[Federal Register Volume 84, Number 204 (Tuesday, October 22, 2019)]
[Rules and Regulations]
[Pages 56369-56376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22823]



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 Rules and Regulations
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 This section of the FEDERAL REGISTER contains regulatory documents 
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  Federal Register / Vol. 84, No. 204 / Tuesday, October 22, 2019 / 
Rules and Regulations  

[[Page 56369]]



DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3, 6, 34, 46, 160, 161, 163, and 167

[Docket ID OCC-2019-0004]
RIN 1557-AE50


Other Real Estate Owned and Technical Amendments

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.

ACTION: Final rule.

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SUMMARY: The OCC is issuing a final rule to clarify and streamline its 
regulation on other real estate owned (OREO) for national banks and 
update the regulatory framework for OREO activities at Federal savings 
associations. The OCC is also removing outdated capital rules for 
national banks and Federal savings associations, which include 
provisions related to OREO, and making conforming edits to other rules 
that reference those capital rules.

DATES: The final rule is effective December 1, 2019.

FOR FURTHER INFORMATION CONTACT: 
    For revisions to part 34, subpart E (OREO): Charlotte Bahin, Senior 
Advisor for Thrift Supervision, (202) 649-6281; Beth Nalyvayko, Bank 
Examiner, Commercial Credit Risk, (202) 649-6670; or J. William 
Binkley, Attorney, Chief Counsel's Office, (202) 649-5490.
    For all revisions: Kevin Korzeniewski, Counsel, Chief Counsel's 
Office, (202) 649-5490; or for persons who are deaf or hearing 
impaired, TTY, (202) 649-5597.

SUPPLEMENTARY INFORMATION: 

I. Background

    On April 24, 2019, the OCC published a proposed rule (proposal) \1\ 
to clarify and streamline the regulation for national bank other real 
estate owned (OREO) activities and to apply that framework to the OREO 
activities of Federal savings associations. The OCC's last significant 
revision to the national bank OREO rules occurred over twenty years 
ago,\2\ and the OCC has gained additional supervisory experience 
related to OREO since that time.
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    \1\ See 84 FR 17094 (April 24, 2019).
    \2\ See 61 FR 11294 (March 20, 1996).
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    In addition, the OCC now supervises Federal savings associations 
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act).\3\ Federal savings associations, unlike national 
banks, are not subject to statutory provisions governing OREO. While 
capital regulations and handbooks issued by the Office of Thrift 
Supervision (OTS) generally established requirements and supervisory 
expectations, respectively, for OREO activities, the OCC rescinded many 
of those documents, creating ambiguity with respect to OREO standards 
for Federal savings associations. As discussed below, the OCC is 
adopting a framework for Federal savings associations that generally is 
consistent with the OTS framework described above. This framework is 
still followed by many savings associations and offers flexibility 
consistent with provisions in the Home Owners' Loan Act (HOLA).\4\
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    \3\ See 12 U.S.C. 5412.
    \4\ 12 U.S.C. 1461 et seq.
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    The OCC also is removing Appendices A and B to 12 CFR part 3 (risk-
based capital guidelines for national banks) and 12 CFR part 167 
(capital requirements for Federal savings associations) and making 
conforming technical edits to other CFR parts that reference those 
provisions. When the OCC revised Part 3, it superseded Appendices A and 
B to part 3 and part 167. However, because there was a transition 
period for part 3, the OCC retained those appendices at that time.\5\ 
Part 167 includes provisions relating to treatment of OREO held by 
Federal savings associations that are no longer in effect. The OCC is 
removing part 167 and related references to avoid any confusion with 
the OREO treatment in this final rule. Since Appendices A and B to part 
3 include the corresponding capital provisions for national banks and 
are similarly outdated, the OCC is rescinding those appendices in this 
final rule as well.
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    \5\ See 78 FR 62018 (October 11, 2013).
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II. Description of Final Rule and Comments

    The OCC received two comments on the proposal. Both comments 
requested clarification or adjustments to the provisions on appraisals 
of OREO. For the reasons discussed below, the OCC does not believe 
changes are necessary to the rule text in response to the comments, and 
therefore is adopting the final rule substantially as proposed. The OCC 
is making minor adjustments to the proposed technical amendments 
related to the capital rules.

A. Definitions (Sec.  34.81)

    This section contains definitions used in the OREO regulation. This 
final rule continues to use the existing definitions for other real 
estate owned (OREO); market value; and recorded investment amount in 
the revised regulation. The term OREO continues to mean DPC real estate 
and former banking premises. The term market value continues to mean 
the value of the property, as determined under the appraisal rule in 12 
CFR part 34, subpart C. Recorded investment amount continues to mean 
the recorded loan balance (for loans) or the net book value (for former 
banking premises).
    In addition, the final rule continues to use the current definition 
of DPC real estate, but with minor revisions related to lease 
accounting described below. The definition of DPC real estate continues 
to mean real estate acquired through any means in satisfaction of a 
debt previously contracted. The definition of the term includes 
capitalized and operating leases, which are the two types of leases 
recognized under current accounting standards from the lessee's 
perspective. However, revised accounting standards requiring operating 
leases to be capitalized are scheduled to be implemented in the near 
future.\6\ Therefore, the OCC is revising the terminology in the 
current definition of DPC real estate to refer to leased real estate, 
rather than to refer specifically to capitalized and operating leases. 
The definition continues to cover all leases, but the revision will 
ensure the regulation is not outdated in this

