weight following completion of the trial period or 
following receipt of the first pay-for-performance incentive payments. 
Other commenters requested that the agencies clarify that a sustained 
period of repayment performance could include payments made after a 
loan had been modified under the Program. The agencies also received a 
comment on the interaction between private mortgage insurance and loan 
modifications, which was beyond the scope of the interim rule.
    Based on an analysis of the comments, the agencies have modified 
the rule to specify that a mortgage modified on a permanent or trial 
basis pursuant to the Program and that was risk-weighted at 50 percent 
may continue to receive a 50 percent risk weight provided it meets 
other prudential criteria.\19\
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    \19\ The agencies intended the interim rule to apply to loans 
modified on both a trial and permanent basis under the Program. 
Accordingly, the modifications to the final rule are clarifying in 
nature.
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    As noted in the preamble to the interim rule, under the agencies' 
existing practice, past due and nonaccrual loans that receive a 100 
percent risk weight may return to a 50 percent risk weight under 
certain circumstances, including after demonstration of a sustained 
period of repayment performance. Because borrower characteristics, such 
as debt service capacity, impact a borrower's creditworthiness, the 
degree of appropriate reliance on a fixed period of payment performance 
may vary for different borrowers.\20\ For these reasons, the agencies 
have not established a specific period of repayments that would 
constitute a ``sustained period of performance'' for a particular loan. 
The agencies confirm that a borrower's payments on a mortgage loan 
modified under the Program, including during the trial period, may be 
considered in assessing whether the borrower has demonstrated a 
sustained period of repayment performance.
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    \20\ The instructions for the Consolidated Reports of Condition 
and Income (Call Report) and the Thrift Financial Report (TFR) 
define a sustained period of repayment performance as a period 
generally lasting ``* * * a minimum of six months and would involve 
payments of cash or cash equivalents. (In returning the asset to 
accrual status, sustained historical repayment performance for a 
reasonable time prior to the restructuring may be taken into 
account.)'' Call Reports instructions are available at http://www.federalreserve.gov/reportforms/CategoryIndex.cfm?WhichCategory=3 
and TFR instructions are available at http://files.ots.treas.gov/4210058.pdf.
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    Commenters also requested that the agencies (1) allow a banking 
organization to risk weight at 50 percent, rather than 100 percent, a 
second-lien mortgage loan that is modified under the Program if the 
first-lien mortgage loan on the property is owned by another entity, 
that first-lien mortgage is also modified under the Program, and there 
is no intervening lien; and (2) allow loans modified pursuant to the 
Program or similar programs that continue to qualify for 50 percent 
risk weight to be excluded from troubled debt restructurings reported 
in quarterly bank regulatory reports. Under the general risk-based 
capital rules all second-lien mortgage loans receive a 100 percent risk 
weight, unless the banking organization that holds the loan also holds 
the first lien, there is no intervening lien, and the loan meets other 
prudential criteria. The agencies believe this treatment is 
commensurate with the risks of junior positions, as lenders have 
limited access to collateral in the event of default. Therefore, the 
agencies have determined that allowing a banking organization to risk 
weight junior-lien mortgage loans at less than 100 percent is not 
appropriate other than in those circumstances already permitted by the 
agencies general risk-based capital rules. With respect to whether 
mortgage loans modified under the Program are considered troubled debt 
restructurings, the question of how these loans should be classified 
and reported will be determined under generally accepted accounting 
principles.

