Statement of Policy on Risk-Based Capital: Multifamily Housing Loans

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AB23

Statement of Policy on Risk-Based Capital: Multifamily Housing

Loans

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule implements section 618(b) of the Resolution

Trust Corporation Refinancing, Restructuring, and Improvement Act of

1991 (RTCRRIA) and amends the FDIC's risk-based capital guidelines to

assign a 50 percent risk weight to loans secured by multifamily

residential properties (multifamily housing loans) that meet certain

prudential criteria and to any securities collateralized by such loans.

At present, such loans are assigned to the 100 percent risk weight

category. This amendment also satisfies a requirement contained in

section 305 of the Federal Deposit Insurance Corporation Improvement

Act of 1991 (FDICIA) concerning the application of the FDIC's risk-

based capital guidelines to multifamily housing loans. The final rule

also addresses the section 618(b) requirement that the FDIC's risk-

based capital guidelines take into account loss sharing arrangements in

connection with sales of multifamily housing loans. The final rule is

intended to facilitate prudent lending for multifamily housing

purposes.

EFFECTIVE DATE: This final rule is effective January 27, 1994.

FOR FURTHER INFORMATION CONTACT: Robert F. Storch, Chief, Accounting

Section, Division of Supervision, Federal Deposit Insurance

Corporation, 550 17th Street NW., Washington, DC 20429, (202) 898-8906.

SUPPLEMENTARY INFORMATION:

I. Background

On March 14, 1989, the Board of Directors of the FDIC adopted a

Statement of Policy on Risk-Based Capital (12 CFR part 325, appendix A,

later redesignated as appendix A to subpart A of part 325) which is

applicable to all insured state nonmember banks supervised by the FDIC

(54 FR 11500). The Office of the Comptroller of the Currency (OCC) and

the Federal Reserve Board (FRB) have also adopted similar risk-based

capital standards for the banks under their supervision. The three

agencies based their risk-based capital standards on the report on

``International Convergence of Capital Measurement and Capital

Standards'' (the Basle Accord) issued by the Basle Committee on Banking

Supervision in July 1988. In addition, the Office of Thrift Supervision

(OTS) has implemented risk-based capital rules for savings

associations.

Under the FDIC's risk-based capital framework, a bank's balance

sheet assets and the credit equivalent amounts of its off-balance sheet

items are assigned to one of four broad risk categories--0, 20, 50, or

100 percent--according to the obligor or, if relevant, the guarantor or

the nature of the collateral. At present, absent qualifying collateral

or guarantees, claims on private sector obligors (other than depository

institutions) are generally assigned to the 100 percent risk weight

category under the risk-based capital guidelines issued by the FDIC,

the FRB, the OCC, and the OTS (collectively, the federal banking

agencies). Thus, multifamily (five or more dwelling units) housing

loans and privately-issued securities collateralized by multifamily

housing loans are normally accorded a 100 percent risk weight by the

FDIC.\1\

---------------------------------------------------------------------------

\1\Multifamily housing loans are also normally accorded a 100

percent risk weight under the risk-based capital guidelines of the

FRB and OCC. However, OTS regulations accord a 50 percent risk

weight to ``qualifying multifamily mortgage loans.'' This type of

loan is defined as a ``loan on an existing property consisting of 5-

36 dwelling units with an initial loan-to-value ratio of not more

than 80% where an average annual occupancy rate of 80% or more of

total units has existed for at least one year.''

---------------------------------------------------------------------------

However, under the Basle Accord, ``loans fully secured by mortgage

on residential property which is rented or is (or is intended to be)

occupied by the borrower'' are permitted to be assigned a 50 percent

risk weight. Nevertheless, the Accord admonishes bank supervisory

authorities to apply this ``concessionary weight * * * restrictively

and in accordance with strict prudential criteria. This may mean, for

example, that in some member countries the 50 per cent. weight * * *

will only be applied where strict, legally-based, valuation rules

ensure a substantial margin of additional security over the amount of

the loan.'' To date, the 50 percent risk weight has been accorded only

to loans secured by one-to-four family residential properties that meet

certain prudential criteria.