[[Page 56370]]

respect after implementation of the new accounting standards.
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    \6\ See FASB ASU 2016-02, ``Leases (Topic 842)'' (February 
2016).
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    In addition, the final rule revises the definition of former 
banking premises to include a reference to 12 CFR 7.1000(a)(1), which 
provides that national banks and Federal savings associations are 
permitted to invest in real estate for use in their banking activities. 
The revised definition defines former banking premises as real estate 
permitted under section 7.1000(a)(1) that is no longer used or 
contemplated to be used for the purposes permitted under that 
section.\7\ The revision should improve regulatory consistency by 
clarifying that both rules cover the same types of real estate for 
banking activities and eliminate confusion about whether the rules 
refer to different types of properties.
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    \7\ While the proposed rule referenced 12 CFR 7.1000(a)(2), 
which provides a non-exclusive list of permissible real estate 
investments, the OCC believes a reference to the general authority 
in 7.1000(a)(1) is more appropriate for the final rule.
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B. Holding Period (Sec.  34.82)

    This section specifies how long a national bank or a Federal saving 
association may hold OREO, provides the starting date for that holding 
period, and addresses additional related provisions affecting the 
holding period.
    The holding period for national banks under the final rule remains 
unchanged and consists of an initial five-year holding period, with up 
to an additional five years if approved by the OCC.
    The final rule establishes an initial holding period for Federal 
savings associations of five years after commencement of the holding 
period to ensure the safe and sound management of OREO holdings. If the 
Federal savings association has not disposed of the OREO within the 
initial five-year holding period, the savings association may request 
OCC approval to continue to hold the real property as OREO for up to 
five additional years. These provisions are consistent with the rules 
that apply to national banks. The OCC's supervisory experience is that 
both types of institutions generally have or obtain similar types of 
OREO. As with national banks, in deciding whether to grant the approval 
to hold OREO beyond the initial five-year holding period, the OCC would 
expect to consider, among other factors, the Federal savings 
association's current and prior efforts to dispose of the property and 
safety and soundness concerns related to an immediate disposition of 
the property. During the initial five-year holding period and any 
subsequent approved period, the Federal savings association would need 
to make reasonable efforts to dispose of the OREO. This provision is 
consistent with prior OTS expectations. This framework also is 
consistent with the requirement previously applicable to Federal 
savings associations under 12 CFR part 167, which required savings 
associations to deduct from regulatory capital the value of OREO held 
for more than five years, or a longer period with OCC approval, as an 
equity investment. This provision created incentives for Federal 
savings associations to dispose of OREO within five years, or a longer 
period approved by the OCC, as the regulatory capital treatment for 
failure to dispose of the property generally would be more onerous than 
disposing of the property. The OCC believes that an initial five-year 
holding period is a sufficient amount of time to dispose of most OREO 
and the option to extend the holding period for an additional five 
years should be sufficient to address atypical properties or unusual 
real estate market conditions.
    The final rule also adopts for Federal savings associations the 
existing national bank provision describing the date the holding period 
for OREO begins. Generally, the holding period for DPC real estate 
would begin on the date the property is transferred to the national 
bank or Federal savings association (for example, after a judicial 
foreclosure or deed-in-lieu of foreclosure), which may be different 
than the date the institution must recognize the property as OREO for 
accounting and financial reporting purposes. The title transfer law of 
the state or other jurisdiction where the property is located governs 
when the property is considered transferred to the national bank or 
Federal savings association. The holding period for former bank 
premises begins when the national bank or Federal savings association 
ceases using a property as bank premises (whether outright or after 
relocating) or abandons a plan to use property held for future bank 
premises.
    The OCC is modifying the holding period for OREO obtained by a 
Federal savings association prior to the effective date of this final 
rule. For this OREO, the holding period would begin on the rule's 
effective date (December 1, 2019) to provide for a full initial five-
year holding period. The OCC still would consider the entire time the 
OREO has been held by the Federal savings association in evaluating any 
request for an additional holding period beyond that initial five 
years. The OCC believes this accommodation provides Federal savings 
associations with a reasonable timeframe to dispose of OREO held prior 
to the effective date of the final rule, rather than calculating the 
holding period back to the initial transfer date.
    The OCC also is clarifying that when a national bank or Federal 
savings association obtains OREO from a merged or acquired institution, 
the relevant holding period commences on the effective date of the 
merger or acquisition and would not include any time the OREO had been 
held by the acquired institution prior to the merger or acquisition. 
Similarly, when an institution converts to a national bank or Federal 
savings association, the relevant holding period begins on the date of 
conversion. However, if the institution was already a national bank or 
Federal savings association immediately prior to the conversion, the 
holding period would not reset on the conversion date.\8\ The OCC 
believes this is appropriate because different OREO standards might 
apply to an institution before it becomes a national bank or Federal 
savings association, unless the institution is already covered by the 
OCC's OREO rule. The revision also extends to Federal savings 
associations the national bank regulatory provision which provides that 
the holding period for DPC real estate that is subject to a redemption 
period imposed under state law begins after the expiration of the 
redemption period.
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    \8\ For example, if a Federal savings association that had OREO 
with a holding period that began in January 2020, converted to a 
national bank in June 2023, the OCC would still consider the holding 
period for the OREO to have begun in January 2020, not June 2023.
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    The revised section also addresses an interpretive issue that 
arises when a national bank or Federal savings association enters into 
a transaction to dispose of OREO, but the real estate is conveyed back 
to the institution for a reason other than a subsequent purchase by the 
institution (for example, if there is a failure to complete the 
disposition or the disposition is validly rescinded or unwound). In 
those cases, the holding period would be tolled during the period of 
time the OREO property was not under the bank's or savings 
association's control. For example, if a third party purchases OREO 
from a national bank or Federal savings association but later legally 
rescinds the sale, the bank or savings association cannot start a new 
five-year holding period for the property. Instead, any previous 
holding period (including approved extensions) is tolled between the 
time the bank or savings association sold and reacquired the real 
property. Similarly, in certain U.S. government mortgage loan programs 
a national bank or Federal savings association may be required to 
transfer a foreclosed