Final Rule

    Based on the above considerations, the agencies have adopted the 
interim rule in final form with the modification discussed above. Under 
the final rule as under the interim rule mortgage loans modified under 
the Program will retain the risk weight appropriate to the mortgage 
loan prior to modification, as long as other applicable prudential 
criteria remain satisfied. Accordingly, under the final rule, a 
qualifying mortgage loan appropriately risk weighted at 50 percent 
before modification under the Program would continue to be risk 
weighted at 50 percent during the trial period and after modification, 
provided it meets other prudential criteria. If a borrower does not 
successfully complete the trial period and the loan is not modified 
under the Program on a permanent basis, the loan would qualify for the 
50 percent risk weight category if it meets the conditions to be a 
qualifying mortgage loan under the general risk-based capital rules. If 
the loan does not meet the conditions, it would receive a 100 percent 
risk weight. A mortgage loan appropriately risk weighted at 100 percent 
prior to modification under the Program would continue to be risk 
weighted at 100 percent during and after the trial period.
    Consistent with the OCC's and the Board's general risk-based 
capital rules, if a mortgage loan were to become 90 days or more past 
due or carried in non-accrual status or otherwise restructured after 
being modified under the Program, the loan would be assigned a risk 
weight of 100 percent. Consistent with the FDIC's general risk-based 
capital rules, if a mortgage loan were to again be restructured after 
being modified under the Program, the loan could be assigned a risk 
weight of 50 percent provided the loan, as modified, is not 90 days or 
more past due or in nonaccrual status and meets the other applicable 
criteria for a 50 percent risk weight. Consistent with the OTS's 
general risk-based capital rules, if a mortgage loan were to again be 
restructured after being modified under the Program, the loan could be 
assigned a risk weight of 50 percent provided the loan, as modified, is 
not 90 days or more past due and meets the other applicable criteria 
for a 50 percent risk weight.
    Additionally, in certain circumstances under the general risk-based 
capital rules (as with, for example, a direct credit substitute or 
recourse obligation), a banking organization is permitted to look 
through an exposure to the risk

[[Page 60140]]

weight of a residential mortgage loan underlying that exposure. In such 
cases, the banking organizations would follow the capital treatment 
provided for in the agencies' general risk-based capital rules, as 
modified by the final rule, when the underlying residential mortgage 
loan has been modified pursuant to the Program.
    The agencies believe that treating mortgage loans modified under 
the Program in the manner described above is appropriate in light of 
the special and unique incentive features of the Program and the fact 
that the Program is offered by the federal government in order to 
achieve the public policy objective of promoting sustainable loan 
modifications for homeowners at risk of foreclosure in a way that 
balances the interests of borrowers, servicers, and lenders. As 
previously described, the Program requires that a borrower's front-end 
debt-to-income ratio on a first-lien mortgage modified under the 
Program be reduced to no greater than 31 percent, which should improve 
the borrower's ability to repay the modified loan, and, importantly, 
provides for Treasury to match reductions in monthly payments dollar-
for-dollar to reduce the borrower's front-end debt-to-income ratio from 
38 percent to 31 percent. In addition, as described above, the Program 
provides material financial incentives for servicers and lenders to 
take actions to reduce the likelihood of defaults, as well as 
incentives for servicers and borrowers designed to help borrowers 
remain current on modified loans. The structure and amount of these 
cash payments meaningfully align the financial incentives for 
servicers, lenders, and borrowers to encourage and increase the 
likelihood of participating borrowers remaining current on their 
mortgages. Each of these incentives is important to the agencies' 
determination with respect to the appropriate regulatory capital 
treatment of mortgage loans modified under the Program.

Regulatory Analysis

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that, in connection with a notice of proposed 
rulemaking, an agency prepare and make available for public comment an 
initial regulatory flexibility analysis that describes the impact of a 
proposed rule on small entities.\21\ Under regulations issued by the 
Small Business Administration,\22\ a small entity includes a commercial 
bank, bank holding company, or savings association with assets of $175 
million or less (a small banking organization). As of June 30, 2009, 
approximately 2,533 small bank holding companies, 386 small savings 
associations, 749 small national banks, 432 small state member banks, 
and 3,040 small state nonmember banks existed. As a general matter, the 
Board's general risk-based capital rules apply only to a bank holding 
company that has consolidated assets of $500 million or more. 
Therefore, the changes to the Board's capital adequacy guidelines for 
bank holding companies will not affect small bank holding companies.
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    \21\ See 5 U.S.C. 603(a).
    \22\ See 13 CFR 121.201.
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    This rulemaking does not involve the issuance of a notice of 
proposed rulemaking and, therefore, the requirements of the RFA do not 
apply. However, the agencies note that the rule does not impose any 
additional obligations, restrictions, burdens, or reporting, 
recordkeeping or compliance requirements on banks or savings 
associations, including small banking organizations, nor does it 
duplicate, overlap or conflict with other federal rules. The rule also 
will benefit small banking organizations that are subject to the 
agencies' general risk-based capital rules by allowing mortgage loans 
modified under the Program to retain the risk weight assigned to the 
loan prior to the modification.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3506), the agencies have reviewed the final rule to 
assess any information collections. There are no collections of 
information as defined by the Paperwork Reduction Act in the final 
rule.