Section 618(b)(1) of the RTCRRIA requires the federal banking

agencies to amend their risk-based capital guidelines to assign

multifamily housing loans that meet certain criteria and any security

collateralized by such loans to the 50 percent risk weight category. In

order for a multifamily housing loan to qualify for this preferential

capital treatment, the loan must be secured by a first lien on a

multifamily residential property, the loan-to-value ratio for the

property must not exceed 80 percent (75 percent if the rate of interest

on the loan changes over the term of the loan), the ratio of annual net

operating income generated by the property (before debt service) to

annual debt service on the loan must not be less than 120 percent (115

percent if the rate of interest on the loan changes over the term of

the loan), the amortization period for principal and interest on the

loan must not exceed 30 years, the loan must have a minimum maturity

for principal repayment of not less than seven years, and the loan must

have had timely payment of principal and interest in accordance with

the loan terms for at least one year. Section 618(b)(1) further

provides that a multifamily housing loan must meet ``any other

underwriting characteristics that the appropriate Federal banking

agency may establish, consistent with the purposes of the minimum

acceptable capital requirements to maintain the safety and soundness of

financial institutions.''

In addition, section 305 of the FDICIA (Pub. L. 102-242, 105 Stat.

2355 (12 U.S.C. 1828 note)) in part requires the federal banking

agencies to amend their risk-based capital standards for insured

depository institutions to ensure that those standards ``reflect the

actual performance and expected risk of loss of multifamily

mortgages.''

Section 618(b)(2) of the RTCRRIA requires the FDIC to amend its

risk-based capital standards:

To provide that any loan fully secured by a first lien on a

multifamily housing property that is sold subject to a pro rata loss

sharing arrangement * * * shall be treated as sold to the extent

that loss is incurred by the purchaser of the loan.

This section then defines the term ``pro rata loss sharing

arrangement'' as ``an agreement providing that the purchaser of a loan

shares in any loss incurred on the loan with the selling institution on

a pro rata basis.''

Section 618(b)(3) of the RTCRRIA then directs the FDIC to amend its

risk-based capital framework ``to take into account other loss sharing

arrangements in connection with the sale'' of multifamily housing loans

``for purposes of determining the extent to which such loans shall be

treated as sold.'' An ``other loss sharing arrangement'' is then

defined as ``an agreement providing that the purchaser of a loan shares

in any loss incurred on the loan with the selling institution on other

than a pro rata basis.''

II. Description of Proposed Rule

On April 1, 1992, the FDIC published a proposed rule designed to

implement the provisions of section 618(b) of the RTCRRIA (57 FR

11010). The preamble to the proposed rule further noted that

implementation of the proposal would also satisfy the provision of

section 305 of the FDICIA concerning the application of the FDIC's

risk-based capital guidelines to multifamily housing loans.

Criteria for Multifamily Housing Loans and Securities

In order to achieve the safety and soundness objective set forth in

section 618(b)(1), the proposal observed that it is imperative that

appropriate criteria be established to distinguish between multifamily

housing loans that are accorded a 100 percent risk weight and those

that are of sufficiently high quality to warrant a more favorable 50

percent risk weight. In this regard, the proposal noted that data

reported in the Consolidated Reports of Condition and Income filed by

all FDIC-insured commercial banks revealed that net charge-offs of

multifamily housing loans by such banks for calendar year 1991 were

2.01 percent of multifamily housing loans outstanding. The percentage

of multifamily housing loans that were 90 days or more past due or in

nonaccrual status as of December 31, 1991, for all FDIC-insured

commercial banks was 5.64 percent of multifamily housing loans

outstanding. In contrast, for single family housing loans, which the

FDIC's risk-based capital guidelines assign to the 50 percent risk

weight category if they meet certain criteria, the net charge-off rate

for calendar year 1991 was only 0.20 percent of loans outstanding.

Single family housing loans that were 90 days or more past due or in

nonaccrual status as of December 31, 1991, for all FDIC-insured

commercial banks were 1.65 percent.