[[Page 56371]]

property to a U.S. government entity, and that entity may later validly 
reject receipt of the property and return title to the bank or savings 
association. In that case, the national bank or Federal savings 
association could not start a new five-year holding period for the 
property but could toll any previous holding period (including approved 
extensions) during the time the government entity had possession of the 
property. However, if the national bank or Federal savings association 
re-acquires property that was previously OREO and had been disposed of 
consistent with this part, then the five-year holding period would 
reset on that property. For example, if a national bank or Federal 
savings association originates a mortgage loan in connection with the 
sale of an OREO property that met the requirements for a valid 
disposition under part 34, but later forecloses on that property due to 
missed mortgage payments, then the bank or savings association will 
obtain a new five-year holding period.

C. Disposition of OREO (Sec.  34.83)

    This section specifies methods for national banks and Federal 
savings associations to dispose of OREO. Generally, the final rule 
retains the existing disposal methods for national banks and allows 
Federal savings associations to dispose of OREO using those same 
methods. These methods include: (i) Selling the property outright or 
over a period of time; (ii) using DPC real estate as bank premises or 
affiliate premises; or (iii) entering into subleases of OREO leases. 
Writing OREO (whether owned or leased) down to zero for accounting 
purposes is not a valid disposition under the existing rules and would 
not be a valid disposition under the final rule.
    To provide for additional flexibility to dispose of OREO, the OCC 
also is adding a new paragraph (a)(5) that recognizes that OREO may be 
disposed of in other ways approved by the OCC consistent with safe and 
sound banking practices. For example, the OCC previously has approved 
national banks and Federal savings associations to dispose of OREO in 
certain circumstances by donating or escheating OREO or by negotiating 
early terminations of OREO leases.
    The final rule recognizes that, unlike a national bank, a Federal 
savings association also may transfer OREO to a service corporation.\9\ 
Under HOLA and 12 CFR 5.59, a Federal savings association may invest in 
a service corporation, which may engage in the same activities as its 
parent Federal savings association under the same terms and conditions. 
A service corporation also may engage in additional activities not 
permitted at a Federal savings association, including certain real 
estate related services such as holding property as an investment in 
real estate.\10\ In addition, 12 CFR 5.59(i) permits a Federal savings 
association to make a contribution to a service corporation in the 
exercise of the association's salvage powers.\11\ Consistent with HOLA 
and 12 CFR 5.59, the final rule allows a Federal savings association, 
through a service corporation, to hold OREO property as an investment 
for longer than 10 years. However, under current statutory and 
regulatory capital requirements, a Federal savings association must 
deconsolidate, and deduct any investments in, a subsidiary engaged in 
activities not permissible for a national bank, including holding 
property as an investment in real estate.\12\
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    \9\ This provision would not apply to a Federal savings 
association that elects to be treated as a covered savings 
association. A covered savings association is not permitted to 
establish any new service corporations and generally must divest any 
interests in existing service corporations. See 12 CFR 101.5.
    \10\ See 12 U.S.C. 1464(c)(4)(B) and 12 CFR 5.59.
    \11\ 12 CFR 5.59(i) provides that ``a Federal savings 
association may exercise its salvage power to make a contribution or 
a loan . . . to a service corporation (``salvage investment'') that 
exceeds the maximum amount otherwise permitted under law or 
regulation.'' The Federal savings association must demonstrate that: 
(i) The salvage investment protects the association's interest in 
the service corporation; (ii) the salvage investment is consistent 
with safety and soundness; and (iii) the association considered 
alternatives to the salvage investment but determined the 
alternatives would not satisfy (i) and (ii).
    \12\ 12 U.S.C. 1464(t)(5) and 12 CFR 3.22(a)(8). Holding 
property as an investment in real estate is not authorized for a 
national bank under 12 U.S.C. 29.
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    Finally, this section of the final rule retains the requirement 
that a national bank must make a diligent and ongoing effort to dispose 
of OREO and maintain documentation of those efforts. The final rule 
also applies these provisions to Federal savings associations. 
Compliance with the requirement to document the national bank's or 
Federal savings association's diligence when attempting to dispose of 
OREO is an important consideration if the national bank or Federal 
savings association requests an extension to hold OREO beyond the 
initial five-year holding period. The requirement that a Federal 
savings association make diligent efforts to dispose of OREO and 
maintain relevant documentation is consistent with both prior OTS 
expectations that savings associations develop salvage plans that 
included provisions for disposition of OREO and the existing 
requirement that Federal savings associations maintain documentation of 
appraisals of OREO.\13\
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    \13\ 12 CFR 160.172.
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D. Appraisal Requirements (Sec.  34.85)