OCC/OTS Executive Order 12866

    Executive Order 12866 requires federal agencies to prepare a 
regulatory impact analysis for agency actions that are found to be 
``significant regulatory actions.'' Significant regulatory actions 
include, among other things, rulemakings that ``have an annual effect 
on the economy of $100 million or more or adversely affect in a 
material way the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or state, 
local, or tribal governments or communities.'' The OCC and the OTS each 
determined that its portion of the final rule is not a significant 
regulatory action under Executive Order 12866.

OCC/OTS Unfunded Mandates Reform Act of 1995 Determination

    The Unfunded Mandates Reform Act of 1995 \23\ (UMRA) requires that 
an agency prepare a budgetary impact statement before promulgating a 
rule that includes a federal mandate that may result in the expenditure 
by state, local, and tribal governments, in the aggregate, or by the 
private sector of $100 million or more (adjusted annually for 
inflation) in any one year. If a budgetary impact statement is 
required, section 205 of the UMRA also requires an agency to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule. The OCC and the OTS each have determined that its 
final rule will not result in expenditures by state, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. Accordingly, neither the OCC nor the 
OTS has prepared a budgetary impact statement or specifically addressed 
the regulatory alternatives considered.
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    \23\ See Public Law 104-4.
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List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Banks, Banking, Capital, 
National banks, Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

    Confidential business information, Crime, Currency, Federal Reserve 
System, Mortgages, Reporting and recordkeeping requirements, Risk.

12 CFR Part 225

    Administrative Practice and Procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 325

    Administrative practice and procedure, Banks, banking, Capital 
adequacy, Reporting and recordkeeping requirements, Savings 
associations, State nonmember banks.

12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Risk, Savings 
associations.

[[Page 60141]]

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

0
For the reasons stated in the common preamble, the Office of the 
Comptroller of the Currency amends Part 3 of chapter I of Title 12, 
Code of Federal Regulations as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

0
1. The authority citation for part 3 continues to read as follows:

    Authority:  12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 1835, 3907, and 3909.


0
2. In appendix A to Part 3, in section 3, revise paragraph (a)(3)(iii) 
to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

* * * * *

Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-
Balance Sheet Items

* * * * *
    (a) * * *
    (3) * * *
    (iii) Loans secured by first mortgages on one-to-four family 
residential properties, either owner occupied or rented, provided 
that such loans are not otherwise 90 days or more past due, or on 
nonaccrual or restructured. It is presumed that such loans will meet 
the prudent underwriting standards. For the purposes of the risk-
based capital guidelines, a loan modified on a permanent or trial 
basis solely pursuant to the U.S. Department of Treasury's Home 
Affordable Mortgage Program will not be considered to have been 
restructured. If a bank holds a first lien and junior lien on a one-
to-four family 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 both determining the 
loan-to-value ratio and assigning a risk weight to the transaction. 
Furthermore, residential property loans made for the purpose of 
construction financing are assigned to the 100% risk category of 
section 3(a)(4) of this appendix A; however, these loans may be 
included in the 50% risk category of this section 3(a)(3) of this 
appendix A if they are subject to a legally binding sales contract 
and satisfy the requirements of section 3(a)(3)(iv) of this appendix 
A.
* * * * *

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons stated in the common preamble, the Board of Governors 
of Federal Reserve System amends parts 208 and 225 of Chapter II of 
title 12 of the Code of Federal Regulations as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

0
3. The authority for part 208 continues to read as follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),1833(j), 
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882, 
2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 U.S.C. 78b, 
78I(b), 78l(i),780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801, 
and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 
4128.


0
4. In appendix A to part 208, revise Section III. C.3., to read as 
follows:

