[Federal Register Volume 61, Number 11 (Wednesday, January 17, 1996)]
[Proposed Rules]
[Pages 1162-1182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-409]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545, 556, 560, 563, 571
[No. 96-1]
RIN 1550-AA94
Lending and Investment
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: Pursuant to section 303 of the Community Development and
Regulatory Improvement Act of 1994 (CDRIA) and the Regulatory
Reinvention Initiative of the Vice President's National Performance
Review, the Office of Thrift Supervision (OTS) has reviewed each of its
lending and investment regulations and related policy statements set
forth in the Code of Federal Regulations (CFR) to determine whether it
is necessary, imposes the least possible burden consistent with safety
and soundness, and is written in a clear, straightforward manner. As a
result, the OTS today is proposing to update, reorganize, and
substantially streamline its lending and investment regulations and
policy statements.
DATES: Comments must be received on or before April 16, 1996.
ADDRESSES: Send comments to Manager, Dissemination Branch, Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552, Attention Docket No. 96-1. These
submissions may be hand-delivered to 1700 G Street, NW., from 9:00 a.m.
to 5:00 p.m. on business days; they may be sent by facsimile
transmission to FAX Number (202) 906-7755. Comments will be available
for inspection at 1700 G Street, NW., from 9:00 a.m. until 4:00 p.m. on
business days.
FOR FURTHER INFORMATION CONTACT: For general information contact:
William J. Magrini, Project Manager, Supervision Policy (202) 906-5744;
Ellen J. Sazzman, Counsel (Banking and Finance), (202) 906-7133; or
Deborah Dakin, Assistant Chief Counsel, (202) 906-6445, Regulations and
Legislation Division, Chief Counsel's Office. For information about
preemption, contact Evelyne Bonhomme, Counsel (Banking and Finance),
(202) 906-7052, Regulations and Legislation Division, Chief Counsel's
Office, Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background of the proposal
II. Historical overview of current lending and investment
regulations
III. Discussion
A. General description of objectives
1. Removal of unnecessary regulations
2. Converting regulations into guidance
3. Reorganization of lending and investment regulations
4. Continuity of current position on federal preemption in
lending area
B. Section-by-section analysis
1. Disposition of existing sections
2. New Part 560--Lending and investment
IV. Proposed disposition of lending-and investment-related
regulations
V. Request for comment
VI. Paperwork Reduction Act of 1995
VII. Executive Order 12866
VIII. Regulatory Flexibility Act Analysis
IX. Unfunded Mandates Act of 1995
I. Background of the Proposal
In a comprehensive review of the agency's regulations in the spring
of 1995, the OTS identified numerous obsolete or redundant regulations
that could be quickly repealed. On December 27, 1995, the OTS published
a final rule in the Federal Register repealing these regulations.1
This resulted in an eight percent reduction in OTS regulations.
\1\ 60 FR 66866 (December 27, 1995).
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As part of its review in the spring of 1995, the OTS also
identified several key areas in its regulations for a more intensive,
systematic regulatory burden review. These areas--lending and
investment authority, subsidiaries and equity investments, insurance
and fees, and charter and bylaws--were selected for intensive review
because they are vital to thrift operations, had not been developed on
an interagency basis, and had not been substantively reviewed in recent
years.
Today's proposal presents the results of the review of the lending
and investment regulations, the first of the subject areas the OTS has
identified for intensive review. Today's proposal, if adopted in final
form, will reduce the number of lending and investment regulations from
43 to 23, and result in a net reduction of 11 pages of CFR text.
We reviewed each lending and investment regulation under the
following criteria:
Is the regulation current?
Can the regulation be eliminated without endangering
safety and soundness, diminishing consumer protection, or violating
statutory requirements?
Is the regulation's subject matter more suited for a
policy statement or handbook guidance?
Is the regulation consistent with the regulations of the
other federal banking agencies?
Can the regulation be easily understood?
Today's proposal reorganizes the lending and investment regulations
into a more rational, user-friendly framework. The proposal removes
unnecessary detail from loan documentation regulations in favor of
general safety and soundness requirements, removes unnecessary
restrictions on the lending and investment powers of federal savings
associations (including restrictions on certain commercial loans and
community development investments), minimizes inequities between
federal and state associations, and eliminates redundant or obsolete
provisions.
This proposal was developed in consultation with those who use the
regulations on a daily basis: the agency's regional examination staff
and representatives of the thrift industry. Regional staff made
recommendations
[[Page 1163]]
on the changes being considered. An industry focus group meeting among
seven thrift representatives, an industry trade association, and OTS
staff discussed staff's initial recommendations.
Both regional staff and industry representatives supported the
overall approach presented. They raised some questions, however, that
are addressed in the discussion below.
II. Historical Overview of Current Lending and Investment
Regulations
The OTS's current lending and investment regulations have remained
virtually unchanged since they were adopted in 1983, following
enactment of the Garn-St Germain Depository Institutions Act of 1982
(DIA).2 Before the DIA, the Home Owners' Loan Act (HOLA) 3
had set forth in great detail specific lending and investment
authorities and accompanying restrictions. The DIA changed this
approach, modifying HOLA section 5(c) to list the broad categories of
investment authorities afforded federal savings associations and to
indicate which of these categories were subject to percentage-of-assets
limitations. The statute provided that the HOLA 5(c) authorities could
be exercised subject to regulations promulgated by the Federal Home
Loan Bank Board (FHLBB), the OTS's predecessor agency. HOLA section
5(c) retains that format today, referring to the Director of the OTS,
rather than the FHLBB.
\2\ Pub. L. 97-320, 96 Stat. 1469, October 15, 1982.
\3\ 12 U.S.C. 1461-1470.
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Before 1983, the FHLBB's lending and investment regulations were
based on the premise that HOLA's investment authorities had to be
implemented expressly by regulation.4 That year, the FHLBB
modified its lending and investment regulations to reflect a new
regulatory approach, stating:
\4\ 48 FR 23032 (May 23, 1983).
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In order to grant associations the maximum flexibility to
exercise the authorities granted by the HOLA, the Board has
determined to revise the general approach to regulating investment
activities of Federal associations.
Accordingly, Part 545 now addresses the authority of
associations only to limit [or] interpret [the statutory
authorizations] or [to] recognize incidental authority. Federal
associations may exercise all of the authority granted by the HOLA
subject only to limitations contained in the regulations.5
\5\ Id.
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As a result, the regulations do not currently list all of a federal
association's lending and investment authorities. The FHLBB emphasized
that ``deletion of sections specifically implementing existing
authority does not mean that any authority can no longer be
exercised.'' 6
\6\ 48 FR 23032.
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As inherited from the FHLBB, today's lending and investment
regulations still contain a fair amount of detail and restrictions in
some areas, such as real estate lending; minimal guidance in others,
such as general leasing authority; and do not mention other important
investment authorities at all, such as the ability to invest in
mortgage-backed securities. Many of the restrictions that the FHLBB
retained in the 1983 regulations, such as loan-to-value requirements,
limitations on the maximum terms of loans, and some percentage-of-
assets limitations beyond those found in the statute were based on
safety and soundness concerns.
While neither the basic lending and investment authorities nor the
lending and investment regulations have changed greatly since 1983, the
safety and soundness restrictions on both federal and state savings
associations have been comprehensively revised. The Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 7
(FIRREA) imposed new capital, loans to one borrower, and appraisal
requirements and tied the investment powers of state savings
associations more closely to federal association powers. The Federal
Deposit Insurance Corporation Improvement Act of 1991 8 (FDICIA)
required new real estate lending standards, as well as operational and
managerial standards. The OTS has adopted new regulations in all of
these areas, most on an interagency basis with the other federal
banking agencies. A number of these regulations directly affect the
ways and extent to which thrifts may make investments and loans and
obviate the need for some specific provisions currently found in the
lending and investment regulations.
\7\ Pub. L. 101-73, 103 Stat. 183, Aug. 9, 1989.
\8\ Pub. L. 102-242, 105 Stat. 2236, Dec. 19, 1991.
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III. Discussion
A. General Description of Objectives
The OTS is today proposing a comprehensive revision of the lending
and investment regulations to reflect statutory and regulatory changes,
as well as the agency's and industry's experience with the current
regulations. This section will discuss the overall objectives behind
today's proposal. A section-by-section analysis follows in Part III.B.
1. Removal of Unnecessary Regulations
The first objective of the OTS proposal is to remove unnecessary,
duplicative, or outdated lending and investment regulations. By
clearing out the unnecessary regulations, the OTS hopes to reduce
regulatory compliance costs and enhance the profitability of thrift
institutions. Examples of the regulations slated for removal are
Sec. 563.97 (loans in excess of 90 percent of value), Sec. 545.44
(mortgage transactions with the Federal Home Loan Mortgage
Corporation), and Sec. 545.37 (combination loans).
In some instances, the agency believes that safety and soundness
concerns still require a regulation, but that this objective can be
satisfied with a less burdensome regulation. For example, the agency is
proposing to amend the scope of ``commercial loans'' under current
Sec. 545.46(b) to exclude commercial loans made by service
corporations. This will free up additional lending authority within the
statutory limit of 10 percent of assets for commercial loans by a
federal savings association. The agency is also proposing to remove
outdated restrictions on manufactured home loans and investments in
government securities and state housing corporations.
2. Converting Regulations Into Guidance
Second, the proposal would convert certain regulatory requirements
to handbook guidance. The goal of such a transfer would be to provide
thrifts with guidance about what the agency considers to be generally
safe and sound practices in a particular area, while giving them more
flexibility in addressing safety and soundness concerns than the
regulations currently allow.
In making determinations about moving specific provisions out of
the lending and investment regulations and into guidance, the OTS has
carefully looked at whether the other federal banking agencies have
specific regulations addressing those issues, such as classification of
assets and loan documentation, or whether they rely more on guidance.
Thrift lending regulations traditionally have been lengthy, generally
providing far more detail and leaving less room for the exercise of
judgment by the industry and examiners than have bank lending
regulations.
Section 303 of CDRIA encourages the federal banking agencies to
move towards greater uniformity in regulations and guidelines on common
supervisory issues. In the past, the federal banking agencies have
worked together to develop common regulations affecting lending,
notably the appraisal and real estate lending standards
[[Page 1164]]
regulations. Pursuant to section 303 and in continuation of this
movement towards uniformity, the OTS is proposing to shift from a more
regulation-specific to a more guidance-oriented approach in its lending
and investment regulations.
One example of this proposed shift in approach is loan
documentation. Currently, Sec. 563.170(c) (1)-(9) lists a number of
documents that thrifts must maintain in connection with various types
of secured and unsecured extensions of credit. While the document list
may provide a useful checklist and may be appropriate as guidance, all
transactions may not require all documents. Conversely, safety and
soundness concerns for a particular transaction may necessitate
different or additional documents beyond those listed in the
regulation. Accordingly, the OTS proposes replacing those specific
documentation requirements with a more general lending documentation
regulation based on interagency safety and soundness guidelines.9
\9\ Standards for Safety and Soundness, 60 FR 35674 (July 10,
1995).
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Both industry representatives attending the focus group meeting and
regional staff raised questions about the effect of incorporating
material currently in regulations into handbooks or other guidance.
Some industry representatives believed that many in the industry and
examination staff view the guidelines in the handbooks as equivalent to
binding regulations and would not perceive a burden reduction in such a
transfer. Various regional staff raised the opposite concern: that if
requirements were moved from regulations to guidance the agency would
find it more difficult to convince some in the industry to operate in a
safe and sound manner in those areas.
By proposing to remove some specific lending regulations and to
rely more heavily on general safety and soundness standards, the OTS is
in no way signalling that an association would not need to maintain
adequate loan documentation or to classify its assets and establish
appropriate valuation allowances. Generally accepted accounting
principles and principles of safety and soundness will still require
these steps to be taken. In most circumstances, supervisory guidance
provided in Regulatory Bulletins, Thrift Bulletins, the Thrift
Activities Handbook and other sources can and should be relied upon to
define safe and sound practices.
In its ongoing training programs, however, the OTS will continue to
emphasize to examiners that guidance documents should not be confused
with regulations. In particular situations, it may be prudent for
institutions to deviate from what is stated in standard guidance
documents. Examiners and thrift management both have a responsibility
to consider what is safe and sound under all the facts of each
circumstance. Neither should rely on the regulations and guidance
documents in rote fashion.
Provided both management and examiners understand the proper role
of regulations and guidance, and the overarching requirement for safe
and sound operations and practices, a move away from detailed
regulations and toward greater reliance on guidance should provide
institutions with more flexibility without diminishing safety and
soundness. The OTS believes that regulations should be reserved for
core safety and soundness requirements. Details on prudent operating
practices should be relegated to guidance. Otherwise, regulated
entities can find themselves unable to respond to market innovations
because they are trapped in a rigid regulatory framework developed in
accordance with conditions prevailing at an earlier time.
Today's proposal represents the agency's current best judgment
about the right balance between which provisions affecting lending and
investment should be binding regulations and which should be guidance
conveying the OTS's more detailed views on what generally constitutes
safe and sound standards under current market conditions. The agency
specifically seeks comments on whether the proposal achieves these
goals.
3. Reorganization of Lending and Investment Regulations
The agency has received comments over the years that its lending
and investment regulations are hard to locate and difficult to follow.
The agency is proposing two remedies for this problem. First, all
lending and investment regulations will be moved into a new part 560,
``Lending and Investment,'' that will specify which regulations apply
to all savings associations (such as loan documentation, disclosure,
and real estate lending standards) and which apply only to federal
savings associations (such as specific lending powers). This part will
include provisions currently located in parts 545 and 563 that are
being modified as part of today's proposal. The OTS expects that this
part will ultimately include all lending and investment regulations
except for Appraisals (located in part 564).
The OTS also proposes to remove unnecessary restatements of
statutory authority and limitations from various sections of part 545.
These would be replaced by a regulation in chart format that would
provide easy reference to the statutory authority for, and statutory
limitations on, federal associations' lending powers. Notes to the
chart would set forth any additional regulatory restrictions. The
agency seeks comment on whether such a chart would make it easier to
locate lending authorities and to determine which restrictions apply.
