[Federal Register Volume 76, Number 129 (Wednesday, July 6, 2011)]
[Notices]
[Pages 39474-39476]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-16809]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision


Monthly Median Cost of Funds Reporting, and Publication of Cost 
of Funds Indices

AGENCY: Office of Thrift Supervision (OTS), Treasury.

ACTION: Notice of Termination of OMB No. 1550-0021, Monthly Median Cost 
of Funds Reporting, and Publication of Cost of Funds Indices.

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SUMMARY: The OTS is terminating the collection of data used to 
calculate and publish the Monthly Median Cost of Funds Index (MMCOF), 
the Quarterly Cost of Funds Index (QCOF), the Semiannual Cost of Funds 
Index (SCOF), and other related cost of funds ratios currently 
published monthly in the OTS's Cost of Funds (COF) Report.\1\
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    \1\ Link to published COF reports: http://www.ots.treas.gov/?p=StatisticalReleases.

FOR FURTHER INFORMATION CONTACT: For further information about the 
changes discussed in this notice, please contact Jim Caton, Managing 
Director--Economic and Industry Analysis, at (202) 906-5680.
    Copies of the reporting form, OMB No. 1550-0021 (OTS Form 1568), 
and instructions for cost of funds reporting requirements are available 
on the OTS Web site through the following link: http://www.ots.treas.gov/?p=StatisticalReleases.

SUPPLEMENTARY INFORMATION:

Abstract

    Some institutions currently submit MMCOF data to the OTS monthly 
for the OTS's use in calculating a monthly median cost of funds index. 
Additionally, the OTS publishes two indices based on calculations from 
data included in the Thrift Financial Report (TFR): \2\
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    \2\ Copies of the reporting forms and instructions for the TFR 
(OMB No. 1550-0023) can be obtained on the OTS Web site (http://www.ots.treas.gov/?p=ThriftFinancialReports).
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    1. A quarterly average cost of funds index, and
    2. A semiannual average cost of funds index.
    These indices are used by certain mortgage lenders as benchmarks 
from which to base rate adjustments for adjustable rate mortgages 
(ARMs).

Effect of Recent Legislation

    The Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203 (the Dodd-Frank Act), was enacted into law on July 
21, 2010. Title III of the Dodd-Frank Act abolishes the OTS, provides 
for its integration with the Office of the Comptroller of the Currency 
(OCC) effective as of July 21, 2011 (the ``transfer date''), and 
transfers the OTS's functions to the OCC, the Board of Governors of the 
Federal Reserve System (Board), and the Federal Deposit Insurance 
Corporation (FDIC).
    Under Title III of the Dodd-Frank Act, all functions of the OTS 
relating to Federal savings associations and rulemaking authority for 
all savings associations are transferred to the OCC. All functions of 
the OTS relating to state-chartered savings associations (other than 
rulemaking) are transferred

[[Page 39475]]

to the FDIC. All functions of the OTS relating to supervision of 
savings and loan holding companies (including rulemaking) are 
transferred to the Board.

Current Actions

    On February 8, 2011, the OTS requested public comment (76 FR 7089) 
\3\ on its notice of intent to discontinue data collection and 
publication of the monthly median cost of funds index and related 
indices. The changes to savings associations' data reporting 
requirements will be effective January 31, 2012. At that time savings 
associations currently regulated by the OTS shall cease filing data 
used to calculate the MMCOF index. Further publication of the MMCOF, 
the QCOF, the SCOF, and other related cost of funds ratios currently 
published monthly in the COF Report shall cease as of January 31, 2012. 
The final COF Report shall be for the month of December 2011. Until the 
effective date of these changes, savings associations shall continue to 
file MMCOF data in the current manner using existing processes.
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    \3\ Link to 76 FR 7089: http://www.ots.treas.gov/_files/4830090.pdf .
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    The OTS received two comments regarding its notice of intent. One 
comment was from a bank/thrift trade association and the other comment 
was from a savings association. The bank/thrift trade association did 
not object to the proposed changes becoming effective as of January 31, 
2012, but requested that ``OTS provide guidance regarding converting 
ARM loans to an alternative index.'' In particular, the bank/thrift 
trade association requested that the guidance ``recognize situations 
where loan contracts might address circumstances where use of an 
alternative index may be necessary, as well as certain legacy ARM 
contracts that we understand may be silent or non-specific regarding 
such circumstances.''
    The other comment was from a savings association. The commenter 
noted that there are ``numerous adjustable interest rate home loans 
including loans sold to the Federal National Mortgage Association (FNMA 
or Fannie Mae) and to the Federal Home Loan Mortgage Corporation (FHLMC 
or Freddie Mac) that use these indices.'' The commenter expressed 
concern for the difficulty of consumers agreeing ``on a substitution of 
indices as the cost of fund indices are generally considered to be a 
``lagging index'' and stated it would be hard to replace that feature 
to the satisfaction of the consumer.