Thus, the FDIC's proposed rule lowering the risk weight for certain

multifamily housing loans incorporated the specific statutory criteria

described in section I. above and also included four additional safety

and soundness criteria that multifamily housing loans would have to

meet in order to receive a reduced risk weight. These four criteria,

which were developed by the FDIC after consulting with the other

federal banking agencies, provided that: (1) The loan-to-value ratio

used to determine the eligibility of a multifamily housing loan for the

lower risk weight would be the ratio at the time the loan was

originated; (2) the loan must not be more than 90 days past due or

carried in nonaccrual status; (3) the average annual occupancy rate of

the property securing the loan must have been at least 80 percent for

at least one year; and (4) the loan must have been made in accordance

with prudent underwriting standards. Taken together, the statutory and

proposed additional criteria were intended to ensure that only those

multifamily housing loans whose future repayment prospects are such

that they expose an institution to relatively low levels of credit risk

would receive the more favorable 50 percent risk weight. These criteria

were also intended to ensure that such loans have risk characteristics

that are consistent with the Basle Accord's provisions regarding the

assignment of a preferential risk weight.

As for securities collateralized by multifamily housing loans, the

FDIC observed in the preamble to the proposed rule that its risk-based

capital guidelines presently accord a 50 percent risk weight to

privately-issued mortgage-backed securities that are ``backed by a pool

of conventional mortgages,'' each of which meets the criteria ``for

inclusion in the 50 percent risk weight category at the time the pool

is originated.'' Such securities must also meet a number of safety and

soundness criteria that are specified in the guidelines. Therefore, by

operation of the existing language on privately-issued mortgage-backed

securities in the FDIC's risk-based capital guidelines, the proposal

stated that the explicit addition of multifamily housing loans to the

50 percent risk weight category would have the effect of lowering to 50

percent the risk weight for privately-issued mortgage-backed securities

collateralized by such loans, provided the multifamily housing loans

that back these securities qualify for a 50 percent risk weight at the

time the securities are originated.\2\

---------------------------------------------------------------------------

\2\In addition, in general, the FDIC's risk-based capital

guidelines currently assign a 20 percent risk weight to mortgage-

backed securities collateralized by multifamily housing loans that

have been issued or guaranteed by a U.S. Government-sponsored

agency. The final rule does not change the treatment of these

mortgage-backed securities.

---------------------------------------------------------------------------

Loss Sharing Arrangements

The FDIC's existing risk-based capital guidelines do not

specifically address how asset sales involving various forms of loss

sharing arrangements are to be handled by a selling bank. This is

because, for purposes of applying the risk-based capital standards, a

bank's balance sheet assets are determined in accordance with the

instructions for the preparation of the Consolidated Reports of

Condition and Income (Call Report). Thus, the instructions for

preparation of Consolidated Reports of Condition and Income are the

source for guidance on determining the extent to which assets such as

multifamily housing loans are treated as sold when there is a loss

sharing arrangement covering the assets. The proposed rule therefore

sought to implement the section 618(b) requirement that the FDIC's

risk-based capital guidelines take into account loss sharing

arrangements on sales of multifamily housing loans by referencing the

relevant Call Report instructions.

With respect to sales subject to pro rata loss sharing

arrangements, the Call Report instructions direct banks to report these

transactions in a manner that is consistent with the language of

section 618(b)(2) quoted in section I above. These instructions state

that:

If the risk retained by the seller is limited to some fixed

percentage of any losses that might be incurred and there are no

other provisions resulting in retention of risk, either directly or

indirectly, by the seller, the maximum amount of possible loss for

which the selling bank is at risk (the stated percentage times the

sale proceeds) shall be reported as a borrowing and the remaining

amount of the assets transferred reported as a sale.

Thus, the FDIC proposed to amend its risk-based capital guidelines

to provide in a footnote an explanation of this treatment for sellers

of multifamily housing loans subject to pro rata loss sharing

arrangements.