Because of the FHLBB's 1983 decision that part 545 would not repeat
all of HOLA section 5(c)'s lending powers but only those where
additional restrictions apply, the proposed chart, based on the current
part 545, is not comprehensive. Although many of the most significant
authorities are listed, some more obscure authorities are not. The
agency seeks comment on whether the proposed chart would be more useful
if it included statutory provisions not currently set forth in the
regulations.
4. Continuity of Current Position on Federal Preemption in Lending Area
One of the points made by industry representatives in the focus
group meeting was that OTS should maintain a clear and consistent
position on the preemptive effect of its lending regulations,
especially if those regulations are restructured, amended, converted
into guidance, or deleted. The OTS has long held that, with certain
narrow exceptions, any state laws or regulations that purport to affect
the lending operations of federal savings associations are preempted.
Such preemption is essential to the OTS's regulation of the operations
of federal savings associations because lending is one of the most
important functions of a savings association. None of the changes
discussed today should be construed as evidencing in any way an intent
by the OTS to change this long-held position. Whether the OTS continues
to have a specific regulation addressing a particular aspect of lending
or chooses to remove a federal regulation to streamline its regulations
and reduce regulatory burden, the agency still intends to occupy the
entire field of lending regulation for federal savings associations.
Because the lending regulations are being moved out of Part 545
and, thus, separated from the general preemption provision that
currently appears in Part
[[Page 1165]]
545,10 the OTS is proposing to include a general lending
preemption provision in new Part 560. This provision (discussed more
fully in the section-by-section analysis in Section III.B.2 below)
merely restates long-standing preemption principles applicable to
federal savings associations, as developed in a long line of court
cases and legal opinions by the OTS and the FHLBB.
\10\ 12 CFR 545.2.
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B. Section-by-Section Analysis
1. Disposition of Existing Sections
Part 545 Operations (Federal Savings Associations)
Section 545.31 Election Regarding Classification of Loans or
Investments
Paragraph (a) of Sec. 545.31 sets forth the OTS's general rule that
where a loan or investment meets the requirements of more than one
authority, the association may elect to place it in any applicable
category. The OTS proposes to retain this paragraph in modified form as
new Sec. 560.31(a).
The OTS is considering moving the description in Sec. 545.31(a) of
the essential characteristics of a loan that can be classified as a
real estate loan into a separate definitional section of the
regulations 11 along with the definition of loan commitment
currently found in paragraph (b).
\11\ The question of whether regulatory definitions should all
be moved into a centralized location in the regulations or instead
be located in or near the sections to which they relate will be
addressed in a subsequent proposal regarding the structure and
organization of OTS regulations (``Regulatory Structure Proposal'').
We anticipate that any changes proposed in the Regulatory Structure
Proposal will be made final at the same time any changes proposed
today are made final.
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Paragraph (b) also provides that loan commitments are included in
total assets and accounted for as an investment for purposes of
determining applicable statutory or regulatory investment limitations
only to the extent that funds are advanced and not repaid. The OTS
proposes to combine this provision into new Sec. 560.31(a).
Paragraph (c) addresses the treatment of loans sold to third
parties for purposes of calculating percentage-of-assets investment
limitations. Paragraph (d) addresses treatment of loans secured by
assignment of loans. The OTS proposes to retain both paragraphs in new
Sec. 560.31.
Section 545.32 Real Estate Loans
Paragraph (a) of Sec. 545.32 reiterates the HOLA's general grant of
statutory authority for federal savings associations to make or invest
in residential (home) or nonresidential real estate loans.12 The
OTS proposes to delete this paragraph and move the statutory reference
into the proposed lending/investment powers chart.
\12\ 12 U.S.C. 1464 (c)(1)(B), (c)(2)(B).
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Paragraphs (b) (1) and (2) of Sec. 545.32 duplicate more
comprehensive interagency-developed real estate lending standards and
appraisal standards set forth at 12 CFR 563.100-101 and 12 CFR Part 564
respectively. Accordingly, the OTS proposes to delete these paragraphs.
Paragraphs (b) (3), (4), (5), and (6) of Sec. 545.32 discuss
federal savings associations' authority to adjust the terms of real
estate loans, to amortize real estate loans, to charge certain initial
fees for real estate loans, and to establish escrow accounts. The HOLA
expressly authorizes federal savings associations to ``invest in, sell
or otherwise deal in * * * loans on the security of liens upon
residential real property'' and ``nonresidential real property.''
13 This express authorization to make real estate loans
necessarily includes within it the authority to adjust and fix the
terms of each loan, including loan charges, an escrow account, the
terms for repayment, and the circumstances under which a repayment
obligation can be modified. The OTS believes that the authority to
adjust, amortize, establish escrow accounts for, and charge fees for
loans properly falls within the scope of savings associations'
statutory authority to originate loans, and these powers do not need to
be specifically identified or restricted in the CFR.
\13\ 12 U.S.C. 1464 (c)(1)(B), (c)(2)(D).
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Because these paragraphs have been relied upon in preemption
opinions of the FHLBB and the OTS, the agency emphasizes that by
proposing to remove these paragraphs, the OTS does not intend any
change in federal thrifts' authority to conduct these activities, but
rather to enhance associations' flexibility in lending. Each of these
areas is specifically cited in proposed new Sec. 560.2 as an area in
which state law is preempted.
Paragraph (c) of Sec. 545.32 defines the phrase ``loan made on the
security of real estate.'' The OTS is considering moving this paragraph
to a definitional section of the regulations or deleting this paragraph
entirely as part of its Regulatory Structure Proposal. Questions have
arisen about the application of the current description of secured real
estate loan both in the context of asset classification and the making
of real estate loans in foreign countries. The OTS seeks comment on
whether the current definition of secured real estate loan has provided
adequate guidance for savings associations and how it could be
clarified or updated.
Paragraph (d) of Sec. 545.32 addresses loan-to-value ratios and
duplicates more comprehensive interagency real estate lending
standards.14 Accordingly, the OTS proposes to delete this
paragraph.
\14\ 12 CFR 563.100-563.101.
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Section 545.33 Home Loans
The introductory paragraph of Sec. 545.33 generally describes home
loans. The OTS is considering moving this paragraph to a new
definitional section of the regulations as part of the Regulatory
Structure Proposal.
Paragraph (a) describes the authority of savings associations to
amortize home loans. The OTS proposes to delete this paragraph for the
reasons discussed under Sec. 545.32(b)(3)-(6).
Paragraph (b) addresses loan-to-value ratios for home loans. The
OTS proposes to delete this paragraph because the interagency real
estate lending standards address the same issues in a more
comprehensive and current manner.
Paragraph (c) sets forth limitations on the adjustments that may be
made to residential mortgages. Paragraph (c) requires that adjustments
to rates, payments, or loan balances be tied to a national or regional
index outside the control of the savings association or a formula or
schedule set forth in the loan contract. Loans must also comply with
the notice requirements of 12 CFR 563.99, which address disclosure
requirements for fixed-rate and adjustable-rate mortgage (ARM) loans
made by all savings associations.
The OTS proposes to delete paragraph (c).15 Because
Sec. 563.99 would remain in place, savings associations would still be
required to provide full disclosure regarding adjustments in rates,
payments, and loan balances. However, the substantive restrictions on
how these adjustments can be made that now appear in Sec. 545.33(c)
would be eliminated. These limitations are much more detailed than
those required of other institutions offering mortgages. When these
adjustment limitations were last substantially revised, in 1983, ARMs
were still relatively new in the marketplace. Consumers did not have a
wide range of choices of lenders offering this type of loan. Today,
consumers are much more familiar with this type of loan and have a wide
variety of possible
[[Page 1166]]
sources for obtaining home mortgages. The OTS believes that as long as
information about adjustments to interest rates, term, payments, and
loan balances is clearly disclosed to purchasers, the details should be
a matter of contract between the savings association and the purchaser.
The agency specifically solicits comments about whether any of the
provisions in Sec. 545.33(c) should be retained.
\15\ The last sentence in paragraph (c)(5) concerns a federal
thrift's right to call a loan due and payable under certain
circumstances. OTS proposes to incorporate this provision into new
Sec. 560.2.
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Among the provisions that would be removed is the requirement that
an ARM's interest rate adjustment be tied to an external index. Some
federal savings associations have argued that this external control
provision puts savings associations at a competitive disadvantage in
the current ARM market and inhibits their ability to manage their
assets. Generally federal savings associations, national banks 16,
and those housing creditors who elect to operate under the Alternative
Mortgage Parity Act 17 are subject to this requirement. The OTS
solicits comment on whether it should retain this requirement or,
alternatively, a requirement of a national or regional index. The OTS
also solicits comment on how federal thrifts might structure their ARM
lending programs to ensure that consumers are protected if adjustments
are not tied to an external index.
\16\ 12 CFR 34.7. The Office of the Comptroller of the Currency
has recently proposed amendments to its real estate lending
regulations that would not amend this requirement. The preamble to
the proposal did not explain why OCC proposes to retain this
requirement. See 60 FR 35353, 35355-35356 (July 7, 1995).
\17\ The Alternative Mortgage Parity Act, Pub. L. 97-320, Title
VII, authorizes certain housing creditors to make alternative
mortgage transactions not withstanding any contrary state law under
certain conditions. Among the conditions that housing creditors that
rely on the Parity Act and are not commercial banks or credit unions
must satisfy is compliance with applicable OTS regulations on ARMs,
which include this paragraph. See 12 CFR 545.33(f).
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Paragraph (d) of Sec. 545.33 addresses loans on cooperatives. The
OTS proposes to delete this paragraph. The interagency real estate
lending standards address the same issues as paragraph (d)(1) in a more
comprehensive and flexible manner. No comparable reserve requirement to
that set forth in paragraph (d)(1) exists for state-chartered thrifts.
The OTS solicits comment on whether the provisions of (d)(2), which set
forth what may constitute security for such a loan, should be included
in guidance.
Paragraph (e) addresses loans to facilitate trade-in or exchange.
The OTS proposes to delete this paragraph because the interagency real
estate lending standards address the same issues in a more
comprehensive and flexible manner.
Paragraph (f) specifies the OTS regulations that state savings
associations and certain other state lenders who elect to make loans
under the Alternative Mortgage Parity Act must follow. The Alternative
Mortgage Parity Act preempts state laws that might otherwise limit
certain state creditors' ability to offer ARMs if they comply with the
OTS regulations identified in this paragraph. The agency is concerned
that this paragraph is not easy to locate for those affected by it. The
OTS therefore proposes to move the provisions of this paragraph, as
modified to reflect changes elsewhere in today's proposal, into new
Sec. 560.210, as part of a subpart dealing with alternative mortgages,
with a title that highlights its content.
Section 545.34 Limitations for Home Loans Secured by Borrower-Occupied
Property
Paragraph (a) permits federal savings associations to include due-
on-sale clauses in loan instruments to the extent authorized under
federal statutes and regulations, regardless of state prohibitions of
due-on-sale clauses.18 The OTS proposes to remove this paragraph
and incorporate its provisions into new Sec. 560.2.
\18\ 12 U.S.C. 1701j-3, 12 CFR Part 591.
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Paragraphs (b) and (c) permit federal savings associations to
include provisions imposing late fees and prepayment penalties in loan
contracts on home loans subject to certain conditions. The OTS proposes
to remove these paragraphs and incorporate these limitations, which may
provide protection for borrowers, into new Sec. 560.34. The OTS
solicits comment on whether these restrictions are important for
borrowers.
Section 545.35 Other Real Estate Loans
Section 545.35 sets forth federal savings associations' authority
to lend and invest in nonresidential real estate subject to certain
statutory and regulatory limitations. Paragraph (a) requires compliance
with real estate lending standards. Paragraph (b) reiterates the
statutory limit of 400 percent of an association's total capital
imposed on investments in nonresidential real estate. The OTS proposes
to delete this section, incorporate the reference to federal savings
associations' statutory authority to invest in nonresidential real
estate loans into the proposed lending and investment powers chart, and
place the limitations into an accompanying endnote.
Section 545.36 Loans To Acquire or To Improve Real Estate
Section 545.36 sets forth regulatory investment limitations
pertaining to acquisition, development, and construction loans. The OTS
proposes to delete this section inasmuch as the interagency real estate
lending standards and interagency safety and soundness standards
address the same issues in a more comprehensive and current manner.
Paragraphs (c) and (d) of Sec. 545.36 would be incorporated into the
Thrift Activities Handbook to provide additional guidance to thrifts
making development loans beyond that contained in the interagency real
estate lending standards.
Section 545.37 Combination Loans
Section 545.37 allows thrifts to combine loans authorized by part
545. The OTS proposes to delete this section as unnecessary and vague.
Section 545.38 Insured and Guaranteed Loans
Paragraphs (a) and (b) of Sec. 545.38 authorize Federal thrifts to
make insured and guaranteed residential real estate loans,
notwithstanding other provisions of part 545 but subject to certain
conditions. The OTS proposes to delete these paragraphs as unnecessary.
Federal savings associations may make an unlimited percentage of
residential real estate loans, subject to the interagency real estate
lending standards. Other regulatory restrictions affecting such loans
have either already been removed from part 545 or are proposed for
deletion today.
Paragraph (c) addresses nonresidential real estate loans that are
guaranteed by the Economic Development Administration, the Farmers Home
Administration, or the Small Business Administration. The OTS proposes
to delete this paragraph and incorporate the HOLA's statutory grant of
authority for Federal thrifts to make guaranteed nonresidential real
estate loans in the endnotes to the proposed lending and investment
powers chart.
Section 545.39 Loans Guaranteed Under the Foreign Assistance Act of
1961
This section reiterates the HOLA's statutory grant of authority
19 to Federal thrifts to make loans guaranteed under the Foreign
Assistance Act (FAA).20 The
[[Page 1167]]
OTS proposes to delete this section and incorporate its provisions into
the proposed lending powers and investment chart and endnotes and new
Sec. 560.43. The OTS solicits comment on whether thrifts have invested
in or made loans guaranteed under the FAA.
\19\ 12 U.S.C. 1464(c)(4)(C).
\20\ 22 U.S.C. 2181, 2184.