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

* * * * *
    III. * * *
    C. * * *
    3. Category 3: 50 percent. This category includes loans fully 
secured by first liens \41\ on 1- to 4-family residential 
properties, either owner-occupied or rented, or on multifamily 
residential properties,\42\ that meet certain criteria.\43\ Loans 
included in this category must have been made in accordance with 
prudent underwriting standards; \44\ be performing in accordance 
with their original terms; and not be 90 days or more past due or 
carried in nonaccrual status. For purposes of this 50 percent risk 
weight category, a loan modified on a permanent or trial basis 
solely pursuant to the U.S. Department of Treasury's Home Affordable 
Mortgage Program will be considered to be performing in accordance 
with its original terms. The following additional criteria must also 
be applied to a loan secured by a multifamily residential property 
that is included in this category: all principal and interest 
payments on the loan must have been made on time for at least the 
year preceding placement in this category, or in the case where the 
existing property owner is refinancing a loan on that property, all 
principal and interest payments on the loan being refinanced must 
have been made on time for at least the year preceding placement in 
this category; amortization of the principal and interest must occur 
over a period of not more than 30 years and the minimum original 
maturity for repayment of principal must not be less than 7 years; 
and the annual net operating income (before debt service) generated 
by the property during its most recent fiscal year must not be less 
than 120 percent of the loan's current annual debt service (115 
percent if the loan is based on a floating interest rate) or, in the 
case of a cooperative or other not-for-profit housing project, the 
property must generate sufficient cash flow to provide comparable 
protection

[[Page 60142]]

to the institution. Also included in this category are privately-
issued mortgage-backed securities provided that:
---------------------------------------------------------------------------

    \41\ If a bank 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 
assigning a risk weight.
    \42\ Loans that qualify as loans secured by 1- to 4-family 
residential properties or multifamily residential properties are 
listed in the instructions to the commercial bank Call Report. In 
addition, for risk-based capital purposes, loans secured by 1- to 4-
family residential properties include loans to builders with 
substantial project equity for the construction of 1- to 4-family 
residences that have been presold under firm contracts to purchasers 
who have obtained firm commitments for permanent qualifying mortgage 
loans and have made substantial earnest money deposits. Such loans 
to builders will be considered prudently underwritten only if the 
bank has obtained sufficient documentation that the buyer of the 
home intends to purchase the home (i.e., has a legally binding 
written sales contract) and has the ability to obtain a mortgage 
loan sufficient to purchase the home (i.e., has a firm written 
commitment for permanent financing of the home upon completion).
    The instructions to the Call Report also discuss the treatment 
of loans, including multifamily housing loans, that are sold subject 
to a pro rata loss sharing arrangement. Such an arrangement should 
be treated by the selling bank as sold (and excluded from balance 
sheet assets) to the extent that the sales agreement provides for 
the purchaser of the loan to share in any loss incurred on the loan 
on a pro rata basis with the selling bank. In such a transaction, 
from the standpoint of the selling bank, the portion of the loan 
that is treated as sold is not subject to the risk-based capital 
standards. In connection with sales of multifamily housing loans in 
which the purchaser of a loan shares in any loss incurred on the 
loan with the selling institution on other than a pro rata basis, 
these other loss sharing arrangements are taken into account for 
purposes of determining the extent to which such loans are treated 
by the selling bank as sold (and excluded from balance sheet assets) 
under the risk-based capital framework in the same as prescribed for 
reporting purposes in the instructions to the Call Report.
    \43\ Residential property loans that do not meet all the 
specified criteria or that are made for the purpose of speculative 
property development are placed in the 100 percent risk category.
    \44\ Prudent underwriting standards include a conservative ratio 
of the current loan balance to the value of the property. In the 
case of a loan secured by multifamily residential property, the 
loan-to-value ratio is not conservative if it exceeds 80 percent (75 
percent if the loan is based on a floating interest rate). Prudent 
underwriting standards also dictate that a loan-to-value ratio used 
in the case of originating a loan to acquire a property would not be 
deemed conservative unless the value is based on the lower of the 
acquisition cost of the property or appraised (or if appropriate, 
evaluated) value. Otherwise, the loan-to-value ratio generally would 
be based upon the value of the property as determined by the most 
current appraisal, or if appropriate, the most current evaluation. 
All appraisals must be made in a manner consistent with the Federal 
banking agencies' real estate appraisal regulations and guidelines 
and with the bank's own appraisal guidelines.
---------------------------------------------------------------------------