For Call Report purposes, in general, other transfers of

multifamily housing loans are to be reported as sales of the

transferred assets only if the selling institution ``(1) retains no

risk of loss from the assets transferred resulting from any cause and

(2) has no obligation to any party for the payment of principal or

interest on the assets transferred'' resulting from any cause. The

FDIC's risk-based capital framework has taken other loss sharing

arrangements into account in this manner when determining the extent to

which assets such as multifamily housing loans are treated as sold and

excluded from the balance sheet assets that must be risk weighted. In

order to implement section 618(b)(3), the FDIC proposed to amend its

risk-based capital guidelines to explicitly disclose this treatment of

other loss sharing arrangements in a footnote.

III. Comment Summary

The FDIC received 21 comment letters addressing various aspects of

its proposed rule. Letters were submitted by 12 depository institutions

or holding companies, four trade associations representing depository

institutions, three trade associations representing housing and home

building interests, and one secondary mortgage market maker. One

comment document was filed by a group of individuals.

Of the 21 letters received, six respondents agreed with the

proposal to lower the risk weight for multifamily housing loans and

offered no suggestions for changes to it. Another 12 commenters

generally found the FDIC's proposal acceptable, but recommended certain

changes in the eligibility criteria or the treatment of loss sharing

arrangements. Three respondents objected to the proposal to lower the

risk weight for multifamily housing loans, although two of these

commenters made suggestions for improving the eligibility criteria.

Three commenters, two of whom supported the proposal and one who

opposed it, expressed concern that Congress had mandated that the

regulatory agencies lower the risk weight for a specific loan category.

Loan-to-Value Ratios

Although the proposal called for the loan-to-value ratio

requirement to be met at the origination of a multifamily housing loan,

the FDIC specifically requested comment on whether, in light of the

other criteria that a multifamily housing loan must also meet, (1) a

loan that does not satisfy the loan-to-value ratio requirement at

origination should be permitted to do so later during the life of the

loan and, if so, under what circumstances, and (2) a loan that

satisfies this requirement at origination but fails to do so at a later

date should thereafter be ineligible for a 50 percent risk weight.

These issues were addressed by five respondents. Two respondents

suggested that the loan-to-value ratios of ``large'' multifamily

properties be recalculated every two years to determine whether the

required ratio continues to be met. The other three respondents stated

that multifamily housing loans not meeting the loan-to-value ratio

requirement at origination should be eligible for the 50 percent risk

weight if the ratio later decreases as a result of either principal

payments or increased property values. However, only one of these three

also recommended that multifamily housing loans should have their risk

weights increased from 50 to 100 percent if their loan-to-value ratios

rise above the levels set forth in the proposal subsequent to their

origination. In contrast, another of these three commenters stated that

a multifamily housing loan whose loan-to-value ratio increases after

origination should be eligible to retain its 50 percent risk weight as

long as the remaining eligibility criteria continued to be met.

Finally, one of these commenters expressed concern about the cost of

obtaining appraisals if the final rule were to require frequent

reappraisals to ensure that the loan-to-value ratio requirement

continues to be satisfied over time.

After considering these comments and consulting with the other

agencies, the FDIC has decided that the loan-to-value ratio requirement

in the final rule should not be a one-time only test at origination.

Rather, a multifamily housing loan that does not satisfy the loan-to-

value ratio requirement at origination, but does so at a later date,

should then receive the benefit of a more favorable risk weight

(assuming the other eligibility criteria are also met). A multifamily

housing loan whose loan-to-value ratio no longer meets the specified

ratio requirement has a reduced margin of collateral protection and its

relative risk has increased to a level that no longer justifies the

loan's continued eligibility for a 50 percent risk weight.

Thus, the final rule makes the loan-to-value ratio requirement an

ongoing eligibility criterion by stating that the ratio should be

determined on the basis of the most current appraisal or evaluation of

the property, whichever may be appropriate.\3\ This approach is also

intended to be consistent with the FDIC's regulations and guidelines

for real estate lending and appraisals. Under these regulations and

guidelines, a bank's written real estate lending policies must

establish prudent underwriting standards, including loan-to-value

limits. In addition, a bank's real estate appraisal and evaluation

programs should include general criteria that identify when it is in

the bank's interests to reappraise or reevaluate real estate

collateral. Thus, the final rule does not mandate a specific frequency

with which reappraisals and reevaluations of multifamily properties

must be made, but relies instead on a bank's own policies and

procedures in this area.