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Section 545.40 Loans on Low-Rent Housing
Section 545.40 exempts loans made pursuant to certain low rent
housing programs of the Department of Housing and Urban Development
from regulatory maximum loan term and loan-to-value limitations. The
OTS proposes to delete this section as unnecessary because the loan
term and loan-to-value ratio limitations referred to in this section
have already been or are now being removed from OTS regulations. By
deleting this section, the OTS does not intend to limit Federal
thrifts' authority to make low-rent housing loans pursuant to
applicable statutory and regulatory provisions, but rather to remove
obsolete restrictions that only serve to confuse CFR users.
Section 545.41 Community Development Loans and Investments
Section 545.41 reiterates the HOLA's statutory grant of authority
to Federal savings associations to make direct community development
loans and investments, subject to an overall 5 percent of assets
limitation.21 The OTS proposes to delete this section and
incorporate the statutory authority reference into the proposed lending
and investment powers chart. The chart will separately list the
sublimit of 2 percent of assets for equity investments in community
development real estate under this authority.
\21\ See 12 U.S.C. 1464(c)(3)(B).
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Section 545.42 Home Improvement Loans
Section 545.42 reiterates the HOLA's statutory grant of authority
to Federal thrifts to make home improvement loans subject to prudent
lending standards.22 The OTS proposes to delete this section and
incorporate the reference to Federal thrifts' statutory authority to
make home improvement loans into the proposed lending and investment
powers chart.
\22\ 12 U.S.C. 1464(c)(1)(J).
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Section 545.43 State Housing Corporation Investment-Insured
Section 545.43 reiterates the HOLA's grant of statutory authority
to Federal thrifts to invest in State housing corporation loans 23
subject to a regulatory 30 percent of assets limitation. This section
also duplicates restrictions in current Sec. 563.95, which regulates
investment in State housing corporations for all savings
associations.24 The OTS proposes to delete Sec. 545.43 and
incorporate the reference to the HOLA's statutory grant of authority to
Federal thrifts to invest in State housing corporation loans into the
proposed lending and investment powers chart.
\23\ 12 U.S.C. 1464(c)(1)(P).
\24\ Section 563.95, as discussed later, is proposed to be
modified and moved into new Part 560.
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Section 545.44 Mortgage Transactions With the Federal Home Loan
Mortgage Corporation
Section 545.44 provides, in accordance with HOLA Sec. 5(c)(1)(E)
and the Federal Home Loan Mortgage Corporation (FHLMC) Act, that
Federal thrifts may enter into or perform mortgage transactions with
the FHLMC. It does not impose any additional regulatory restrictions,
nor does it currently exempt these transactions from any regulatory
restrictions. The OTS proposes to delete this section as an unnecessary
reiteration of statutory authority and savings associations' inherent
power to enter into business contracts. The OTS also solicits comments
on whether the OTS should incorporate the definition of ``mortgage''
set forth in Sec. 302 of the FHLMC Act, currently cross-referenced in
this section, in a general definitional section as part of its
Regulatory Structure Proposal.
Section 545.45 Manufactured Home Financing
Paragraph (a) of Sec. 545.45 contains several definitions relating
to manufactured home financing. The proposed disposition of this
section will render these definitions unnecessary and, therefore, the
OTS proposes to delete this paragraph.
Paragraph (b) of Sec. 545.45 reiterates the HOLA's statutory grant
of authority to federal thrifts to invest in or make manufactured home
loans.25 The OTS proposes to delete this paragraph and incorporate
the statutory reference to federal thrifts' authority to invest in
manufactured home loans into the proposed lending and investment powers
chart.
\25\ 12 U.S.C. 1464(c)(1)(J).
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Paragraphs (c) and (d) of Sec. 545.45 address inventory financing
and retail financing for manufactured home chattel paper and establish
term and loan to value limits for such loans. The OTS believes these
paragraphs describe underwriting standards for manufactured homes that
are more suitable as guidance and proposes to transfer these paragraphs
to the Thrift Activities Handbook. The OTS solicits comment as to
whether these paragraphs provide useful guidance to savings
associations.26
\26\ One commenter on the agency's August 28, 1995 proposal to
remove unnecessary provisions from its regulations suggested the
removal of the provisions in paragraphs (d)(2)(ii)(chattel paper
must generally be payable within 20 years in substantially equal
payments) and (iii)(the financed amount may not exceed certain loan
to value ratios), claiming that they imposed a competitive
disadvantage for federal savings associations.
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Paragraph (e) provides that a federal thrift's sale of manufactured
home chattel paper must be sold without recourse. Since it was adopted,
the OTS has adopted a capital regulation that requires thrifts to hold
appropriate levels of capital against all sales with recourse.27
The OTS therefore proposes to delete this paragraph.
\27\ See 12 CFR 567.1(kk), 567.6(a)(2)(i)(C).
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Section 545.46 Commercial Loans
Paragraph (a) of Sec. 545.46 reiterates the HOLA's grant of
statutory authority to federal thrifts to invest in and make commercial
loans not to exceed 10 percent of their assets.28 The OTS proposes
to delete this paragraph and incorporate the authority and statutory
limitation in paragraph (a) into the proposed lending and investment
powers chart.
\28\ 12 U.S.C. 1464(c)(2)(A). The language in Sec. 545.46(a)
regarding pre-1984 investment limits is obsolete and will be
deleted.
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The agency is also proposing to delete paragraph (b). This
paragraph defines commercial loans to include commercial overdrafts
related to demand accounts and commercial unsecured loans by service
corporations. Paragraph (b)(1) (commercial overdrafts) will be
incorporated into an endnote to the lending and investment powers
chart. Thus, commercial overdrafts will continue to be subject to the
commercial lending limit.
As for commercial loans made at the service corporation level,
however, the agency has determined that the statutory maximum 3 percent
of assets that federal savings associations may invest in service
corporations generally provides a sufficient safeguard for the savings
association, as it does for all other types of activities conducted in
service corporations. Under the current service corporation regulation,
only a service corporation's commercial loans are aggregated with its
parent's loans for purposes of statutory percentage-of-assets
limitations on general investment
[[Page 1168]]
authority.29 Other service corporation investments are not. The
agency believes such a distinction is no longer warranted and that such
loans should no longer be subject to the statutory 10 percent of assets
limitation on commercial lending set forth in HOLA section 5(c)(2)(A).
\29\ 12 CFR 545.74(c)(1)(1995). For purposes of some other
regulations, such as loans to one borrower (12 CFR 563.99) and
transactions with affiliates (12 CFR 563.41 and 563.42), investments
at the service corporation level are aggregated with investments of
the parent savings association. Today's proposal does not affect
those regulatory provisions.
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By removing these loans from the definition of commercial loans,
federal savings associations' limited authority to make commercial
loans will be somewhat enhanced, benefiting both thrifts and their
customers, without endangering safety and soundness or thrifts' primary
mission of providing mortgage lending.
Section 545.47 Overdraft Loans
Section 545.47 reiterates the HOLA's statutory grant of authority
to federal thrifts to make loans specifically related to transaction
accounts, which includes overdraft loans.30 The OTS proposes to
delete this section and incorporate the reference to federal thrifts'
statutory authority to make overdraft loans into the proposed lending
and investment powers chart.
\30\ 12 U.S.C. 1464(c)(1)(A).
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The endnote accompanying this provision will specify that
commercial overdraft loans formerly covered by Sec. 545.46 remain
subject to the same commercial lending limits.
Section 545.48 Letters of Credit
Section 545.48 authorizes federal thrifts to issue letters of
credit in conformance with the Uniform Commercial Code or the Uniform
Customs and Practices for Documentary Credits and subject to certain
general standards. As already discussed, the HOLA expressly authorizes
federal thrifts to invest in or make commercial loans, and this express
authorization to make commercial loans necessarily includes within it
the authority to issue letters of credit. For ease of reference, the
OTS proposes to reference the authority of federal thrifts to issue
letters of credit in the proposed lending and investment powers chart.
The OTS believes it would be useful to establish general standards
for the issuance of letters of credit for all savings associations. The
OTS therefore also proposes to incorporate the substance of
Sec. 545.48(a), modified to include a broader range of permissible
letters of credit, into new Sec. 560.120 as prudent lending standards
for the issuance of letters of credit. The OTS believes, and industry
representatives at the focus group meeting concurred, that many states
have already incorporated similar standards and that most associations
already have such prudent practices in place.
The OTS solicits comment on whether transferring the substance of
Sec. 545.48(a) to the new part 560 would provide needed uniform
standards for all savings associations, the benefits of which would
outweigh any additional burden on state-chartered savings associations.
Alternatively, the OTS invites comment on whether Sec. 545.48(a) should
be transferred to handbook guidance.
The OTS proposes to delete paragraph (b) of Sec. 545.48, which
addresses the treatment of funds advanced under a letter of credit
without compensation from the account party, because it duplicates
Sec. 545.31(b), which the OTS proposes to incorporate into new
Sec. 560.31(a).
Section 545.49 Loans on Securities
Section 545.49 reiterates the HOLA's statutory grant of authority
to federal thrifts to invest in loans to financial institutions and
brokers secured by obligations backed by the United States government
or certain agencies or instrumentalities thereof.31 The OTS
proposes to delete this section and incorporate a reference to thrifts'
statutory authority to invest in such loans secured by U.S. government
or agency backed obligations into the proposed lending and investment
powers chart. The introductory paragraph that limits permissible
investments in agencies or instrumentalities of the United States to
those entities named in Sec. 566.1(g)(3) is being removed as
unnecessary.
\31\ 12 U.S.C. 1464(c)(1)(C), (D), (E), (F).
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Section 545.50 Consumer Loans
Section 545.50 reiterates the HOLA's statutory grant of authority
to federal thrifts to make consumer loans subject to a 35 percent of
assets limit.32 For purposes of determining compliance with this
limit, federal thrifts must aggregate their consumer loans with any
investments in corporate debt securities and commercial paper.33
In other words, a federal thrift's aggregate investments in consumer
loans, corporate debt securities, and commercial paper may not exceed
35 percent of its assets.
\32\ 12 U.S.C. 1464(c)(2)(D).
\33\ Id.
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The OTS proposes to delete Sec. 545.50 and to incorporate the
reference to federal thrifts' statutory authority to make consumer
loans, subject to the statutory asset limit, into the proposed lending
and investment powers chart. The OTS plans to include an endnote
incorporating the provisions of Sec. 545.50(c), which addresses loans
to dealers in consumer goods. The OTS is considering moving paragraph
(b) of Sec. 545.50, which defines consumer loans, to a consolidated
definitional location in the regulations as part of its Regulatory
Structure Proposal. The OTS solicits comment on how the definition of
consumer loan can be clarified for categorization purposes and
coordinated with other OTS regulations that address consumer
credit.34 The current definition of consumer loan that appears in
Sec. 545.50(b) expressly excludes credit cards. As a result, under
current regulations, credit card loans are not subject to the 35
percent of assets investment limit applicable to consumer loans,
corporate debt securities, and commercial paper. A separate regulation,
Sec. 545.51 (discussed below), governs the credit card activity of
federal savings associations. No percentage of assets limits are
imposed on credit cards by that regulation.
\34\ Compare 12 CFR 545.50(b)'s definition of consumer loan,
which excludes credit extended in connection with credit cards, with
12 CFR 561.12, which defines consumer credit for purposes of the
regulations in part 563 to include credit cards.
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This approach mirrors the HOLA. The statutory provision authorizing
federal thrifts to invest in consumer loans, corporate debt securities,
and commercial paper subject to a 35 percent of assets limit is
separate from the statutory provision that authorizes them to invest in
credit cards. The statutory provision authorizing credit cards contains
no percentage of assets limit.
The OTS has reviewed the legislative history of the two statutory
provisions. The legislative history does not provide clear guidance
regarding whether any linkage was intended. Thus, under normal rules of
statutory interpretation, the plain language of the statute would
ordinarily be given effect. As indicated above, the plain language
imposes no percentage of assets limit on credit card operations. This
does not mean that federal thrifts can make unlimited credit card
loans, however. Independent of the investment authorizations in HOLA
section 5, all savings associations are required to meet the qualified
thrift lender test.35 Credit card loans count as qualified thrift
investments only to a very limited extent. The qualified thrift
[[Page 1169]]
lender test effectively requires all savings associations to hold a
substantial amount of residential mortgage-related assets.
\35\ 12 U.S.C. 1467a(m).
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The proposed rule carries forward the pattern of OTS's existing
regulations. Under the proposed rule, credit card loans would not be
subjected to the 35 percent of assets limit. The OTS solicits comment,
however, regarding whether this is the proper approach.
Section 545.51 Credit Cards
As discussed above, Sec. 545.51(a) reiterates the HOLA's grant of
statutory authority to federal thrifts to issue credit cards and extend
credit in connection therewith, and otherwise engage in credit card
operations.36 The OTS proposes to delete this section and
incorporate a reference to federal savings associations' statutory
authority to engage in credit card operations into the proposed
lending/investment powers chart. Consistent with the current form of
Sec. 545.51(a), credit card operations would not be subject to the 35
percent of assets limit.
\36\ 12 U.S.C. 1464(b)(4).
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Paragraph (b), addressing the confidentiality of personal security
identifiers in conjunction with credit card operations, would be
deleted as redundant with the provisions of the Electronic Funds
Transfer Act and Regulation E.37
\37\ See 15 U.S.C. 1693 et seq. and 12 CFR part 205
respectively.
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Section 545.52 Loans on Savings Accounts
Section 545.52 reiterates the HOLA's statutory grant of authority
to federal thrifts to make loans on the security of savings accounts
and sets forth a regulatory limitation on such loans.38 The OTS
proposes to delete this section and incorporate the reference to
federal thrifts' statutory authority to make loans on savings accounts
into the proposed lending and investment powers chart. The limitation
on loans on savings accounts to the withdrawal amount of the savings
account set forth in paragraph (b) will be retained as an endnote.
\38\ 12 U.S.C. 1464(c)(1)(A).
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Section 545.53 Finance Leasing
This section authorizes federal thrifts to engage in various
leasing activities that are the functional equivalent of lending,
subject to certain regulatory limitations.39 The OTS proposes to
reference federal thrifts' finance leasing authority with applicable
limitations in the proposed lending and investment powers chart.