    This section specifies the appraisal requirements applicable to 
OREO. The final rule carries over the existing requirements for 
appraisals of OREO for national banks and applies those same 
requirements to Federal savings associations. Generally, this section 
requires an appraisal consistent with 12 CFR part 34, subpart C when 
property is obtained as OREO, followed by periodic monitoring 
thereafter. In addition, this section would continue to include 
existing exceptions from the appraisal requirements. For example, an 
appraisal is not required if there is still a valid appraisal that was 
created in a transaction involving the property, as described in Sec.  
34.85(b). Because the requirements for appraisals of OREO held by 
Federal savings associations are set out in the final rule, the OCC 
also is repealing 12 CFR 160.172, which includes comparable appraisal 
standards for OREO held by Federal savings associations.
    As noted above, the OCC received two comments raising three issues 
related to the appraisal provisions applicable to OREO. One comment 
requested that the OCC permit appraisals of OREO to use liquidation 
value or disposition value instead of market value as required by the 
current rule, as the commenter stated that these alternate values are 
commonly used with OREO. The OCC notes that liquidation value or 
disposition value generally assume a seller who is compelled or 
strongly motivated to sell a property as compared to a market value 
appraisal that assumes a willing seller in the ordinary course of 
business. As the OREO rule permits an initial holding period of five 
years, that timeframe aligns better with the assumptions of a seller 
under a market value appraisal rather than a liquidation value or 
disposition value appraisal for purposes of this rule. While a bank or 
savings association may request alternate values in addition to market 
value, only a market value appraisal is required for OREO in the final 
rule.
    Another commenter requested clarification regarding the amount a 
bank should use in determining whether to request an appraisal of a 
property in foreclosure. Under the final rule, an appraisal is required 
by default when the property is obtained as OREO,

[[Page 56372]]

unless the ``recorded investment amount'' of the OREO is less than the 
applicable threshold in 12 CFR 34.43(a). For foreclosed real estate, 
referred to as DPC property in the final rule, recorded investment 
amount means the recorded loan balance (i.e., contractual loan balance 
less payments and charge-offs) at the time the property is obtained as 
OREO. If the recorded investment amount is less than the applicable 
threshold, 12 CFR 34.43(b) generally requires an evaluation, instead of 
an appraisal, for OREO.
    The same commenter also requested clarification on applying the 
requirement to obtain an appraisal or evaluation after a foreclosed 
property is transferred to OREO but when the bank may not have full 
access to the property (for example, if the bank obtains title to the 
property but the prior owners continue to occupy the property as 
squatters) and whether an alternate valuation is appropriate in those 
circumstances. The OCC believes that it is important for a bank or 
savings association to obtain the best appraisal or evaluation possible 
at the time a property is transferred to OREO. In situations where it 
may be unreasonable or unsafe to conduct a full appraisal or evaluation 
of the interior or other portions of the property, the appraisal or 
evaluation may include ``extraordinary assumptions'' about the 
condition of the interior of the property or other areas that could not 
reasonably and safely be accessed at the time the property is 
transferred to OREO. Once the bank or savings association completes the 
process of obtaining access to or possession of the property and the 
property has been inspected by the lender or an authorized third-party, 
the appraisal or evaluation should promptly be updated if the actual 
condition of the property materially differs from the extraordinary 
assumptions.