---------------------------------------------------------------------------

\3\At the origination of a loan to purchase an existing

multifamily property, the lesser of the actual acquisition cost or

value estimate would be used in the loan-to-value ratio.

---------------------------------------------------------------------------

The specific loan-to-value ratios required by the proposed rule,

i.e., 80 percent for fixed rate loans and 75 percent for adjustable

rate loans, were addressed by two commenters. Each suggested that the

same ratio should apply regardless of whether a loan has a fixed or

adjustable rate. However, one of these commenters preferred using an 80

percent ratio for all multifamily housing loans while the other

preferred a 75 percent ratio. The final rule retains the separate

ratios for fixed and adjustable rate loans that were contained in the

proposal. These ratios are taken directly from the statute.

In addition, two commenters indicated that multifamily housing

loans that do not meet the loan-to-value ratio requirement but have

additional collateral or credit enhancements such as mortgage insurance

should be eligible for the 50 percent risk weight. The FDIC's risk-

based capital standards formally recognize only certain forms of

collateral and guarantees for purposes of risk-weighting assets and

credit equivalent amounts of off-balance sheet items. The FDIC does not

believe it would be appropriate to recognize additional forms of

collateral and guarantees solely for multifamily housing loans.

Annual Occupancy Rate

Comments were received from three respondents on the proposed

requirement, not mandated by the statute, that the average annual

occupancy rate of the property securing the loan must have been at

least 80 percent for at least one year. These commenters pointed out

that the ongoing loan-to-value ratio and debt service coverage ratio

requirements set forth in the statute should be sufficient to ensure

that only high quality multifamily housing loans would qualify for the

50 percent risk weight. It was also indicated that information on

occupancy rates is not regularly being obtained as part of the

financial data that borrowers supply on the properties securing

multifamily housing loans. Thus, the inclusion of an occupancy rate

requirement in the final rule would impose an additional burden on both

borrowers and lenders. The FDIC agrees with these commenters and has

eliminated the proposed occupancy rate requirement from the final rule.

Properties Owned by Cooperatives and Nonprofit Organizations

Four commenters questioned the applicability of the eligibility

criteria to properties owned by cooperative housing corporations and

nonprofit organizations. In particular, the ``operating income''

concept included in the debt service coverage requirement was

considered inappropriate because these types of properties, since they

are not owned by investors seeking a return on their investments, are

not operated to produce income. Accordingly, these commenters suggested

that, for multifamily properties with a nonprofit form of ownership, a

more flexible approach to meeting the debt service coverage ratio

requirements set forth in the statute would be justified. The FDIC

recognizes that the cash flow to service a loan secured by a

multifamily property can come from ``operating income'' as well as from

other sources. Therefore, the debt service coverage criterion in the

final rule indicates that properties owned by cooperative housing

corporations or nonprofit organizations must generate sufficient cash

flow to provide protection to the bank comparable to that afforded by

the debt service coverage levels set forth in the statute that are

based on annual net operating income.

Repayment Performance

Two commenters stated that the FDIC's proposal to add a requirement

that a multifamily housing loan must not be more than 90 days past due

or carried in nonaccrual status in order to qualify for the 50 percent

risk weight was unnecessary because of the statutory requirement that

all principal and interest payments be made on a timely basis in

accordance with the terms of the loan for at least one year. One of

these commenters indicated that a loan on which timely payments have

been made for at least one year ``will not be more than 90 days past

due and is unlikely to be in nonaccrual status'' while the other

suggested that the loan would be ``in reasonably good shape, even it is

technically ninety (90) days past due.''

Although it may not have been clear from the proposal, the

requirement that a loan not be 90 days or more past due or in

nonaccrual status was intended to be an ongoing test that would have to

be met at the time a multifamily housing loan was placed in the 50

percent risk weight category and thereafter. The FDIC's risk-based

capital guidelines currently contain the same ongoing requirement for

one-to-four family residential mortgages to qualify for the 50 percent

risk weight. In contrast, the statutory requirement that timely

contractual principal and interest payments must have occurred for at

least one year before a multifamily housing loan can qualify for a 50

percent risk weight is a one-time requirement. To eliminate confusion,

the final rule separately lists these two eligibility criteria and

clarifies that timely payments must have been made for at least one

year before a multifamily housing loan is placed in the 50 percent risk

weight category.