\39\ Section 545.53 cites several HOLA lending provisions, 12
U.S.C. 1464(c)(1)(B), (c)(2)(A), and (c)(2)(D), as the basis for
federal thrifts' leasing authority.
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The OTS is also proposing to consolidate the finance leasing
requirements of this section with the general leasing requirements of
Sec. 545.78 into one streamlined section, new Sec. 560.41. As part of
this consolidation and streamlining, OTS proposes to delete the term
limits in paragraph (c)(2) of Sec. 545.53. Institutions should be free
to establish their own term limits based on prudent underwriting
criteria and market conditions. OTS proposes to amend the residual
value requirement for finance leases in current Sec. 545.53(c)(2). The
current rule states that no more than 20 percent of the return may be
realized from the residual value of the property. Commenters have
stated that this language is confusing and that the 20 percent
requirement is too strict in light of the fact that the Office of the
Comptroller of the Currency (OCC) allows national banks to make leases
with a residual value of 25 percent of the original cost of the
property to the lessor. Therefore, OTS proposes to amend its residual
value requirement for finance leases, to clarify the language and to
incorporate the 25 percent standard.40
\40\ The OCC has recently proposed amendments to its leasing
regulation at 60 FR 46246 (September 6, 1995).
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The OTS solicits comment on whether it should consolidate the
salvage powers described in this section and in the service corporation
regulations into one new section that will outline salvage powers on
all types of loans and investments.
Section 545.72 Government Obligations
Section 545.72 reiterates the HOLA's grant of statutory authority
to federal thrifts to invest in obligations of any state, territory, or
political subdivision thereof.41 The OTS proposes to delete this
section and incorporate the reference to federal thrifts' statutory
authority to invest in government obligations into the proposed lending
and investment powers chart. The provisions of Sec. 545.72(a) regarding
investments in obligations meeting investment grade requirements will
be incorporated into new Sec. 560.42 and noted in the endnotes to the
chart.
\41\ 12 U.S.C. 1464(c)(1)(H).
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Other provisions of Sec. 545.72 will also be modified and
incorporated into new Sec. 560.42. In order to encourage additional
safe and sound community-related investments under this provision, the
agency is proposing to modify the regulatory restrictions currently
contained in Sec. 545.72(b) for unrated government obligations before
incorporating them into the new section.
First, the agency is clarifying that the 1 percent of assets
limitation for investments in obligations of a state or political
subdivision where a savings association has its home or a branch office
that do not meet the rating or full faith and credit requirements of
Sec. 545.72(a) is an aggregate limit. However, the OTS is proposing to
allow savings associations to invest additional amounts in such
obligations, without geographic restrictions, if the obligation is
approved for investment by the OTS. This will allow savings
associations additional flexibility while allowing the agency the
opportunity to monitor the potential riskiness of such investments.
The OTS is also proposing to remove the restriction on gold-related
obligations contained in paragraph (c) as obsolete.42
\42\ See 57 FR 40352 (September 3, 1992).
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Section 545.73 Inter-American Savings and Loan Bank
Section 545.73 reiterates federal savings associations' statutory
authority to invest in the share capital and capital reserve of the
Inter-American Savings and Loan Bank, subject to statutory and
regulatory limitations on the amount of the investment.43 The OTS
proposes to remove this section and incorporate this authority and
limitations into the new lending and investment powers chart, endnotes
and new Sec. 560.43, which addresses foreign assistance investments. As
with investments authorized under the Foreign Assistance Act, discussed
earlier under Sec. 545.39, the OTS solicits comment on the extent to
which federal savings associations have utilized this authority.
\43\ 12 U.S.C. 1464(c)(4)(C).
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Section 545.74 Service Corporations
The OTS proposes, as discussed under Sec. 545.46 above, to no
longer aggregate commercial loans made by a savings association's
service corporation with such loans made by the savings association
itself for purposes of the statutory 10 percent of assets limitation.
The agency proposes a conforming change to Sec. 545.74(c)(1)(vi), where
this regulatory aggregation is repeated. The remaining provisions of
Sec. 545.74 are under separate review as part of the agency's
reinvention of its subsidiaries regulations.
[[Page 1170]]
Section 545.75 Commercial Paper and Corporate Debt Securities
Section 545.75(a) reiterates the HOLA's grant of statutory
authority to federal thrifts to invest in commercial paper and
corporate debt securities.44 The OTS proposes to delete this
paragraph and to reference federal thrifts' statutory authority to
invest in commercial paper and corporate debt securities in the
proposed lending and investment powers chart. The agency proposes to
retain the limitations on these investments contained in paragraphs (b)
and (c) and to move them into a new Sec. 560.40 on commercial paper and
corporate debt securities in part 560. The agency solicits comment on
whether these provisions should, alternatively, be removed from the
regulations and incorporated as guidance in the Thrift Activities
Handbook.
\44\ 12 U.S.C. 1464(c)(2)(D).
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The agency proposes to delete paragraph (d) as no longer having any
practical application for thrifts in light of section 28(d) of the
Federal Deposit Insurance Act. Paragraph (d) authorizes a Federal
savings association to invest in commercial paper and corporate debt
securities not meeting the rating and marketability requirements of
paragraphs (b) and (c), so long as such investments are not otherwise
prohibited by section section 28(d) of the FDIA, which prohibits
investments in junk bonds. The OTS solicits comment as to whether there
is any scenario under which paragraph (d) is still relevant.
Section 545.78 Leasing
Section 545.78(a) reiterates the HOLA's grant of statutory
authority to federal thrifts to invest in tangible personal property
for leasing purposes.45 The OTS proposes to incorporate this
statutory authority reference into the proposed lending and investment
powers chart. The OTS also proposes to delete paragraph (b) of
Sec. 545.78, which imposes a maximum 70 percent residual value limit
for general leasing activities, because the OTS believes that such an
underwriting restriction may be unduly restrictive if applied in all
cases. Such lease underwriting considerations are more appropriately
addressed in the Thrift Activities Handbook as guidance. As discussed
under Sec. 545.53 earlier, new part 560 will contain a Sec. 560.41
addressing both finance leasing and general leasing authority.
\45\ 12 U.S.C. 1464(c)(2)(C).
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Part 556 Statements of Policy
Section 556.2 Power To Engage In Escrow Business
Section 556.2 addresses federal thrifts' power to engage in the
escrow business. The OTS proposes to delete this policy statement. As
already discussed with regard to Sec. 545.32(b)(6), the OTS believes
that the authority to establish escrow accounts is subsumed within the
authority of federal savings associations to make loans and does not
need to be specifically identified in the CFR.
Section 556.3 Real Estate
Section 556.3(a) addresses the treatment of motels as either
improved nonresidential real estate or combination home and business
property for real estate categorization purposes. The OTS proposes to
delete this paragraph and incorporate it into guidance. Section
556.3(b) permits federal thrifts to purchase paving certificates that
constitute a lien on property securing an association's loan. The OTS
proposes to delete this section and transfer the language of the policy
statement to the Thrift Activities Handbook.
Section 556.10 First Liens on Properties Sold by the Secretary of HUD
Section 556.10 reiterates federal thrifts' authority to make
mortgage loans insured by the Federal Housing Administration and
secured by first liens on improved real estate and discusses the
treatment and documentary evidence of such loans after disposal by the
Secretary of Housing and Urban Development. The OTS proposes to delete
this policy statement and move it to guidance in the Thrift Activities
Handbook.
Part 563--Operations (All Savings Associations)
Section 563.95 Investment in State Housing Corporations
Section 563.95 covers investments in or loans to state housing
corporations by all savings associations. It imposes certain
conditions, including percentage-of-asset limitations, depending on the
type of loan or investment and the savings association's capital level.
The OTS proposes to modify and update this section and move it into a
new Sec. 560.121 in new part 560.
Paragraph (a) deals with loans to, and investments in obligations
of, state housing corporations that are secured, directly or
indirectly, by first liens on insured improved real estate. The OTS
proposes to remove percentage-of-asset limitations in this paragraph
(a). Although in the agency's opinion the existing percentage-of-assets
limitations would not affect most savings associations that make this
type of investment, removing the limit will allow thrifts to exercise
business judgment in determining the amount they wish to invest in such
loans and obligations, subject, as always, to overall safety and
soundness considerations.
The OTS proposes to update the language in paragraph (b), which
covers investments in obligations of state housing corporations that do
not fall under paragraph (a), in several ways. First, the agency
proposes to remove the outdated limitation based on a thrift's level of
``general reserves surplus and undivided profits.'' Instead, any thrift
that is adequately capitalized under 12 CFR Part 565 may make such
investments. Second, the OTS proposes to allow investments under
paragraph (b) to be made in obligations of state housing corporations
located in any state in which the association has its home or a branch
office. Third, the OTS proposes to revise the aggregate limit on such
investments to equal a thrift's total capital under 12 CFR Part 567 and
to move this requirement into a new paragraph (b)(2). Finally, the
agency proposes to delete the requirement that a thrift may make no
more than 25 percent of its aggregate investment in this type of
obligation in the obligations of any one state housing corporation.
This requirement effectively requires an institution to invest in four
state housing corporations any time it wishes to invest in one.
The agency also proposes to delete existing paragraph (c), which
allows thrifts (that otherwise have the legal authority to do so) to
make direct equity investments in equity securities of state housing
authorities. Federal thrifts currently do not have authority to invest
in equity securities of state housing corporations, and section 28 of
the FDIA constrains state chartered thrifts from making, or retaining
past July 1, 1994, any equity investment not permissible for federal
thrifts.46 The OTS solicits comment as to whether there is any
scenario under which paragraph (c) is still relevant.
\46\ See 12 U.S.C. 1831e(c), which states that a state chartered
savings association ``may not directly acquire or retain any equity
investment of a type or in an amount that is not permissible for a
Federal savings association,'' with a limited exception for service
corporation investments.
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The agency proposes to move paragraph (d), substantially unchanged,
into new Sec. 560.121 as paragraph (c). This paragraph addresses a
thrift's obligation before making an investment
[[Page 1171]]
in a state housing corporation, to obtain the corporation's agreement
to make information available to the OTS upon request.
Section 563.97 Loans in Excess of 90 Percent of Value
Section 563.97 authorizes thrifts to make loans on the security of
residential real estate with loan-to-value ratios in excess of 90
percent of value, consistent with the interagency real estate lending
standards. The OTS proposes to delete this section because the
interagency real estate lending standards address the same issues in a
more comprehensive manner.
Section 563.99 Fixed-Rate and Adjustable-Rate Mortgage Loan
Disclosures, Adjustment Notices, and Interest Rate Caps
Section 563.99 defines fixed and adjustable rate mortgage loans and
requires thrifts to make certain disclosures to applicants of
adjustable rate mortgage loans. The OTS is considering moving the
definitions in paragraph (a) to a consolidated definitional location in
the regulations as part of the Regulatory Structure Proposal. The
agency also expects ultimately to move this section into new Part 560,
Subpart C, ``Adjustable Rate Mortgages.''
The disclosure requirements of Sec. 563.99 and the Federal Reserve
Board's (FRB) Truth in Lending Regulation Z 47 are substantially
parallel except for their coverage of certain types of credit
transactions. Pursuant to Sec. 303(b) of the CDRIA, the FRB is required
to review its regulations with respect to disclosures pursuant to the
TILA with regard to adjustable-rate mortgages in order to simplify the
disclosures, if necessary, and make the disclosures more meaningful and
comprehensible to consumers.48 Accordingly, the OTS will undertake
a comprehensive review of Sec. 563.99 in conjunction with the FRB's
section 303 review of Regulation Z.
\47\ See 12 CFR 226.19(b), 226.20(c).
\48\ 12 U.S.C. 4803.
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Currently Sec. 563.99 covers all adjustable rate loans with a term
of more than one year, secured by property occupied or to be occupied
by the borrower. Unlike Sec. 563.99, Regulation Z's coverage is not
determined by the nature of the secured property but rather by other
criteria, e.g., the extension of credit must be for personal, family,
or household purposes.49
\49\ 12 CFR 226.1(c)(1)(iv).
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As the regulations currently interact, certain transactions are
encompassed by Sec. 563.99 but not by Regulation Z. For example, a
savings association that makes a business purpose adjustable rate
mortgage loan secured by a home would be subject to the disclosure
requirements set forth at Sec. 563.99; however, no disclosures would be
required under Regulation Z.50 In order to establish parity in
coverage with respect to disclosure requirements among lenders, the OTS
is today proposing to revise Sec. 563.99 to exclude from that section's
coverage adjustable rate loans that are primarily for a business,
commercial, or agricultural purposes, consistent with Regulation
Z.51
\50\ Regulation Z exempts from its disclosure requirements
extensions of credit primarily for business, commercial, or
agricultural purposes. See 12 CFR 226.3(a)(1).
\51\ 12 CFR 226.3(a).
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Section 563.100-.101 Real Estate Lending Standards
These sections prescribe real estate lending standards that require
all savings associations to adopt and maintain comprehensive written
real estate lending policies that are consistent with safe and sound
practices and with the Guidelines for Real Estate Lending.52
Savings associations' policies must address certain lending
considerations including loan-to-value limits, loan administration
procedures, portfolio diversification standards, and documentation,
approval, and reporting requirements. The OTS is not proposing changes
to these sections today, but plans ultimately to redesignate and move
them substantially unchanged into a new part 560.
\52\ Appendix A to the Real estate lending standards at
Secs. 563.100-563.101.
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The OTS adopted the real estate lending standards pursuant to an
interagency effort mandated by section 304 of the FDICIA.53
Pursuant to Section 303 of the CDRIA, the OTS and the other banking
agencies are each to review these standards and to ``consider the
impact that such standards have on the availability of credit for small
business, residential, and agricultural purposes, and on low- and
moderate-income communities.'' 54 The OTS welcomes comments on the
impact that the real estate lending standards, including the
Guidelines, are having on the availability of the types of credit and
communities described above.
\53\ See 57 FR 62890 (December 31, 1992).
\54\ 12 U.S.C. 4803(a)(1)(C).