    (1) The structure of the security meets the criteria described 
in section III(B)(3) above;
    (2) If the security is backed by a pool of conventional 
mortgages, on 1- to 4-family residential or multifamily residential 
properties each underlying mortgage meets the criteria described 
above in this section for eligibility for the 50 percent risk 
category at the time the pool is originated;
    (3) If the security is backed by privately issued mortgage-
backed securities, each underlying security qualifies for the 50 
percent risk category; and
    (4) If the security is backed by a pool of multifamily 
residential mortgages, principal and interest payments on the 
security are not 30 days or more past due.
    Privately-issued mortgage-backed securities that do not meet 
these criteria or that do not qualify for a lower risk weight are 
generally assigned to the 100 percent risk category.
    Also assigned to this category are revenue (non-general 
obligation) bonds or similar obligations, including loans and 
leases, that are obligations of states or other political 
subdivisions of the U.S. (for example, municipal revenue bonds) or 
other countries of the OECD-based group, but for which the 
government entity is committed to repay the debt with revenues from 
the specific projects financed, rather than from general tax funds.
    Credit equivalent amounts of derivative contracts involving 
standard risk obligors (that is, obligors whose loans or debt 
securities would be assigned to the 100 percent risk category) are 
included in the 50 percent category, unless they are backed by 
collateral or guarantees that allow them to be placed in a lower 
risk category.
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
5. The authority for part 225 continues to read as follows:

    Authority:  12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, 
and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


0
6. In Appendix A to part 225, revise section III.C.3., to read as 
follows:

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure

* * * * *
    III. * * *
    C. * * *
    3. Category 3: 50 percent. This category includes loans fully 
secured by first liens \48\ on 1- to 4-family residential 
properties, either owner-occupied or rented, or on multifamily 
residential properties,\49\ that meet certain criteria.\50\ Loans 
included in this category must have been made in accordance with 
prudent underwriting standards; \51\ be performing in accordance 
with their original terms; and not be 90 days or more past due or 
carried in nonaccrual status. For purposes of this 50 percent risk 
weight category, a loan modified on a permanent or trial basis 
solely pursuant to the U.S. Department of Treasury's Home Affordable 
Mortgage Program will be considered to be performing in accordance 
with its original terms. The following additional criteria must also 
be applied to a loan secured by a multifamily residential property 
that is included in this category: all principal and interest 
payments on the loan must have been made on time for at least the 
year preceding placement in this category, or in the case where the 
existing property owner is refinancing a loan on that property, all 
principal and interest payments on the loan being refinanced must 
have been made on time for at least the year preceding placement in 
this category; amortization of the principal and interest must occur 
over a period of not more than 30 years and the minimum original 
maturity for repayment of principal must not be less than 7 years; 
and the annual net operating income (before debt service) generated 
by the property during its most recent fiscal year must not be less 
than 120 percent of the loan's current annual debt service (115 
percent if the loan is based on a floating interest rate) or, in the 
case of a cooperative or other not-for-profit housing project, the 
property must generate sufficient cash flow to provide comparable 
protection to the institution. Also included in this category are 
privately-issued mortgage-backed securities provided that:
---------------------------------------------------------------------------

    \48\ If a banking organization 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 assigning a risk weight.
    \49\ Loans that qualify as loans secured by 1- to 4-family 
residential properties or multifamily residential properties are 
listed in the instructions to the FR Y-9C Report. In addition, for 
risk-based capital purposes, loans secured by 1- to 4-family 
residential properties include loans to builders with substantial 
project equity for the construction of 1-to 4-family residences that 
have been presold under firm contracts to purchasers who have 
obtained firm commitments for permanent qualifying mortgage loans 
and have made substantial earnest money deposits. Such loans to 
builders will be considered prudently underwritten only if the bank 
holding company has obtained sufficient documentation that the buyer 
of the home intends to purchase the home (i.e., has a legally 
binding written sales contract) and has the ability to obtain a 
mortgage loan sufficient to purchase the home (i.e., has a firm 
written commitment for permanent financing of the home upon 
completion).
    \50\ Residential property loans that do not meet all the 
specified criteria or that are made for the purpose of speculative 
property development are placed in the 100 percent risk category.
    \51\ Prudent underwriting standards include a conservative ratio 
of the current loan balance to the value of the property. In the 
case of a loan secured by multifamily residential property, the 
loan-to-value ratio is not conservative if it exceeds 80 percent (75 
percent if the loan is based on a floating interest rate). Prudent 
underwriting standards also dictate that a loan-to-value ratio used 
in the case of originating a loan to acquire a property would not be 
deemed conservative unless the value is based on the lower of the 
acquisition cost of the property or appraised (or if appropriate, 
evaluated) value. Otherwise, the loan-to-value ratio generally would 
be based upon the value of the property as determined by the most 
current appraisal, or if appropriate, the most current evaluation. 
All appraisals must be made in a manner consistent with the Federal 
banking agencies' real estate appraisal regulations and guidelines 
and with the banking organization's own appraisal guidelines.
---------------------------------------------------------------------------