Index Substitution

    The Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, Public Law 101-73 (FIRREA), was enacted into law on August 9, 
1989. Section 402(e)(4) of FIRREA requires the OTS to designate 
acceptable substitute indices should it discontinue publication of 
indices used for ARM rate adjustments. The Director of OTS must 
determine, after notice and opportunity for comment, that (A) the new 
indices are based upon data substantially similar to that of the 
original indices; and (B) the substitution of the new indices will 
result in an interest rate substantially similar to the rate in effect 
at the time the original index became unavailable. Any such substitute 
index may be substituted by the holder of any such adjustable rate 
mortgage instrument upon notice to the borrower.
    As described in the February 8, 2011 notice, the OTS analyzed the 
values and changes of 17 publicly available indices on a monthly basis 
from January 1990 through August 2010 to help designate acceptable 
substitute indices for the MMCOF, QCOF, and SCOF indices. The OTS 
compared the values and changes of the publicly available indices to 
those of the MMCOF, QCOF, and SCOF. Correlation coefficients \4\ were 
calculated for each publicly available index value to the MMCOF, QCOF, 
and SCOF.
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    \4\ The correlation coefficient is a single number that 
describes the degree of relationship between two variables. A 
perfect positive correlation (a correlation coefficient of +1) 
implies that as one index moves, either up or down, the other index 
will move in lockstep, in the same direction.
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    The bank/thrift trade association noted that each of the indices 
identified have adequately high correlation with the OTS's COF indices 
and did not express a particular preference for one substitute over the 
others. The bank/thrift trade association's members consider the 
Monthly Treasury Average (MTA) index to be less suitable as a direct 
substitute because of recent changes in interest rate relationships 
resulting from monetary policy actions. The OTS agrees.
    The OTS also finds that the MTA is less of a lagging market index 
(LMI) than the 11th District COF or the Federal COF indices. Similarly, 
the National Average Contract Mortgage Rate index is less of an LMI 
than either of these COF indices.
    The bank/thrift trade association commented that the 11th District 
COF index has the strongest correlation to the OTS COF indices, but is 
not as well known outside the 11th Federal Home Loan Bank District as 
some other substitute indices that OTS analyzed. The OTS agrees with 
this comment. Further, the OTS notes that only Arizona, California, and 
Nevada savings associations that are members of the Federal Home Loan 
Bank of San Francisco are eligible to be considered for inclusion in 
this COF index. Thus, a limited number of savings associations in a 
limited geographic area participate in providing data for this index. 
Given that this is a weighted average index with a limited number of 
participating institutions, the resulting values can be skewed by a few 
very large institutions.
    The bank/thrift trade association noted that the Federal COF index 
is well known and highly correlated to the OTS's MMCOF, QCOF, and SCOF 
indices, but the future of the Federal COF index may depend on the 
outcome of reform of government-sponsored enterprises (GSEs), including 
Freddie Mac. The OTS believes that any reform of the GSEs would by 
necessity provide for either a continuation of the Federal COF or an 
acceptable substitute index to the Federal COF similar to FIRREA's 
provision for substitutes for the OTS's COF indices.
    The savings association commenter mentioned there may be a large 
volume of loans using the OTS COF indices that have been sold to FNMA 
and FHLMC. As described in the February 8, 2011 notice, the OTS 
analyzed the trends in savings associations' ARMs tied to LMIs and 
found the volumes of these ARMs declined precipitously over the past 
ten years to currently very low levels. Moreover, the OTS analyzed the 
usage and trends of various indices used to base rate adjustments for 
ARMs held by, or serviced by, lenders of all types throughout the 
United States from 1999 through 2010. This analysis, based on lenders 
of all types, confirmed the analysis based on savings association-
specific data. For example, based on data analyzed from the CoreLogic/
LoanPerformance Servicing Database,\5\ OTS found that less than 0.05 
percent of the number and 0.01 percent of the balances of ARMs loans 
outstanding as of December 31, 2010, use the MMCOF for the index rate.
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    \5\ Data were calculated from the CoreLogic/LoanPerformance 
Servicing Database. The database includes 44.1 million active first 
mortgages for a total of $7.5 trillion active balances that are 
either held in portfolio as whole loans or securitized as of 
December 31, 2010. The data represent approximately 80 percent of 
outstanding first mortgages in the U.S.
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    The savings association commenter also expressed concern about the 
difficulty of obtaining borrowers' consent to substitute indices 
proposed

[[Page 39476]]

by the holders of their mortgages. The OTS notes that, pursuant to 
FIRREA, substitute indices designated by the Director may be 
substituted by the holder of any such adjustable rate mortgage 
instrument upon notice to the borrower.
    Given the Federal COF index's close correlation with the indices to 
be terminated, and pursuant to the requirements of FIRREA, the OTS is 
designating the Federal COF index \6\ as an acceptable substitute index 
effective with the termination date of the discontinued indices. 
Further, the calculation of the Federal COF does not depend on a 
separate data collection from a limited amount of participants and is 
easily calculated.
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    \6\ Link to Federal COF index data:  http://www.freddiemac.com/news/finance/cof_index.htm.
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    In summary, after considering the comments received on the notice 
of intent, the OTS will terminate the collection of data used to 
calculate and publish the MMCOF, the QCOF, the SCOF, and other related 
cost of funds ratios currently published monthly in the OTS's COF 
Report. Savings associations shall cease filing the MMCOF data after 
the December 31, 2011, report date. Until the effective date of these 
changes, savings associations shall continue to file MMCOF data in the 
current manner using existing processes.
    The holder of any adjustable rate mortgage instrument whose 
interest rate is adjusted based on the discontinued MMCOF, QCOF, and 
SCOF indices shall provide notice as soon as possible after publication 
of this termination notice to each affected borrower of the termination 
of such index.
    Holders of MMCOF adjustable rate mortgage instruments shall begin 
using the Federal COF index for the index rate at adjustment 
determination dates beginning after December 31, 2011. Holders of QCOF 
adjustable rate mortgage instruments shall begin using an index rate 
calculated as the average of the three monthly Federal COF index values 
that were published immediately previous to adjustment determination 
dates beginning after December 31, 2011. Holders of SCOF adjustable 
rate mortgage instruments shall begin using an index rate calculated as 
the average of the six monthly Federal COF index values that were 
published immediately previous to adjustment determination dates 
beginning after December 31, 2011.

    Dated: June 29, 2011.
John E. Bowman,
Acting Director, Office of Thrift Supervision.
[FR Doc. 2011-16809 Filed 7-5-11; 8:45 am]
BILLING CODE 6720-01-P