---------------------------------------------------------------------------
Section 563.160 Classification of Certain Assets
Section 563.160 requires thrifts to classify their own assets and
establish valuation allowances. The OTS proposes to delete this section
in its entirety.55
\55\ The OTS has already requested comment on deleting the
definitions of ``substandard,'' ``doubtful,'' and ``loss'' set forth
in paragraph (b), and the definition of ``Special Mention'' assets
in paragraph (e) because definitions of those terms are contained in
the Thrift Activities Handbook. 58 FR 38730 (July 20, 1993).
Commenters supported such deletions. The OTS proposed deleting
paragraph (f) as part of its regulatory review proposal of August
28, 1995, and received no unfavorable comments.
---------------------------------------------------------------------------
Section 563.160 was added in 1987 pursuant to section 402 of CEBA,
which amended the HOLA to add a new section 9 requiring that the FHLBB,
the OTS's predecessor, adopt regulations establishing an asset
classification system. FIRREA removed that section and in turn amended
the HOLA to require only that OTS asset classification regulations and
policies be no less stringent than the OCC's.56 None of the
banking agencies, including OCC, has an asset classification
regulation. Their asset classification systems are set forth in
supervisory guidance.
\56\ See HOLA section 4(c), 12 U.S.C. 1463.
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In order to more closely parallel the asset classification systems
of the other federal banking agencies, the OTS believes that
Sec. 563.160 can be removed without impairing safety and soundness. The
existing asset classification system will be placed in the Thrift
Activities Handbook.
This change in no way relieves thrifts of the responsibility to
properly classify their assets and establish prudent valuation
allowances as necessary. Nor does it reduce the OTS's statutory
supervisory authority to require associations to classify their assets
and establish valuation allowances based on examination findings.
Section 563.170 Examinations and Audits; Appraisals; Establishment and
Maintenance of Records
Paragraph (a) of Sec. 563.170 authorizes the OTS to examine thrifts
consistent with OTS policies and to annually assess thrifts for the
costs of such examinations based on the thrifts' assets. The OTS
proposes to retain this paragraph.
Paragraph (b) authorizes the OTS to select appraisers to perform
appraisals of real estate in connection with examinations and audits
and requires thrifts to pay for such appraisal services. The agency
proposes to retain this paragraph.
Paragraph (c) sets forth general record maintenance requirements
for savings associations to ensure that examiners have access to an
accurate and complete record of all business transacted by the thrift.
The OTS proposes to retain this
[[Page 1172]]
general introductory paragraph, with a modification to incorporate
language in current paragraph (c)(9) on maintaining records required by
other laws or regulations.
Paragraphs (c)(1)-(9) set forth a list of specific loan documents
that, at a minimum, thrifts must maintain to comply with
Sec. 563.170(c). While the documents listed are generally appropriate
and could be used as a checklist for prudent lending, a rigid
requirement that all documents be present for each loan is too
restrictive and does not necessarily address all safety and soundness
concerns. Currently, if an institution is missing any of the documents
required by regulation, it is technically in violation of that
regulation, even if the safety and soundness intent of the regulation
has been satisfied. Conversely, safety and soundness concerns may, in a
particular instance, necessitate different or additional documentation
beyond those records listed in the regulation.
For example, Sec. 563.170(c)(1)(v) requires either a financial
statement or a credit report for all loans, ostensibly to justify the
borrower's willingness and ability to repay the loan. However, the
ability and willingness of a borrower to repay a consumer or home loan
may be better demonstrated with a verification of employment (not
currently required) and a satisfactory credit report, rather than a
financial statement. For commercial borrowers, verification by the
institution that the borrower's financial statements accurately reflect
all assets, liabilities, and any other guarantees or encumbrances is
more important to the decision to extend credit than the mere presence
of a financial statement.
Since FIRREA, several interagency regulations have been developed
that include guidelines for proper loan documentation. These
underwriting and documentation standards minimize the need for OTS to
have a regulation setting specific documentation requirements.
Guidelines appended to the interagency real estate lending
standards state that an institution should establish loan
administration procedures that address documentation.57 The OTS
also sets forth loan documentation and credit underwriting requirements
in the interagency Standards for Safety and Soundness and Guidelines
Establishing Standards for Safety and Soundness to which all federal
insured depository institutions are expected to adhere.58
\57\ See 12 CFR part 563, subpart D, appendix A.
\58\ 12 CFR Part 570 and Appendix A thereto, 60 FR 35674 (July
10, 1995).
---------------------------------------------------------------------------
The OTS proposes replacing the specific documentation listed in
paragraphs (c)(1)-(9) with more general documentation standards in a
new Sec. 560.170 in part 560. These proposed standards are drawn from
the interagency guidelines establishing standards for safety and
soundness.
Deleting these paragraphs would not only relieve savings
associations of documentation requirements that exceed those for banks
and other financial institutions but also may enable savings
associations to take better advantage of technological marketplace
advances such as telephone and computerized home banking. The OTS
invites comment as to whether the proposed revisions to loan
documentation requirements are sufficiently flexible to accommodate
savings associations' participation in telephone and computerized home
banking.
The OTS is considering transferring the current document list in
paragraphs (c)(1)-(5), (7), to the Thrift Activities Handbook to be
used as a checklist of records generally maintained by prudent lenders
to support a loan.
Paragraph (c)(10) of Sec. 563.170 exempts certain small business
loans from the documentation requirements set forth in paragraphs
(c)(1)-(7). The OTS proposes to delete paragraph (c)(10) inasmuch as
the revision of paragraphs (c)(1)-(7) eliminates the need for this
exemption.
Paragraph (d) of Sec. 563.170 addresses change in location of
accounting or control records. Paragraph (e) addresses use of data
processing services for maintenance of records. The OTS proposes to
retain these paragraphs, but solicits comments on how these paragraphs
might be updated to reflect technological changes in record
maintenance.
Section 563.172 Re-evaluation of Real Estate Owned
Section 563.172 requires savings associations to appraise all real
estate owned (REO) at the earlier of in-substance foreclosure or at the
time of acquisition and, thereafter, as dictated by prudent management
policy. The OTS is considering deleting this section inasmuch as
thrifts can apply the appraisal regulations and general accounting
principles (GAAP) to determine when an appraisal may be appropriate or
necessary for safety and soundness. If it is retained, this section
would be incorporated into new part 560. The OTS solicits comment on
the need for this section and on how the interaction between this
section and the appraisal regulations at part 564 might be clarified.
Part 571 Statements of Policy
Section 571.8 Investment in State Housing Corporations
Section 571.8 limits savings associations' investment authority in
state housing corporations to certain public and private corporations
and agencies. The OTS proposes to delete this policy statement as an
unnecessary limitation on the definition of state housing corporation.
Section 571.13 Participation Interests in Pools of Loans
Section 571.13 addresses appropriate documentation for a savings
association's purchase of a participation interest in a pool of loans
(in the nature of mortgage-backed securities) and indicates that
compliance with the documentation requirements of Sec. 563.170 may be
impracticable for such transactions. The OTS proposes to delete this
section inasmuch as the proposed revision of Sec. 563.170(c) would
eliminate the need for this policy statement. The OTS plans to transfer
the documentation guidance for purchases of participation interests in
pools of loans to the Thrift Activities Handbook.
Section 571.20 Payment for Appraisals
Section 571.20 addresses payment by savings associations for
appraisals obtained as part of an OTS examination. The OTS proposes to
delete this section and expects to transfer this policy statement to
the Thrift Activities Handbook.
Section 571.22 Most Favored Lender Status
Section 571.22 implements section 4(g) of the HOLA, which
authorizes savings associations to charge on any extension of credit an
interest rate equal to the greater of (a) one percentage point above
the discount rate on 90-day commercial paper in effect at the Federal
Reserve bank in the Federal Reserve district in which the savings
association is located or (b) the rate allowed by the laws of the State
in which the savings association is located. The OTS proposes to move
the provisions of this section into new section 560.2 without
substantive modification.
However, the OTS requests specific comment on one aspect of
Sec. 571.22. Paragraph (b) indicates that any savings association
seeking to make loans at the
[[Page 1173]]
interest rate authorized for a state most favored lender must also
comply with the same ``substantive state law requirements'' that are
applicable to that state lender when making loans of the same type. The
OCC, which administers a very similar statutory provision for national
banks, uses a slightly different phrase to describe what types of state
laws must be complied with pursuant to the most favored lender
doctrine. The OCC requires national banks to comply with all state laws
that apply to the state most favored lender and are ``material to the
determination of the interest rate'' authorized under state law.59
The OTS has previously opined that this standard is essentially the
same as the OTS's ``substantive law'' standard.60 Accordingly,
when addressing interpretive questions, the OTS has looked to the case
law and other precedent interpreting the national bank standard. In
order to promote both clarity and parity, the OTS specifically requests
comment regarding whether paragraph (b) of Sec. 571.22 should be
replaced in its entirety with a reference to state laws that are
``material to the determination of the interest rate.''
\59\ 12 CFR 7.7310.
\60\ OTS Op. Chief Counsel, Oct. 14, 1992.
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2. New Part 560--Lending and Investment
The OTS proposes to adopt a new part 560, Lending and Investment,
that will ultimately include all of the agency's lending and investment
regulations except for Appraisals (part 564) and subsidiary-related
investments (currently under separate review). The agency believes that
this reorganization will make it much easier for those using the
agency's regulations to find all relevant lending and investment
powers, authorities, and limitations.
Section 560.1 Authority and Scope (Proposed)
This proposed section sets out the basic statutory authority for
lending and which regulations in this part will apply only to federal
savings associations and which to all savings associations. It also
briefly sets forth the agency's expectations that all lending and
investment activities are to be conducted prudently, consistent with
safety and soundness, with adequate portfolio diversification, and in a
manner appropriate for the size of the institution, the nature and
scope of its operations, and conditions in its lending market.
Section 560.2 Applicability of Law (Proposed)
This proposed section sets forth the OTS's longstanding position,
as developed in caselaw and legal opinions by both the OTS and its
predecessor, the FHLBB, and as currently reflected in Sec. 545.2, on
the federal preemption of state laws purporting to affect the lending
activities of federal savings associations. Because the lending
regulations are being moved out of Part 545 and, thus, separated from
Sec. 545.2 and because many of the details of the lending regulations
that have been cited in preemption opinions are being removed, the OTS
proposes to include new Sec. 560.2 to confirm and carry forward its
existing preemption position.
As discussed in Section III.A.4., above, lending is one of the core
activities in which federal savings associations engage. The OTS
believes that Federal preemption of State laws purporting to affect
lending is critical to filling the agency's mandate under HOLA sections
4(a) and 5(a) to provide for the safe and sound operation of Federal
savings associations in accordance with the best practices of thrift
institutions in the United States. Today's proposal, which deals only
with preemption in the lending area and does not amend Sec. 545.2,
provides general standards drawn from caselaw and legal opinions and
the agency's current regulations. The agency is hopeful that the
increased clarity and specificity of Sec. 560.2 will reduce confusion
and the need for frequent preemption inquiries to OTS.
Subpart A--Lending and Investment Powers for Federal Savings
Associations
This subpart will contain lending and investment regulations
directly applicable only to federal savings associations.
Section 560.30 General Lending and Investment Powers (Proposed)
Proposed Sec. 560.30 takes the form of a chart that lists many of
the lending and investment powers granted to federal thrifts by the
HOLA. It is derived from the regulations that currently appear in part
545. An important component of this regulation are the endnotes to the
chart that elaborate upon statutory limitations, impose regulatory
limitations, or otherwise describe conditions on the exercise of these
powers.
Although the chart references many of the more commonly used
powers, it does not give a complete listing of all statutory lending
and investment authorities. The OTS solicits comment on whether a chart
in this format makes the CFR easier to use. The OTS also invites
comment on whether the chart would be more useful if it codified all
statutory powers, even those without statutory or regulatory
limitations or those rarely used.
Section 560.31 Election Regarding Categorization of Investments and
Related Calculations
This proposed section is derived from current Sec. 545.31,
incorporating the modifications described earlier under that section.
Section 560.34 Limitations on Home Loans
This proposed section is derived from current Sec. 545.34 (b) and
(c).
Section 560.40 Commercial Paper and Corporate Debt Securities
This proposed section is derived from paragraphs (b) and (c) of
current Sec. 545.75.
Section 560.41 Leasing
This proposed section is a consolidation and reorganization of
current Sec. 545.53 (finance leasing) and Sec. 545.78 (general leasing
authority), incorporating the modifications described under those
sections.
Section 560.42 State and Local Government Obligations
This proposed section is derived from section 5(c)(1)(H) of the
HOLA and paragraphs (a) and (b) of current Sec. 545.72.
Section 560.43 Foreign Assistance Investments
This proposed section is a consolidation and reorganization of
current Secs. 545.39 and 545.73.
Subpart B--Lending and Investment Provisions Applicable to All Savings
Associations
This proposed subpart will contain safety and soundness based
lending standards and provisions applicable to all savings
associations, including state savings associations, to the extent that
they have the authority to make the investments it discusses. The
agency expects to move its Real Estate Lending Standards and
Guidelines, currently located at 12 CFR 563.100-.101 and Appendix A to
Part 563, Subpart D, into this subpart.
Section 560.120 Letters of Credit
This proposed section is derived from current Sec. 545.48 and
establishes standards for letters of credit for all savings
associations.
[[Page 1174]]
Section 560.121 Investments in State Housing Corporations
This proposed section is derived from current Sec. 563.95,
incorporating the modifications described earlier under that section.
Section 560.170 Records for Lending Transactions
This proposed section will contain general loan documentation
requirements based on the interagency safety and soundness standards
and guidelines found at 12 CFR Part 570. It will replace the specific
loan documentation requirements currently found at 12 CFR 563.170(c)
(1)-(10).
Subpart C--Adjustable Rate Mortgages
This proposed subpart will contain new Sec. 560.210, ``Alternative
Mortgage Parity Act'' and will also ultimately include ARM disclosure
requirements currently found in Sec. 563.99, with the possible
amendments discussed under that section.
Section 560.210 Alternative Mortgage Parity Act
This proposed section is derived from current Sec. 545.33(f),
``Notice of housing creditors regarding alternative mortgage
transactions.'' The OTS has observed that housing creditors interested
in engaging in alternative mortgage transactions could not easily
locate this section and believes placing it into a subpart specifically
dealing with alternative mortgages will make it more accessible to
users. The section has been streamlined and modified to reflect changes
proposed today, including the removal of cross-references of provisions
proposed for repeal.