    (1) The structure of the security meets the criteria described 
in section III(B)(3) above;
    (2) if the security is backed by a pool of conventional 
mortgages, on 1- to 4-family residential or multifamily residential 
properties, each underlying mortgage meets the criteria described 
above in this section for eligibility for the 50 percent risk 
category at the time the pool is originated;
    (3) If the security is backed by privately-issued mortgage-
backed securities, each underlying security qualifies for the 50 
percent risk category; and
    (4) If the security is backed by a pool of multifamily 
residential mortgages, principal and interest payments on the 
security are not 30 days or more past due. Privately-issued 
mortgage-backed securities that do not meet these criteria or that 
do not qualify for a lower risk weight are generally assigned to the 
100 percent risk category.
    Also assigned to this category are revenue (non-general 
obligation) bonds or similar obligations, including loans and 
leases, that are obligations of states or other political 
subdivisions of the U.S. (for example, municipal revenue bonds) or 
other countries of the OECD-based group, but for which the 
government entity is committed to repay the debt with revenues from 
the specific projects financed, rather than from general tax funds.
    Credit equivalent amounts of derivative contracts involving 
standard risk obligors (that is, obligors whose loans or debt 
securities would be assigned to the 100 percent risk category) are 
included in the 50 percent category, unless they are backed by 
collateral or guarantees that allow them to be placed in a lower 
risk category.
* * * * *

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority for Issuance

0
For the reasons stated in the common preamble, the Federal Deposit 
Insurance Corporation amends Part 325 of Chapter III of Title 12, Code 
of the Federal Regulations as follows:

PART 325--CAPITAL MAINTENANCE

0
7. The authority citation for part 325 continues to read as follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; Public Law 102-233, 105 
Stat. 1761, 1789, 1790, (12 U.S.C. 1831n note); Public Law 102-242, 
105 Stat. 2236, as amended by Public Law 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Public Law 102-242, 105 Stat. 2236, 
2386, as amended by Public Law 102-550, 106 Stat. 3672, 4089 (12 
U.S.C. 1828 note).

[[Page 60143]]


0
8. Amend Appendix A to part 325 by revising footnote 39 to read as 
follows:

Appendix A to Part 325--Statement of Policy on Risk-Based Capital

* * * * *
    II * * *
    C.* * *
* * * * *
    \39\ This category would also include a first-lien residential 
mortgage loan on a one-to-four family property that was 
appropriately assigned a 50 percent risk weight pursuant to this 
section immediately prior to modification (on a permanent or trial 
basis) under the Home Affordable Mortgage Program established by the 
U.S. Department of Treasury, so long as the loan, as modified, is 
not 90 days or more past due or in nonaccrual status and meets other 
applicable criteria for a 50 percent risk weight. In addition, real 
estate loans that do not meet all of the specified criteria or that 
are made for the purpose of property development are placed in the 
100 percent risk category.
* * * * *

Department of the Treasury

Office of Thrift Supervision

12 CFR Chapter V

0
For reasons set forth in the common preamble, the Office of Thrift 
Supervision amends part 567 of Chapter V of title 12 of the Code of 
Federal Regulations as follows:

PART 567--CAPITAL

0
9. The authority for citation for part 567 continues to read as 
follows:

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

PART 567--CAPITAL

0
10. Section 576.1 is amended in the definition Qualifying mortgage loan 
by revising paragraph (4) to read as follows


Sec.  567.1  Definitions.

* * * * *
    Qualifying mortgage loan
* * * * *
    (4) A loan that meets the requirements of this section prior to 
modification on a permanent or trial basis under the U.S. Department of 
Treasury's Home Affordable Mortgage Program may be included as a 
qualifying mortgage loan, so long as the loan is not 90 days or more 
past due.
* * * * *

    Dated: November 10, 2009.
John C. Dugan,
Comptroller of Currency.

    By order of the Board of Governors of the Federal Reserve 
System, November 12, 2009.
Jennifer J. Johnson,
Secretary of the Board.

    Dated at Washington DC, this 12th day of November 2009.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.

    Dated: October 29, 2009.

    By the Office of the Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. E9-27776 Filed 11-19-09; 8:45 am]
BILLING CODE 6714-01-P; 6210-01-P; 4810-33-P; 6720-01-P