E. OREO Expenditures and Notification (Sec.  34.86)

    This section contains provisions related to permissible 
expenditures on OREO. The final rule codifies various interpretations 
regarding other permissible expenses related to OREO for national banks 
and Federal savings associations in new paragraphs (a) and (b). 
Paragraph (a) allows national banks and Federal savings associations to 
pay any normal operating expenses relating to the OREO property, such 
as taxes, insurance, utilities, and maintenance, and homeowners' or 
condominium association fees, to the extent those fees are reasonable 
and consistent with safe and sound banking practices. This addition is 
consistent with a provision in existing paragraph (b)(1), prior 
interpretations issued by the OCC for national banks, and prior OTS 
expectations concerning payment of taxes, insurance, and similar 
expenses on OREO by Federal savings associations.\14\
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    \14\ For more information, see Comptroller's Handbook on ``Other 
Real Estate Owned'' (August 2018). For Federal savings associations, 
this provision was included in the OTS Examination Handbook, Section 
251, ``Real Estate Owned and Repossessed Assets'' (December 2010), 
which has since been rescinded by the OCC.
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    Paragraph (b) allows national banks and Federal savings 
associations to pay expenses for the operation of a business associated 
with the OREO property, if (i) payment of the expenses is reasonably 
calculated to reduce the shortfall between the current value of the 
property and the national bank or Federal savings association's 
investment in the property; and (ii) the expenses are consistent with 
safe and sound banking practices. For example, if a national bank or 
Federal savings association obtains an OREO property that includes a 
functioning hotel and resort, the national bank or Federal savings 
association may be able to minimize its loss on the defaulted loan by 
continuing to pay business expenses to operate the hotel and resort, 
such as staff wages, inventory, management fees, and licensing fees, 
while the OREO is being prepared for sale. The OCC has previously 
addressed these types of expenses for national banks consistent with 
safe and sound banking practices, and this provision extends the 
permission to Federal savings associations.\15\
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    \15\ See Comptroller's Handbook on ``Other Real Estate Owned'' 
(August 2018).
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    Under the current rule, a national bank is permitted to make 
advances to complete an OREO development or improvement project 
(referred to as ``additional expenditures''). Paragraph (c) continues 
the existing requirements for additional expenditures on OREO for a 
national bank and applies the same requirements to a Federal savings 
association. A national bank or Federal savings association could make 
additional expenditures only if (i) the expenditures are reasonably 
calculated to reduce the shortfall between the current value of the 
property and the bank's investment in the property; (ii) the 
expenditures are not made for purposes of speculation in real estate; 
and (iii) the expenditures are consistent with safe and sound banking 
practices. These requirements are consistent with prior OTS 
expectations, which addressed a Federal savings association's 
reasonable capital expenditures to reduce the loss on OREO obtained by 
the savings association.\16\
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    \16\ For Federal savings associations, this provision was 
included in the OTS Examination Handbook, Section 251, ``Real Estate 
Owned and Repossessed Assets'' (December 2010), which has since been 
rescinded by the OCC.
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    In addition, paragraph (d) updates the requirements for prior 
notification for significant additional expenditures on OREO for 
national banks and extends the provision to Federal savings 
associations. Currently, under 12 CFR 34.86(b), a national bank must 
notify the OCC at least 30 days before making additional expenditures 
if the amount of the expenditures and recorded investment in the OREO 
exceeds ten percent of the national bank's capital and surplus, which 
generally is based on regulatory capital calculated under 12 CFR part 
3. Federal savings associations were subject to supervisory review of 
any expenditures on OREO in excess of their lending limits, which are 
calculated based on a formula that incorporates a percentage of capital 
and surplus.\17\ While based on different calculations, the supervisory 
review for Federal savings associations had a similar purpose as the 
required OCC notification for national banks, namely, to ensure that 
institutions did not expend an excessive amount of funds to complete or 
renovate OREO. The OCC is updating and streamlining the notification 
provision by requiring prior notification only when the proposed 
additional expenditures and recorded investment in an individual OREO 
property exceed 10 percent of the institution's total equity capital 
based on the institution's most recent Consolidated Reports of 
Condition and Income (Call Report). The OCC believes that using a 
measure based on total equity capital for this purpose, rather than a 
measure tied to 12 CFR part 3 regulatory capital or lending limits, 
allows for a less burdensome and more transparent calculation, while 
not impairing the OCC's supervisory review of institutions that propose 
making significant additional expenditures on OREO.
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    \17\ This provision was reflected in the OTS lending limits at 
12 CFR 560.93 and included in the OTS Examination Handbook, Section 
211, ``Loans to One Borrower'' (December 2007). The OCC has 
superseded the rule and rescinded the handbook section.
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    A comparison of capital and surplus and total equity capital for 
national banks supports this approach.\18\ Based on information from 
the June 30, 2018

[[Page 56373]]

Call Report, the measures of regulatory capital and total equity 
capital are numerically comparable, and identical in some cases, for 
many national banks that hold OREO. Under the final rule, national 
banks with significant loan loss reserves or excessive losses recorded 
in accumulated other comprehensive income will generally have a lower 
limit for notification compared with the ``capital and surplus'' 
measure. The OCC believes that this result is appropriate, as those 
losses may indicate national banks with a higher risk profile for which 
notification of significant OREO expenditures is most relevant. 
National banks holding assets that are deducted under the regulatory 
capital rule, such as mortgage servicing assets or investments in other 
financial institutions, would generally have a higher limit for 
notification under the revised measure.
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    \18\ The OCC did not review these measures for Federal savings 
associations because Federal savings associations were not subject 
to either the existing limit or notification provision for 
improvements to OREO.
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F. Additional Provisions

    The OCC is rescinding existing 12 CFR 34.87, which requires 
national banks to account for OREO consistent with the instructions for 
the Call Report, because it is now redundant to statutory requirements. 
Historically, there have been differences between regulatory accounting 
principles and generally accepted accounting principles (GAAP). 
However, currently, national banks and Federal savings associations 
must follow GAAP when accounting for transactions involving OREO.\19\ 
Therefore, codifying this requirement in the OREO rule is unnecessary. 
Guidance on the application of GAAP for OREO transactions can be found 
in the instructions for the Call Report and the OCC's Bank Accounting 
Advisory Series.\20\ However, the OCC notes that, although the 
accounting standard generally establishes a bright line for when a bank 
or savings association must report a property as OREO for financial 
reporting purposes (i.e., when a judge completes a judicial 
foreclosure), section 34.82(b) does not establish a bright line for 
when property is originally transferred to a bank or savings 
association. As a result, the date on which reporting requirements 
begin for OREO under the accounting standard may be different than the 
date that the holding period commences under 34.82(b), as described 
above in Section III.B. The OCC also notes that writing off a property 
or lease classified as OREO for accounting purposes does not eliminate 
the need to comply with the requirements of this subpart, including the 
requirement for appraisals and disposition of the property or lease 
under one of the allowed methods.
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    \19\ See 12 U.S.C. 1831n(a)(2).
    \20\ Bank Accounting Advisory Series (August 2019), available 
at: https://www.occ.gov/publications-and-resources/publications/banker-education/files/pub-bank-accounting-advisory-series.pdf.
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IV. Technical Amendments

    As described above, the OCC also is removing Appendices A and B to 
12 CFR part 3 (risk-based capital guidelines for national banks) and 12 
CFR part 167 (capital requirements for Federal savings associations) 
and making conforming technical edits to other parts, as part 167 is 
outdated and includes OREO provisions that conflict with the provisions 
described in this final rule. The final rule also makes conforming 
technical changes to portions of the OCC's rules that refer to 
Appendices A and B to 12 CFR part 3 or to 12 CFR part 167. 
Specifically, the OCC is making conforming edits to 12 CFR 3.1, 6.1, 
6.2, Appendix A to Subpart D of part 34, 46.6, 160.100, Appendix A to 
160.101, 161.55, 163.74, and 163.80. This final rule does not impact 
the legal status of any reference to the superseded capital rules in 
outstanding compliance and enforcement orders, agreements, and 
memoranda of understanding entered into by the OCC and a national bank 
or Federal savings association, as those references became references 
to 12 CFR part 3 when the revised capital rule became effective.