IV. Proposed Disposition of Lending- and Investment-Related
Regulations
The following chart displays the proposed reorganization of OTS's
existing lending- and investment-related regulations.
----------------------------------------------------------------------------------------------------------------
Original provision New provision Comment
----------------------------------------------------------------------------------------------------------------
Sec. 545.31(a).................... Sec. 560.31(a)............ Modified; last sentence to be addressed in
Regulatory Structure rulemaking.
Sec. 545.31(b).................... Sec. 560.31(a)............ Modified; last sentence to be addressed in
Regulatory Structure rulemaking.
Sec. 545.31(c),(d)................ Sec. 560.31(b), (c)....... Unchanged.
Sec. 545.32(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.32(b)(1),(2)............. ........................... Removed.
Sec. 545.32(b)(3)-(6)............. ........................... Removed, included as areas in which state law
is preempted under Sec. 560.2.
Sec. 545.32(c).................... ........................... To be addressed in Regulatory Structure
rulemaking.
Sec. 545.32(d).................... ........................... Removed.
Sec. 545.33 Introductory paragraph ........................... To be addressed in Regulatory Structure
rulemaking.
Sec. 545.33(a)-(e)................ ........................... Removed, included as area in which state law
is preempted under Sec. 560.2.
Sec. 545.33(f).................... Sec. 560.210.............. Modified.
Sec. 545.34(a).................... Sec. 560.2................ Modified and reorganized.
Sec. 545.34(b), (c)............... Sec. 560.34............... Substantially unchanged.
Sec. 545.35....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.36....................... ........................... Removed. Paragraphs (c) and (d) to be
incorporated into guidance.
Sec. 545.37....................... ........................... Removed.
Sec. 545.38(a),(b)................ ........................... Removed.
Sec. 545.38(c).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.39(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.39(b).................... Sec. 560.43............... Modified.
Sec. 545.40....................... ........................... Removed.
Sec. 545.41....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.42....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.43....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.44....................... ........................... Removed.
Sec. 545.45(a),(b)................ Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.45(c),(d)................ ........................... To be incorporated into guidance.
Sec. 545.45(e).................... ........................... Removed.
Sec. 545.46(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.46(b) introductory Sec. 560.30............... Incorporated into lending and investment
paragraph and (b)(1). powers chart.
Sec. 545.46(b)(2)................. ........................... Removed.
Sec. 545.47....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.48....................... Sec. 560.30............... Authority incorporated into lending and
investment powers chart.
Sec. 545.48(a).................... Sec. 560.120.............. Modified.
Sec. 545.48(b).................... ........................... Removed.
Sec. 545.49....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.50(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.50(b).................... ........................... To be addressed in Regulatory Structure
rulemaking.
Sec. 545.50(c).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.51(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.51(b).................... ........................... Removed.
Sec. 545.52....................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.53(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.53(b)-(d)................ Sec. 560.41............... Significantly changed.
Sec. 545.72 Introductory paragraph Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.72(a), (b)............... Sec. 560.42............... Significantly changed.
Sec. 545.72(c).................... ........................... Removed.
Sec. 545.73 Introductory paragraph Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.73(a), (b)............... Sec. 560.43............... Modified.
[[Page 1175]]
Sec. 545.74(c)(1)(vi)............. ........................... Removed.
Sec. 545.75(a).................... Sec. 560.30............... Incorporated into lending and investment
powers chart.
Sec. 545.75(b), (c)............... Sec. 560.40............... Modified.
Sec. 545.75(d).................... ........................... Removed.
Sec. 545.78....................... Sec. 560.30. See also Significantly changed and incorporated into
560.41. lending and investment powers chart.
Sec. 556.2........................ ........................... Removed.
Sec. 556.3........................ ........................... To be incorporated into guidance.
Sec. 556.10....................... ........................... To be incorporated into guidance.
Sec. 563.95....................... Sec. 560.121.............. Significantly changed.
Sec. 563.97....................... ........................... Removed.
Sec. 563.99....................... ........................... Modified by adding new paragraph (g).
Sec. 563.160...................... ........................... Removed.
Sec. 563.170(a),(b)............... ........................... Unchanged.
Sec. 563.170(c)................... ........................... Modified.
Sec. 563.170(c)(1)-(10)........... Sec. 560.170.............. Significantly changed.
Sec. 563.170(d),(e)............... ........................... Unchanged.
Sec. 563.172...................... ........................... Modifications or removal under consideration.
Sec. 571.8........................ ........................... Removed.
Sec. 571.13....................... ........................... Removed.
Sec. 571.20....................... ........................... To be incorporated into guidance.
Sec. 571.22....................... Sec. 560.2................ No substantive change.
----------------------------------------------------------------------------------------------------------------
V. Request for Comment
The OTS invites comment on all aspects of the proposal as well as
specific comments on the proposed changes. For the convenience of the
reader, specific areas noted for comment earlier in this preamble are
repeated under section B., below.
A. General Areas for Comment
The OTS also solicits comments on several broader areas of concern:
(1) What is the best approach for providing clear guidance on the
preemptive effect of OTS's lending regulations for federal savings
associations?
(2) Could a supervisory approach more dependent on general
guidelines and safety and soundness standards lead to differences in
interpretation of regulatory requirements and safety and soundness
standards? Would these differences result in unnecessary
misunderstandings and confrontations between institutions and
supervisory staff? What types of communications or training would ease
the transition to a supervisory approach more dependent on guidelines?
(3) Are there regulatory or policy barriers in OTS's lending and
investment regulations that prevent or otherwise discourage savings
associations from investing in community development activities? As
discussed above, OTS is proposing to remove unnecessary restrictions
from its regulations on investments in government obligations and state
housing corporations. The agency seeks comments on other regulatory
changes that would encourage safe and sound community lending that are
within its statutory authority.
(4) While savings associations have, and will continue to have, a
focus on mortgage lending, it is important that the regulations do not
impair their ability to offer other types of loans. A savings
association should be able to structure its portfolio of assets to
offer the best mix of income-producing products that will meet its
community's credit needs consistent with statutory authority. The
agency is proposing to remove commercial loans made by service
corporations from the overall commercial lending limit, which it
believes is consistent with safety and soundness and within its
statutory authority. The agency solicits comments on what other
regulations affecting federal savings associations' commercial lending,
especially small business lending, authority could be modified.
B. Specific Requests for Comment
For the convenience of the reader, the specific points on which the
proposal requests comment are repeated below:
(1) Should the regulation contain a chart listing the most commonly
used lending and investment powers that would make it easier to locate
lending authorities and determine which restrictions apply? Would such
a chart be more useful if it included statutory provisions not
currently set forth in the regulations?
(2) Today's proposal represents the agency's current best
considered judgment about the right balance between which provisions
affecting lending should be binding regulations and which should be
guidance conveying the OTS's general views on safety and soundness
standards. Does the proposal achieve these goals?
(3) The section-by-section analysis highlights particular lending
provisions that the agency is considering modifying or removing in an
effort to streamline the lending regulations and remove unnecessary
restrictions. Are specific, detailed regulations needed in these areas?
(4) Has the current definition of secured real estate loan provided
adequate guidance for savings associations and how could it be
clarified or updated?
(5) Should any of the provisions in Sec. 545.33(c), limitations on
adjustments to mortgages, be retained?
(6) Should OTS retain the requirement that an index used for an ARM
must be outside the institution's control or, alternatively, a
requirement of a national or regional index? The OTS also solicits
comment on how federal thrifts might structure their ARM lending
programs to ensure that consumers are protected if adjustments need not
be tied to external indices.
(7) Should the provisions of Sec. 545.33(d)(2), which set forth
what may constitute security for a loan on a cooperative, be included
in guidance?
(8) Are the restrictions on late fees and prepayment penalties on
home loans, currently found in Sec. 545.34(b) and (c) and proposed to
be incorporated into new Sec. 560.34, important for borrowers?
(9) Have thrifts invested in or made loans guaranteed under the
Foreign Assistance Act?
(10) How can OTS best reference federal thrifts' authority to make
low-rent housing loans in the proposed lending and investment powers
chart?
[[Page 1176]]
(11) Should the definition of ``mortgage'' set forth in Sec. 302 of
the FHLMC Act, currently cross-referenced in Sec. 545.44, be
incorporated into a future general definitional section?
(12) Do paragraphs (c) and (d) of Sec. 545.45 on manufactured home
financing underwriting standards provide useful guidance to savings
associations?
(13) Does transferring the substance of the letters of credit
regulation, Sec. 545.48(a), to the new part 560 provide needed uniform
standards for the thrift industry, the benefits of which would outweigh
any additional burden on state savings associations? Alternatively,
should Sec. 545.48(a) be transferred to handbook guidance?
(14) How can the definition of consumer loan be clarified for
classification purposes and coordinated with other OTS regulations that
define consumer credit differently?
(15) Should the salvage powers described in the leasing regulation
(proposed new Sec. 560.41) and in the service corporation regulation
(Sec. 545.74) be consolidated into one new section that will outline
salvage powers on all types of loans and investments?
(16) To what extent have savings associations utilized the
authority to invest in the Inter-American Savings and Loan Bank?
(17) The agency proposes to retain paragraphs (b) and (c) of
current Sec. 545.75 and to move them into a new Sec. 560.40 on
commercial paper and corporate debt securities in part 560. Should
these provisions, alternatively, be removed from the regulations and
incorporated as guidance in the Thrift Activities Handbook?
(18) The agency proposes to delete paragraph (d) of current
Sec. 545.75, commercial paper and corporate debt securities, as no
longer having any practical application for savings associations in
light of section 28(d) of the FDIA. Is there any scenario under which
paragraph (d) is still relevant?
(19) Pursuant to 303 of the CDRIA, the OTS and the other banking
agencies are each to review these standards and to consider the impact
that such standards have on credit availability for small business,
residential, and agricultural purposes, and on low- and moderate-income
communities. What impact have the interagency real estate lending
standards, including the Guidelines, had on the availability of the
types of credit and communities described above?
(20) Are the proposed revisions to loan documentation requirements
(proposed new Sec. 560.170) sufficiently flexible to accommodate
participation in telephone and computerized home banking?
(21) Paragraph (d) of Sec. 563.170 addresses change in location of
accounting or control records. Paragraph (e) addresses use of data
processing services for maintenance of records. How can these
paragraphs be updated to reflect technological changes in record
maintenance?
(22) What is the need for Sec. 563.172, re-evaluation of real
estate? How can the interaction between this section and the appraisal
regulations at part 564 be clarified?
(23) Should paragraph (b) of Sec. 571.22 (most favored lender) be
replaced in its entirety with a reference to state laws that are
``material to the determination of the interest rate,'' in order to
clarify the meaning of paragraph (b) and to promote parity between
savings associations and national banks?
VI. Paperwork Reduction Act of 1995
The OTS invites comment on:
(1) Whether the proposed collection of information contained in
this notice of proposed rulemaking is necessary for the proper
performance of the agency's functions, including whether the
information has practical utility;
(2) The accuracy of the agency's estimate of the burden of the
proposed information collection;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected; and
(4) Ways to minimize the burden of the information collection,
including the use of automated collection techniques or other forms of
information technology.
Respondents/recordkeepers are not required to respond to this
collection of information unless it displays a currently valid OMB
control number.
The reporting requirements contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on all aspects of this information collection
should be sent to the Office of Management and Budget, Paperwork
Reduction Project (1550), Washington, DC 20503 with copies to the OTS,
1700 G Street, NW., Washington, DC 20552.
The recordkeeping requirements in this notice of proposed
rulemaking are found in 12 CFR 560.170 and 563.170. The recordkeeping
requirements set forth in this notice of proposed rulemaking are needed
by the OTS in order to supervise savings associations and develop
regulatory policy. The likely recordkeepers are OTS-regulated savings
associations.
Estimated number of respondents and/or recordkeepers: 1,460.
Estimated average annual burden hours per recordkeeper: 422 hours.
Estimated total annual reporting and recordkeeping burden: 616,431
hours.
Start-up costs to respondents: None.
Records are to be maintained for the period of time respondent/
recordkeeper owns the loan plus three years.
VII. Executive Order 12866
The Director of the OTS has determined that this proposed rule does
not constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
VIII. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS certifies that this proposal will not have a significant economic
impact on a substantial number of small entities. The proposal does not
impose any additional burdens or requirements upon small entities and
lowers several paperwork and other burdens on all savings associations.
IX. Unfunded Mandates Act of 1995
The OTS has determined that the requirements of this proposed rule
will not result in expenditures by State, local, and tribal
governments, or by the private sector, of more than $100 million in any
one year. Accordingly, a budgetary impact statement is not required
under section 202 of the Unfunded Mandates Act of 1995.
List of Subjects
12 CFR Part 545
Accounting, Consumer protection, Credit, Electronic funds
transfers, Investments, Manufactured homes, Mortgages, Reporting and
recordkeeping requirements, Savings associations.
12 CFR Part 556
Savings associations.
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 563
Accounting, Advertising, Crime, Currency, Flood insurance,
Investments, Mortgages, Reporting and recordkeeping requirements,
Savings associations, Securities, Surety bonds.
[[Page 1177]]
12 CFR Part 571
Accounting, Conflicts of interest, Investments, Reporting and
recordkeeping requirements, Savings associations.
Accordingly, and under the authority of 12 U.S.C. 1462a, the Office
of Thrift Supervision proposes to amend chapter V, title 12, Code of
Federal Regulations, as set forth below.
PART 545--OPERATIONS
1. The authority citation for part 545 continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.
Sec. 545.31 [Amended]
2. Section 545.31 is amended by removing the first two sentences of
paragraph (a), and paragraphs (c) and (d).
Sec. 545.32 [Amended]
3. Section 545.32 is amended by removing and reserving paragraphs
(a), (b), and (d).
Sec. 545.33 [Amended]
4. Section 545.33 is amended by removing and reserving paragraphs
(a) through (f).
Secs. 545.34-545.43, 545.45-545.49 [Removed]
5. Sections 545.34 through 545.43 and 545.45 through 545.49 are
removed.
Sec. 545.50 [Amended]
6. Section 545.50 is amended by removing and reserving paragraphs
(a) and (c).
Secs. 545.51-545.53 [Removed]
7. Sections 545.51 through 545.53 are removed.
Sec. 545.72-545.73 [Removed]
8. Sections 545.72 through 545.73 are removed.
9. Section 545.74 is amended by revising paragraph (c)(1)(vi) to
read as follows:
Sec. 545.74 Service corporations.
* * * * *
(c) * * *
(1) * * *
(vi) Commercial loans and participations therein.
* * * * *
Sec. 545.75 [Removed]
10. Section 545.75 is removed.
Sec. 545.78 [Removed]
11. Section 545.78 is removed.
PART 556--STATEMENTS OF POLICY
12. The authority citation for part 556 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C.
1693-1693r.
Secs. 556.2, 556.3, 556.10 [Removed]
13. Sections 556.2, 556.3, and 556.10 are removed.
14. Part 560 is added to read as follows:
PART 560--LENDING AND INVESTMENT
Sec.
560.1 General.
560.2 Applicability of law.
Subpart A--Lending and Investment Powers for Federal Savings
Associations
560.30 General lending and investment powers for Federal savings
associations.
560.31 Election regarding categorization of loans or investments
and related calculations.
560.34 Limitations on home loans.
560.40 Commercial paper and corporate debt securities.
560.41 Leasing.
560.42 State and local government obligations.
560.43 Foreign assistance investments.
Subpart B--Lending and Investment Provisions Applicable to All Savings
Associations
560.120 Letters of credit.
560.121 Investment in state housing corporations.
560.170 Records for lending transactions.
Subpart C--Adjustable Rate Mortgages
560.210 Alternative Mortgage Parity Act.
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828, 1701j-3,
3803, 3806; 42 U.S.C. 4106.
Sec. 560.1 General.
(a) Authority and scope. This part is being issued by the OTS under
its general rulemaking and supervisory authority under the Home Owners'
Loan Act, 12 U.S.C. 1462 et seq. Subpart A of this part sets forth the
lending and investment powers and authority of Federal savings
associations. Subpart B of this part contains safety-and-soundness
based lending and investment provisions applicable to all savings
associations. Subpart C of this part deals with adjustable-rate
mortgages.
(b) General lending standards. Each savings association is expected
to conduct its lending and investment activities prudently. Each
association should use lending and investment standards that are
consistent with safety and soundness and ensure adequate portfolio
diversification and are appropriate for the size and condition of the
institution, the nature and scope of its operations, and conditions in
its lending market. Each association should adequately monitor its
portfolio and collateral.
Sec. 560.2 Applicability of law.
(a) General standards. In considering whether State laws apply to
the lending and investment activities of Federal savings associations,
the OTS will apply generally recognized principles of Federal
preemption of state law. For purposes of this part, ``State law''
includes any State statute, regulation, ruling, order or judicial
decision. The OTS intends to occupy the entire field of lending
regulation for Federal savings associations. For purposes of clarity,
paragraphs (b) and (d) of this section set forth specific areas in
which State laws are expressly preempted as they purport to affect
lending by Federal savings associations and any limitations on such
preemption. Paragraph (c) of this section sets forth the specific areas
in which state laws that may have an effect on lending are not
preempted by Federal law.
(b) Express preemption. Federal savings associations may make all
loans and investments authorized under federal law, including this
part, without regard to limitations in state law purporting to regulate
such activities, including, without limitation, laws governing:
(1) Licensing, registration and filings and reports;
(2) Loan to value ratios;
(3) Amortization of loans, including the deferral and
capitalization of interest;
(4) Adjustments to the interest rate, payment, balance, or term to
maturity of the loan, including calling a loan due and payable upon the
passage of a number of years since closing or a specified event
external to the loan;
(5) Loan-related fees, including without limitation, initial
charges, late charges, and prepayment penalties;
(6) Escrow accounts;
(7) Security property, including leaseholds;
(8) Disclosure requirements and access to credit reports;
(9) Requirements on disbursements and repayments;
(10) Mortgage processing;
(11) Usury and interest rate ceilings to the extent provided in 12
U.S.C. 1735f-7(a) and part 590 of this chapter and 12 U.S.C. 1463(g)
and paragraph (d) of this Sec. 560.2; and
(12) Due-on-sale clauses to the extent provided in 12 U.S.C. 1701j-
3 and part 591 of this chapter.
(c) State laws that are not preempted. Notwithstanding paragraph
(b) of this
[[Page 1178]]
section, state laws in the following areas are not preempted as they
affect the lending operations of Federal savings associations:
(1) General contract law;
(2) General real property law;
(3) Homestead laws specified in 12 U.S.C. 1462a(f);
(4) Tort law; and
(5) Criminal law.
(d) Most favored lender. (1) Under 12 U.S.C. 1463(g), savings
associations are authorized to charge interest at a rate not to exceed
the greater of either one percent above the Federal Reserve ninety-day
discount rate or the rate allowed to the most favored lender on the
particular class of loans under State law whenever the greater of
either of these rates exceeds the rate the association is permitted to
charge by State law.
(2) Savings associations may only charge the preferential rates
reserved for most favored lenders when they are making the same type of
loans as the most favored lender. Accordingly, savings associations may
not charge the maximum loan rates permitted for small loan companies
unless that loan meets the substantive state law requirements as to
loan term amount, use of proceeds, identity of borrower, and so forth.
Consumer protections specifically required in such loans when made by
the most favored lender are also to be considered substantive and must
be included in loans made by savings associations that desire to use
most-favored-lender rates.
(3) Federal savings associations are not required to submit to
state most-favored-lender restrictions that are primarily procedural or
regulatory in nature. Such restrictions include licensing, bonding, and
reporting to State authorities. The degree to which state-chartered
savings associations must comply with such restrictions will be
determined by their State supervisors.
Subpart A--Lending and Investment Powers for Federal Savings
Associations
Sec. 560.30 General lending and investment powers for Federal savings
associations.
Pursuant to section 5(c) of the Home Owners Loan Act (HOLA), 12
U.S.C. 1464(c), a federal savings association may make, invest in,
purchase, sell, participate in, or otherwise deal in (including
brokerage or warehousing) all loans and investments allowed under
section 5(c) of the HOLA including, without limitation, the following
loans, extensions of credit, and investments, subject to the
limitations indicated and any such terms, conditions, or limitations as
may be prescribed from time to time by the Office by policy directive,
order, or regulation:
Lending and Investment Powers Chart
----------------------------------------------------------------------------------------------------------------
Statutory percentage of assets
Category HOLA authorization limitations (endnotes contain
applicable regulatory limitations)
----------------------------------------------------------------------------------------------------------------
Commercial loans................... 5(c)(2)(A)........................... 10% of total assets.
Commercial paper and corporate debt 5(c)(2)(D)........................... Up to 30% of total assets.1,.2
securities.
Community development.............. 5(c)(3)(B)........................... 5% of total assets.
Community development direct 5(c)(3)(B)........................... 2% of total assets.\3\
investments.
Consumer loans..................... 5(c)(2)(D)........................... Up to 35% of total assets.1,.4
Credit cards....................... 5(b)(4).............................. None.\5\
Education loans.................... 5(c)(3)(A)........................... 5% of total assets.
Finance leasing.................... 5(c)(1)(B)........................... Based on collateral type for
5(c)(2)(A)........................... property financed.\6\
5(c)(2)(D)...........................
Foreign assistance investments..... 5(c)(4)(C)........................... 1% of total assets.\7\
General leasing.................... 5(c)(2)(C)........................... 10% of assets.\6\
Home improvement loans............. 5(c)(1)(J)........................... None.\5\
Home (residential) loans \8\....... 5(c)(1)(B)........................... None. 5, 9
Letters of credit.................. 5(c)(2)(A)........................... Included in aggregate 10% of assets
commercial lending limitation.\10\
Loans secured by accounts.......... 5(c)(1)(A)........................... None.5, 11
Loans to financial institutions, 5(c)(1)(H)........................... None.5, 12
brokers, and dealers.
Manufactured home loans............ 5(c)(1)(J)........................... None.5, 13
Nonresidential real property loans. 5(c)(2)(B)........................... 400% of total capital.\14\
State and local government 5(c)(1)(H)........................... None5, 15
obligations.
State housing corporations......... 5(c)(1)(P)........................... None.5, 16
Transaction account loans, 5(c)(1)(A)........................... None.5,17
including overdrafts.
----------------------------------------------------------------------------------------------------------------
NOTES:
\1\ For purposes of determining a Federal savings association's percentage assets limitation, investment in
commercial paper and corporate debt securities must be aggregated with the Federal savings association's
investment in consumer loans.
\2\ A Federal savings association may invest in commercial paper and corporate debt securities, which includes
corporate debt securities convertible into stock, subject to the provisions of Sec. 560.40.
\3\ This 2% of assets limitation is a sublimit within the overall 5% of assets limitation on community
development loans and investments.
\4\ Amounts in excess of 30% of assets, in aggregate, may be invested only in loans made by the association
directly to the original obligor and for which no finder's or referral fees have been paid. A Federal savings
association may include loans to dealers in consumer goods to finance inventory and floor planning in the
total investment made under this section.
\5\ While there is no statutory limit on certain categories of loans and investments, including credit card
loans, home improvement loans, and deposit account loans, the OTS may establish an individual limit on such
loans or investments if the association's concentration in such loans or investments presents a safety and
soundness concern.
\6\ A Federal savings association may engage in leasing activities subject to the provisions of Sec. 560.41.
\7\ This 1% of assets limitation applies to the aggregate outstanding investments made under the Foreign
Assistance Act and in the capital of the Inter-American Savings and Loan Bank. Such investments may be made
subject to the provisions of Sec. 560.43.
\8\ A home (or residential) loan includes loans secured by on one-to-four family dwellings, multi-family
residential property and loans secured by a unit or units of a condominium or housing cooperative.
\9\ A Federal savings association may make home loans subject to the provisions of Sec. 560.34.
\10\ A Federal savings association may issue letters of credit subject to the provisions of Sec. 560.120.
[[Page 1179]]
\11\ Loans secured by savings accounts and other time deposits may be made without limitation, provided the
Federal savings association obtains a lien on, or a pledge of, such accounts. Such loans may not exceed the
withdrawable amount of the account.
\12\ A Federal savings association may only invest in loans secured by obligations of, or by obligations fully
guaranteed as to principal and interest by, the United States or any of its agencies or instrumentalities
where the borrower is a financial institution insured by the Federal Deposit Insurance Corporation or is a
broker or dealer registered with the Securities and Exchange Commission and the market value of the securities
for each loan at least equals the amount of the loan at the time it is made.
\13\ If the wheels and axles of the manufactured home have been removed and it is permanently affixed to a
foundation, a loan secured by a combination of a manufactured home and developed residential lot on which it
sits may be treated as a home loan.
\14\ Without regard to any limitations of this part, a Federal savings association may make or invest in the
fully insured or guaranteed portion of nonresidential real estate loans insured or guaranteed by the Economic
Development Administration, the Farmers Home Administration, or the Small Business Administration.
Unguaranteed portions of guaranteed loans must be aggregated with uninsured loans when determining an
association's compliance with the 400% of capital limitation for other real estate loans.
\15\ This category includes obligations issued by any state, territory, or possession of the United States or
political subdivision thereof (including any agency, corporation, or instrumentality of a state or political
subdivision), subject to Sec. 560.42.
\16\ A Federal savings association may invest in state housing corporations subject to the provisions of Sec.
560.121.
\17\ Payments on accounts in excess of the account balance (overdrafts) on commercial deposit or transaction
accounts shall be considered commercial loans for purposes of determining the association's percentage of
assets limitation.
Sec. 560.31 Election regarding categorization of loans or investments
and related calculations.
(a) If a loan or other investment is authorized under more than one
section of the Home Owners' Loan Act, as amended, or this part, a
Federal savings association may designate under which section the loan
or investment has been made. Such a loan or investment may be
apportioned among appropriate categories, and may be moved, in whole or
part, from one category to another. A loan commitment shall be counted
as an investment and included in total assets of a Federal savings
association only to the extent that funds have been advanced and not
repaid pursuant to the commitment.
(b) Loans sold to a third party shall be included in calculation of
a percentage-of-assets investment limitation only to the extent they
are sold with recourse.
(c) A Federal savings association may make a loan secured by
assignment of loans to the extent that it could, under applicable law
and regulations, make or purchase the underlying assigned loans.
Sec. 560.34 Limitations on home loans.
(a) Late charges. A Federal savings association may include in the
loan contract a provision authorizing the imposition of a late charge
with respect to the payment of any delinquent periodic payment. With
respect to any loan made after July 31, 1976, on the security of a home
occupied or to be occupied by the borrower, no late charge, regardless
of form, shall be assessed or collected by a Federal savings
association, unless any monthly billing, coupon, or notice the Federal
savings association may provide regarding installment payments due on
the loan discloses the date after which the charge may be assessed. A
Federal savings association may not impose a late charge more than one
time for late payment of the same installment, and any installment
payment made by the borrower shall be applied to the longest
outstanding installment due. A Federal savings association shall not
assess a late charge as to any payment received by it within fifteen
days after the due date of such payment. No form of such late charge
permitted by this paragraph shall be considered as interest to the
Federal savings association and the Federal savings association shall
not deduct late charges from the regular periodic installment payments
on the loan, but must collect them as such from the borrower.
(b) Loan payments and prepayments. Except for loans to natural
persons secured by borrower-occupied property and on which periodic
advances are being made, payments on the principal indebtedness of all
loans on real estate shall be applied directly to reduction of such
indebtedness, but prepayments made on an installment loan may be
reapplied from time to time wholly or partly to offset payments which
subsequently accrue under the loan contract. A Federal savings
association may impose a penalty on the prepayment of a loan as
provided in the loan contract.
Sec. 560.40 Commercial paper and corporate debt securities.
Pursuant to 12 U.S.C. 1464(c)(2)(D), a Federal savings association
may invest in, sell, or hold commercial paper and corporate debt
securities subject to the provisions of this section.