V. Regulatory Analyses

A. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995,\21\ the OCC may not 
conduct or sponsor, and a person is not required to respond to, an 
information collection unless the information collection displays a 
valid OMB control number. The OCC has submitted the information 
collection requirements imposed by this final rule to OMB for review. 
However, the final rule will not result in a change in burden. While 
the respondent count will increase with the addition of Federal savings 
associations, the OCC estimates fewer notices from national banks due 
to a decrease in charters since the last review, resulting in no change 
in burden.
---------------------------------------------------------------------------

    \21\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Section 34.86(d) updates the requirements for prior notification 
for significant additional expenditures on OREO for national banks and 
extends the provision to Federal savings associations. Currently, a 
national bank must notify the OCC at least 30 days before making 
additional expenditures if the amount of the expenditures and recorded 
investment in the OREO exceeds ten percent of its capital and surplus, 
based on regulatory capital calculated under 12 CFR part 3. Federal 
savings associations are subject to supervisory review of any 
expenditures on OREO in excess of their lending limits, which are 
calculated based on a formula that incorporates a percentage of capital 
and surplus.
    The final rule updates and streamlines the notification provision 
by requiring prior notification only when the proposed additional 
expenditures and recorded investment in an individual OREO property 
exceeds 10 percent of the institution's total equity capital based on 
its most recent Call Report. National banks with significant loan loss 
reserves or excessive losses recorded in accumulated other 
comprehensive income will generally have a reduced limit for 
notification. National banks holding assets that are deducted under the 
regulatory capital rule, will generally have an increase limit for 
notification under the final rule. The OCC expects a similar result for 
Federal savings associations that previously used a notification 
framework based on lending limits.
    Title: Real Estate Lending and Appraisals.
    OMB Control No.: 1557-0190.
    Frequency of Response: On occasion.
    Affected Public: Businesses or other for-profit organizations.
    Estimated Number of Respondents: 6.
    Estimated Burden per Respondent: 5 hours.
    Estimated Total Annual Burden: 30 hours.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the functions of the OCC, including whether the 
information has practical utility;
    (b) The accuracy of the OCC's estimates of the burden of the 
collections of information;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the collections on respondents, 
including through the use of automated collection techniques or other 
forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.

B. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act \22\ requires an agency, in 
connection with

[[Page 56374]]

a final rule, to prepare a Final Regulatory Flexibility Analysis 
describing the impact of the rule on small entities (defined by the SBA 
for purposes of the RFA to include commercial banks and savings 
institutions with total assets of $600 million or less and trust 
companies with total revenue of $41.5 million or less) or to certify 
that the final rule would not have a significant economic impact on a 
substantial number of small entities. As of December 31, 2018, the OCC 
supervised 782 small entities. The final rule would apply to all 
entities supervised by the OCC and, therefore, would affect a 
substantial number of small entities. The economic impact on each small 
Federal savings association is estimated to be approximately $1,824, 
which is not significant based on 5% of total annual salaries or 2.5% 
of other noninterest income. The economic impact on each small national 
bank is estimated to be de minimis. Therefore, the OCC certifies the 
final rule would not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \22\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

C. OCC Unfunded Mandates Reform Act of 1995

    The OCC analyzed the final rule under the factors set forth in the 
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this 
analysis, the OCC considered whether the final rule 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 in any one year (adjusted for inflation). The OCC 
estimates that the total cost of the final rule is $568,000. Therefore, 
the OCC has determined that this final rule would not result in 
expenditures by State, local, and Tribal governments, or the private 
sector, of $100 million or more in any one year. Accordingly, the OCC 
has not prepared a written statement to accompany this final rule.

D. Riegle Community Development and Regulatory Improvement Act of 1994

    This rulemaking would not impose additional reporting, disclosure, 
or other requirements on an insured depository institution. Therefore, 
section 302(a) of the Riegle Community Development and Regulatory 
Improvement Act of 1994 does not apply to this rulemaking.

E. Congressional Review Act Determination

    Pursuant to the Congressional Review Act, the Office of Management 
and Budget's Office of Information and Regulatory Affairs designated 
this rule as not a ``major rule,'' as defined at 5 U.S.C. 804(2).

List of Subjects

12 CFR Part 3

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

12 CFR Part 6

    National banks.

12 CFR Part 34

    Appraisal, Appraiser, Banks, Banking, Consumer protection, Credit, 
Mortgages, National banks, Reporting and recordkeeping requirements, 
Savings associations, Truth in lending.

12 CFR Part 46

    Banks, Banking, Capital, Disclosures, National banks, Reporting and 
recordkeeping requirements, Risk, Stress test.

12 CFR Part 160

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.

12 CFR Part 161

    Administrative practice and procedure, Savings associations.

12 CFR Part 163

    Accounting, Administrative practice and procedure, Advertising, 
Conflicts of interest, Crime, Currency, Investments, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, Surety 
bonds.