(a) Limitations. (1) Commercial paper must be:
(i) Denominated in dollars; and
(ii)(A) As of the date of purchase, as shown by the most recently
published rating made of such investments by at least two nationally
recognized investment ratings services, rated in either one of the two
highest categories; or
(B) If unrated, guaranteed by a company having outstanding paper
that is rated as provided in paragraph (a)(1)(ii)(A) of this section.
(2) Corporate debt securities must be:
(i) Denominated in dollars;
(ii) Securities that may be sold with reasonable promptness at a
price that corresponds reasonably to their fair value; and
(iii) Rated in one of the four highest categories by a nationally
recognized investment ratings service at its most recently published
rating before the date of purchase of the security.
(3) A Federal savings association's total investment in the
commercial paper and corporate debt securities of any one issuer, or
issued by any one person or entity affiliated with such issuer,
together with other loans shall not exceed the general lending
limitations contained in Sec. 563.93(c) of this chapter.
(4) Investments in corporate debt securities convertible into stock
are subject to the following additional limitations:
(i) The purchase of securities convertible into stock at the option
of the issuer is prohibited;
(ii) At the time of purchase, the cost of such securities must be
written down to an amount that represents the investment value of the
securities considered independently of the conversion feature; and
(iii) Federal savings associations are prohibited from exercising
the conversion feature.
(5) A Federal savings association shall maintain information in its
files adequate to demonstrate that it has exercised prudent judgment in
making investments under this section.
(b) Notwithstanding the limitations contained in this section, the
Office may permit investment in corporate debt securities of another
savings association in connection with the purchase or sale of a branch
office or in connection with a supervisory merger or acquisition.
Sec. 560.41 Leasing.
(a) Authorization. Pursuant to general lending authority in 12
U.S.C. 1464(c)(1)(B), 1464(c)(2)(A), and 1464(c)(2)(D), a Federal
savings association may engage in leasing activities that are the
functional equivalent of lending, subject to the
[[Page 1180]]
limitations of this section. Pursuant to 12 U.S.C. 1464(c)(2)(C), a
Federal savings association may invest in tangible personal property
for the purpose of leasing that property, subject to the limitations of
this section.
(b) General. A Federal savings association may become the legal or
beneficial owner of tangible personal property or real property for the
purpose of leasing such property, may obtain an assignment of a
lessor's interest in a lease of such property, and may incur
obligations incidental to its position as the legal or beneficial owner
and lessor of the leased property, subject to the limitations of this
section.
(c) Finance leasing. (1) A financing lease of tangible personal
property made to a natural person for personal, family or household
purposes pursuant to this section shall be subject to all limitations
applicable to the amount of a Federal savings association's investment
in consumer loans. A financing lease made for commercial, corporate,
business, or agricultural purposes pursuant to this section shall be
subject to all limitations applicable to the amount of a Federal
savings association's investment in commercial loans. A financing lease
of residential or nonresidential real property made pursuant to this
section shall be subject to all limitations applicable to the amount of
a Federal savings association's investment in real estate loans.
(2) To qualify as the functional equivalent of a loan, a financing
lease must meet all of the following requirements:
(i) The lease must be a net, full-payout lease representing a non-
cancelable obligation of the lessee, notwithstanding the possible early
termination of the lease.
(ii) Both the estimated residual value of the property and that
portion of the estimated residual value relied upon by the lessor to
satisfy the requirements of a full-payout lease must be reasonable in
light of the nature of the leased property and all relevant
circumstances so that realization of the lessor's full investment plus
the cost of financing the property depends primarily on the
creditworthiness of the lessee, and not on the residual market value of
the leased property.
(iii) At the termination of a financing lease, either by expiration
or default, property acquired must be liquidated or released on a net
basis as soon as practicable. Any property held in anticipation of
releasing must be reevaluated and recorded at the lower of fair market
value or book value.
(3) Definitions. For the purposes of this section:
(i) The term net lease means, a lease under which the Federal
savings association will not, directly or indirectly, provide or be
obligated to provide for:
(A) The servicing, repair or maintenance of the leased property
during the lease term;
(B) The purchasing of parts and accessories for the leased
property; Provided, that improvements and additions to the leased
property may be leased to the lessee upon its request in accordance
with the full-payout requirements of this section;
(C) The loan of replacement or substitute property while the leased
property is being serviced;
(D) The purchasing of insurance for the lessee, except where the
lessee has failed to discharge a contractual obligation to purchase or
maintain insurance; or
(E) The renewal of any license, registration of filing for the
property unless such action by the Federal savings association is
necessary to protect its interest as an owner or financier of the
property.
(ii) The term full-payout lease means a lease transaction in which
any unguaranteed portion of the estimated residual value relied on by
the association to yield the return of its full investment in the
leased property, plus the estimated cost of financing the property over
the term of the lease does not exceed 25% of the original cost of the
property to the lessor.
(iii) The term realization of investment means that a Federal
savings association that enters into a lease financing transaction must
reasonably expect to realize the return of its full investment in the
leased property, plus the estimated cost of financing the property over
the term of the lease from:
(A) Rentals;
(B) Estimated tax benefits, if any; and
(C) The estimated residual value of the property at the expiration
of the term of the lease.
(d) General leasing. (1) Pursuant to section 5(c)(2)(C) of the
HOLA, a Federal savings association may invest in tangible personal
property, including vehicles, manufactured homes, machinery, equipment,
or furniture for the purpose of rental or sale. Lease investments made
under this section are not restricted to being the functional
equivalent of loans as is the case for financing leases.
(2) A Federal savings association's investments in such property
may not exceed 10% of its assets.
(e) Salvage powers. If, in good faith, a Federal savings
association believes that there has been an unanticipated change in
conditions that threatens its financial position by significantly
increasing its exposure to loss, the provisions of this section shall
not prevent the Federal savings association:
(1) As the owner and lessor under a net, full-payout lease, from
taking reasonable and appropriate action to salvage or protect the
value of the property or its interest arising under the lease;
(2) As the assignee of a lessor's interest in a lease, from
becoming the owner and lessor of the leased property pursuant to its
contractual right, or from taking any reasonable and appropriate action
to salvage or protect the value of the property or its interest arising
under the lease; or
(3) From including any provisions in a lease, or from making any
additional agreements, to protect its financial position or investment
in the circumstances set forth in paragraphs (d)(1) and (d)(2) of this
section.
Sec. 560.42 State and local government obligations.
Pursuant to 12 U.S.C. 1464(c)(1)(H), a Federal savings association
may invest in obligations issued by any State or political subdivision
thereof, subject to the following conditions:
(a) A Federal savings association may not invest more than 10% of
its capital in obligations of any one issuer, exclusive of general
obligations of the issuer.
(b) The obligations must continue to hold one of the four highest
national investment grade ratings, or must be issued by a public
housing agency and backed by the full faith and credit of the United
States.
(c) Notwithstanding the limitations in paragraph (b) of this
section, a Federal savings association may invest, in the aggregate, up
to one percent of its assets in the obligations of a State, territory,
possession, or political subdivision in which the association's home
office or a branch office is located.
(d) Notwithstanding the limitations in paragraphs (b) and (c) of
this section, a Federal savings association may invest in any
obligations approved by the Office.
Sec. 560.43 Foreign assistance investments.
Pursuant to 12 U.S.C. 1464(c)(4)(C), a Federal savings association
may make foreign assistance investments in an aggregate amount not to
exceed one percent of its assets, subject to the following conditions:
(a) For any investment made under the Foreign Assistance Act, the
loan agreement shall specify what constitutes an event of default, and
provide that
[[Page 1181]]
upon default in payment of principal or interest under such agreement,
the entire amount of outstanding indebtedness thereunder shall become
immediately due and payable, at the lender's option. Additionally, the
contract of guarantee shall cover 100% of any loss of investment
thereunder, except for any portion of the loan arising out of fraud or
misrepresentation for which the party seeking payment is responsible,
and provide that the guarantor shall pay for any such loss in U.S.
dollars within a specified reasonable time after the date of
application for payment.
(b) To make any investments in the share capital and capital
reserve of the Inter-American Savings and Loan Bank, a Federal savings
association must be adequately capitalized and have adequate allowances
for loan and lease losses. The Federal savings association's aggregate
investment in such capital or capital reserve, including the amount of
any obligations undertaken to provide said Bank with reserve capital in
the future (call-able capital), will not, as a result of such
investment, exceed one-quarter of 1% of its assets or $100,000,
whichever is less.
Subpart B--Lending and Investment Provisions Applicable to All
Savings Associations
Sec. 560.120 Letters of credit.
(a) To the extent that a savings association has been given the
authority to invest in letters of credit elsewhere, a savings
association may issue and commit to issue letters of credit within the
scope of and in conformance with the laws and rules of practice
recognized by law, such as the Uniform Commercial Code, the Uniform
Customs and Practice for Documentary Credits, the United Nations
Commission on International Trade Law, the Convention on Independent
Guarantees and Standby Letters of Credit, and the Uniform Rules for
Bank-to-Bank Reimbursements Under Documentary Credits. Savings
associations may pledge collateral to secure its obligations
thereunder, subject to the following requirements:
(1) Each letter of credit must conspicuously state that it is a
letter of credit;
(2) The issue's undertaking must contain a specified expiration
date or be for a definite term, and must be limited in amount;
(3) The issuer's obligation to pay must be solely dependent upon
the presentation of conforming documents as specified in the letter of
credit, and not upon the factual performance or nonperformance by the
parties to the underlying transaction; and
(4) The account party must have an unqualified obligation to
reimburse the issuer for payments made under the letter of credit.
(b) To the extent funds are advanced under a letter of credit
without compensation from the account party, the amount shall be
treated as an extension of credit subject to percentage-of-assets
limits and other requirements under an applicable provision of this
part.
Sec. 560.121 Investment in state housing corporations.
(a) Any savings association to the extent it has legal authority to
do so, may make investments in, commitments to invest in, loans to, or
commitments to lend to any state housing corporation; provided, that
such obligations or loans are secured directly, or indirectly through a
fiduciary, by a first lien on improved real estate which is insured
under the National Housing Act, as amended, and that in the event of
default, the holder of such obligations or loans has the right
directly, or indirectly through a fiduciary, to subject to the
satisfaction of such obligations or loans the real estate described in
the first lien, or the insurance proceeds.
(b) Any savings association that is adequately capitalized may, to
the extent it has legal authority to do so, invest in obligations
(including loans) of or issued by any state housing corporation
incorporated in the State in which such savings association has its
home or a branch office; provided (except with respect to loans), that:
(1) The obligations are rated in one of the four highest grades as
shown by the most recently published rating made of such obligations by
a nationally recognized rating service; or
(2) The obligations, if not rated, are approved by the Office. The
aggregate outstanding direct investment in obligations under paragraph
(b) of this section shall not exceed the amount of the savings
association's total capital.
(c) Each state housing corporation in which a savings association
invests under the authority of paragraph (b) of this section shall
agree, before accepting any such investment (including any loan or loan
commitment), to make available at any time to the Office such
information as the Office may consider to be necessary to ensure that
investments are properly made under this section.
Sec. 560.170 Records for lending transactions.
In establishing and maintaining its records pursuant to
Sec. 563.170 of this chapter, each savings association and service
corporation should establish and maintain loan documentation practices
that:
(a) Ensure that the institution can make an informed lending
decision and can assess risk on an ongoing basis;
(b) Identify the purpose and all sources of repayment for each
loan, and assess the ability of the borrower(s) and any guarantor(s) to
repay the indebtedness in a timely manner;
(c) Ensure that any claims against a borrower, guarantor, security
holders, and collateral are legally enforceable;
(d) Demonstrate appropriate administration and monitoring of its
loans; and
(e) Take into account the size and complexity of a loan.
Subpart C--Adjustable Rate Mortgages
Sec. 560.210 Alternative Mortgage Parity Act.
Pursuant to 12 U.S.C. 3803, housing creditors that are not
commercial banks, credit unions, or Federal savings associations may
make alternative mortgage transactions as defined by that section and
further defined and described by applicable regulations identified
herein, notwithstanding any state constitution, law, or regulation. In
accordance with 12 U.S.C. 3807(b), this part 560 and 12 CFR 563.99 are
identified as appropriate and applicable to the exercise of this
authority and all regulations not so identified are deemed
inappropriate and inapplicable. Housing creditors engaged in credit
sales should read the term ``loan'' as ``credit sale'' wherever
applicable.
PART 563--OPERATIONS
15. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1828, 3806.
Sec. 563.95 [Removed]
16. Section 563.95 is removed.
Sec. 563.97 [Removed]
17. Section 563.97 is removed.
18. Section 563.99 is amended by adding paragraph (g) to read as
follows:
Sec. 563.99 Fixed-rate and adjustable-rate mortgage loan disclosures,
adjustment notices, and interest rate caps.
* * * * *
(g) Exempt transactions. This section does not apply to an
extension of credit primarily for a business, commercial, or
agricultural purpose.
Sec. 563.160 [Removed]
19. Section 563.160 is removed.
[[Page 1182]]
Sec. 563.170 [Amended]
20. Section 563.170 is amended by revising paragraph (c) to read as
follows:
Sec. 563.170 Examinations and audits; appraisals; establishment and
maintenance of records.
* * * * *
(c) Establishment and maintenance of records. To enable the Office
to examine savings associations and affiliates and audit savings
associations, affiliates, and service corporations pursuant to the
provisions of paragraph (a) of this section, each savings association,
affiliate, and service corporation shall establish and maintain such
accounting and other records as will provide an accurate and complete
record of all business it transacts. This includes, without limitation,
establishing and maintaining such other records as are required by
statute or any other regulation to which the savings association,
affiliate, or service corporation is subject. The documents, files, and
other material or property comprising said records shall at all times
be available for such examination and audit wherever any of said
records, documents, files, material, or property may be.
* * * * *
PART 571--STATEMENTS OF POLICY
21. The authority citation for part 571 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.
Secs. 571.8, 571.13, 571.20, 571.22 [Removed]
22. Sections 571.8, 571.13, 571.20, and 571.22 are removed.
Dated: January 5, 1996.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 96-409 Filed 1-16-96; 8:45 am]
BILLING CODE 6720-01-P