12 CFR Part 167

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

Authority and Issuance

    For the reasons set out in the preamble, the OCC is revising 12 CFR 
chapter I as follows:

PART 3--CAPITAL ADEQUACY STANDARDS

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

    Authority:  12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).


Sec.  3.1   [Amended]

0
2. Section 3.1 is amended by removing and reserving paragraph 
(f)(1)(ii).

Appendix A to Part 3 [Removed]

0
3. Remove Appendix A to part 3.

Appendix B to Part 3 [Removed]

0
4. Remove Appendix B to part 3.

PART 6--PROMPT CORRECTIVE ACTION

0
5. The authority citation for part 6 continues to read as follows:

     Authority:  12 U.S.C. 93a, 1831o, 5412(b)(2)(B).


Sec.  6.1   [Amended]

0
6. Section 6.1 is amended by removing and reserving paragraph (f)(1).


Sec.  6.2   [Amended]

0
7. Section 6.2 is amended by removing footnotes 30, 31, 32, 33, 34, and 
35.

PART 34--REAL ESTATE LENDING AND APPRAISALS

0
8. The authority citation for part 34 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1462a, 1463, 
1464, 1465, 1701j-3, 1828(o), 3331 et seq., 5101 et seq., and 
5412(b)(2)(B) and 15 U.S.C. 1639h.

Subpart D--Real Estate Lending Standards

0
9. Footnote 2 of Appendix A to Subpart D of part 34 is revised to read 
as follows:

Appendix A to Subpart D of Part 34--Interagency Guidelines for Real 
Estate Lending

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

Subpart E--Other Real Estate Owned

0
10. Section 34.81 is amended by:
0
a. Removing the paragraph designations and arranging the definitions in 
alphabetical order;
0
b. Removing the definition of ``capital and surplus''; and
0
c. Revising the definitions of ``debts previously contracted (DPC) real 
estate'' and ``former banking premises''.
    The revisions read as set forth below.


Sec.  34.81  Definitions.

* * * * *

[[Page 56375]]

    Debts previously contracted (DPC) real estate means real estate 
(including leases) acquired by a national bank or Federal savings 
association through any means in full or partial satisfaction of a debt 
previously contracted.
    Former banking premises means real estate permissible under Sec.  
7.1000(a)(1) of this chapter that is no longer used or contemplated to 
be used for the purposes permitted under that section.
* * * * *

0
11. Section 34.82 is amended by revising paragraphs (a) and (b) and 
adding paragraphs (d) and (e) to read as follows:


Sec.  34.82  Holding period.

    (a) Holding period for OREO--(1) National bank. A national bank 
shall dispose of OREO at the earliest time that prudent judgment 
dictates, but not later than the end of the holding period (or an 
extension thereof) permitted by 12 U.S.C. 29.
    (2) Federal savings association. A Federal savings association may 
hold OREO for not more than five years after commencement of the 
holding period. On the request of a Federal savings association, the 
OCC may extend the holding period for not more than an additional five 
years.
    (b) Commencement of holding period. The holding period begins on 
the date that:
    (1) Ownership of the property is originally transferred to a 
national bank or Federal savings association, including as a result of 
a merger with or acquisition of another organization holding OREO;
    (2) A national bank or Federal savings association completes 
relocation from former banking premises to new banking premises or 
ceases to use the former banking premises without relocating;
    (3) A national bank or Federal savings association decides not to 
use real estate acquired for future banking expansion;
    (4) An institution converts to a national bank or Federal savings 
association, unless the institution was a national bank or Federal 
savings association immediately prior to the conversion; or
    (5) Is December 1, 2019, for OREO obtained by a Federal savings 
association prior to that date.
* * * * *
    (d) Effect of failed disposition. If a national bank or Federal 
savings association disposes of OREO, but the real estate subsequently 
is conveyed back to the institution within five years as a result of a 
valid rescission or invalidation of the original disposition, then the 
holding period will be tolled for the period during which the real 
estate was not in possession of the national bank or Federal savings 
association.
    (e) Re-acquisition of former OREO. If a national bank or Federal 
savings association reacquires a property that had been OREO and was 
disposed of consistent with Sec.  34.83, the holding period will reset.

0
12. Section 34.83 is amended:
0
a. By revising the section heading and paragraphs (a) introductory 
text, (a)(3) introductory text, (a)(3)(i)(B), and (a)(3)(ii);
0
b. In paragraph (a)(4) by removing the period at the end and adding ``; 
or'' in its place;
0
c. Adding paragraph (a)(5);
0
d. Redesignating paragraph (b) as paragraph (c);
0
e. Adding new paragraph (b); and
0
f. In newly redesignated paragraph (c), by adding ``or Federal savings 
association'' after ``national bank''.
    The revisions and addition read as follows:


Sec.  34.83  Disposition of OREO.

    (a) Disposition. A national bank or Federal savings association may 
dispose of OREO in the following ways:
* * * * *
    (3) With respect to a lease:
    (i) By obtaining an assignment or a coterminous sublease. If a 
national bank or Federal savings association enters into a sublease 
that is not coterminous, the period during which the master lease must 
be divested will be suspended for the duration of the sublease, and 
will begin running again upon termination of the sublease. A national 
bank or Federal savings association holding a lease as OREO may enter 
into an extension of the lease that would exceed the holding period 
referred to in Sec.  34.82 if the extension meets the following 
criteria:
* * * * *
    (B) The national bank or Federal savings association, prior to 
entering into the extension, has a firm commitment from a prospective 
subtenant to sublease the property; and
* * * * *
    (ii) Should the OCC determine that a national bank or Federal 
savings association has entered into a lease, extension of a lease, or 
a sublease for the purpose of real estate speculation, the OCC will 
take appropriate measures to address the violation, which may include 
requiring the bank or savings association to take immediate steps to 
divest the lease or sublease; and
* * * * *
    (5) By any other method approved by the OCC.
    (b) Additional method for Federal savings associations. A Federal 
savings association also may transfer OREO to a service corporation. A 
service corporation may hold real property transferred to it:
    (1) As OREO, subject to the requirements otherwise applicable to 
the Federal savings association under this Subpart E; or
    (2) As an investment in real estate under Sec.  5.59.
* * * * *


Sec.  34.85  [Amended]

0
13. Section 34.85 is amended:
0
a. After ``national bank'', wherever it appears, by adding ``or Federal 
savings association''; and
0
b. In paragraphs (a)(2) and (b), by adding ``or savings association'' 
after ``the bank''.

0
14. Section 34.86 is revised to read as follows:


Sec.  34.86  OREO expenditures and notification.

    (a) Operating expenditures. A national bank or Federal savings 
association may pay operating expenses on OREO, including taxes, 
insurance, utilities, and maintenance, that are reasonable and 
consistent with safe and sound banking practices.
    (b) Business expenditures. A national bank or Federal savings 
association may pay expenses for OREO that includes the operation of a 
business, provided the expenses are:
    (1) Reasonably calculated to reduce any shortfall between the 
property's market value and the recorded investment amount; and
    (2) Consistent with safe and sound banking practices.
    (c) Additional expenditures. For OREO that is a development or 
improvement project, a national bank or Federal savings association may 
make advances to complete the project if the advances are:
    (1) Reasonably calculated to reduce any shortfall between the 
property's market value and the recorded investment amount;
    (2) Not made for the purpose of speculation in real estate; and
    (3) Consistent with safe and sound banking practices.
    (d) Notification procedures for additional expenditures. (1) A 
national bank or Federal savings association shall notify the 
appropriate supervisory office at least 30 days before implementing a 
development or improvement plan for OREO when the sum of the plan's 
estimated cost and the

[[Page 56376]]

bank's or savings association's current recorded investment amount 
(including any unpaid prior liens on the property) exceeds 10 percent 
of the bank's or savings association's total equity capital on its most 
recent report of condition. A national bank or Federal savings 
association need notify the OCC under this paragraph (d)(1) only once.
    (2) The required notification must demonstrate that the additional 
expenditure is consistent with the conditions and limitations in 
paragraph (c) of this section.
    (3) Unless informed otherwise, the national bank or Federal savings 
association may implement the proposed plan on the thirty-first day (or 
sooner, if notified by the OCC) following receipt by the OCC of the 
notification, subject to any conditions imposed by the OCC.


Sec.  34.87  [Removed]

0
15. Remove Sec.  34.87.

PART 46--ANNUAL STRESS TEST

0
16. The authority citation for part 46 continues to read as follows:

    Authority: 12 U.S.C. 93a; 1463(a)(2); 5365(i)(2); and 
5412(b)(2)(B).


Sec.  46.6  [Amended]

0
17. Section 46.6 is amended in paragraph (a)(2), in the first sentence, 
by removing ``or part 167, as applicable,'' after ``12 CFR part 3''.

PART 160--LENDING AND INVESTMENT

0
18. The authority for part 160 continues to read as follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1701j-3, 1828, 
3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.


Sec.  160.100  [Amended]

0
19. Section 160.100 is amended by removing ``or 167.1, as 
applicable,''.

0
20. Section 160.101 is amended by revising footnote 2 in appendix A to 
Sec.  160.101 to read as follows:


Sec.  160.101  Real estate lending standards.

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


Sec.  160.172  [Removed]

0
21. Remove Sec.  160.172.

PART 161--DEFINITIONS FOR REGULATIONS AFFECTING ALL SAVINGS 
ASSOCIATIONS

0
22. The authority for part 161 continues to read as follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 5412(b)(2)(B).


Sec.  161.55  [Amended]

0
23. Section 161.55 is amended in paragraph (c) by removing ``or part 
167, as applicable'' after ``12 CFR part 3''.

PART 163--SAVINGS ASSOCIATIONS--OPERATIONS

0
24. The authority for part 163 continues to read as follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1817, 1820, 1828, 
1831o, 3806, 5101 et seq., 5412(b)(2)(B); 31 U.S.C. 5318; 42 U.S.C. 
4106.


Sec.  163.74  [Amended]

0
25. Section 163.74 is amended in paragraphs (i)(2)(iv) and (v) by 
removing ``or part 167, as applicable,'' after ``12 CFR part 3''.


Sec.  163.80  [Amended]

0
26. Section 163.80 is amended in paragraph (e)(1) introductory text by 
removing ``or part 167, as applicable''.

PART 167--[REMOVED]

0
27. Under the authority of 12 U.S.C. 1464, part 167 is removed.

    Dated: October 11, 2019.
Morris R. Morgan,
First Deputy Comptroller, Comptroller of the Currency.
[FR Doc. 2019-22823 Filed 10-21-19; 8:45 am]
 BILLING CODE 4810-33-P