Prudent Underwriting Standards

The proposal's final eligibility criterion required the multifamily

housing loan to have been made ``in accordance with applicable lending

limits and other prudent underwriting standards.'' Two commenters asked

what was meant by ``prudent underwriting standards.'' Guidance for

prudent real estate loan underwriting standards is outlined in appendix

A to part 365 of the FDIC's rules and regulations, ``Interagency

Guidelines for Real Estate Lending Policies'' (12 CFR part 365,

appendix A), which was adopted by the FDIC in October 1992 (57 FR

62896, December 31, 1992).

A third commenter suggested that this criterion was unnecessary and

that it should go without saying that a bank should comply with

applicable lending limits. This commenter also questioned why lending

limits were singled out in this criterion when compliance with many

other statutory and regulatory requirements is expected during the

underwriting of a loan. The FDIC has deleted the specific reference to

lending limits in the final rule.

Optional Nature of Lower Risk Weight

One commenter who supported the proposal nonetheless requested that

the FDIC ensure that banks are aware that, under the final rule, they

have the option of assigning multifamily housing loans that meet the

criteria specified in the rule to the 50 percent risk weight or

continuing to treat such loans as 100 percent risk weight assets. One

of the commenters who opposed the proposal did so because the cost

associated with substantiating that a multifamily housing loan was

eligible to be placed in the 50 percent risk weight category would

exceed the benefit of the lower risk weight.

The FDIC has no intention of imposing this cost on banks that would

prefer not to incur it. Thus, the FDIC wishes to reiterate that, at

each bank's option, assets, including multifamily housing loans, and

credit equivalent amounts of off-balance sheet items that are eligible

to be assigned to a risk weight category lower than 100 percent may be

included in a higher risk weight category (e.g., the 100 percent risk

weight category) than the category to which the assets or credit

equivalent amounts are otherwise eligible to be assigned.

Loss Sharing Arrangements

Comment letters from two respondents addressed the treatment of

loss sharing arrangements in connection with the sale of multifamily

housing loans that was contained in the proposed rule. Both commenters

agreed with the proposal's approach for handling a pro rata loss

sharing arrangement (i.e., for the selling bank to treat the transfer

as a sale to the extent that the purchaser shares with the seller on

pro rata basis in any loss incurred), but took exception to the

proposed treatment of other loss sharing arrangements. Under the

proposal, other loss sharing arrangements were to be taken into account

for purposes of determining the extent to which multifamily housing

loans are treated by the selling bank as sold (and excluded from

balance sheet assets) under the risk-based capital framework in the

same manner as prescribed for reporting purposes in the Call Report

instructions. Hence, multifamily housing loans sold subject to loss

sharing arrangements on other than a pro rata basis would treat such

loans as sold for risk-based capital purposes only if the selling bank

retains no risk of loss from the loans transferred resulting from any

cause and has no obligation to any party for the payment of principal

or interest on the loans transferred resulting from any cause.

One commenter indicated that, in lieu of the proposed treatment for

other loss sharing arrangements, the selling institution ``should

retain capital in proportion to the risk retained but not for the whole

loan.'' The other commenter who addressed loss sharing arrangements

stated that the proposed treatment of other loss sharing arrangements

does not ``provide an accurate measure of risk exposure or

appropriately tailored incentives,'' ``may discourage lenders from

limiting their recourse obligation,'' and is ``inconsistent with the

statutory requirement.'' This commenter recommended that the FDIC

``adopt rules that distinguish different loss risks for non-pro rata

arrangements, rather than the existing rule in the Call Reports'' and

offered suggested approaches for doing so. This commenter also

acknowledged that the regulatory capital treatment of asset sales

subject to loss sharing arrangements is an issue that goes beyond

multifamily housing loans and requires a comprehensive solution.

The FDIC recognizes that the proposed rule on other loss sharing

arrangements essentially treats all such arrangements in an identical

manner regardless of the terms of the arrangement and, as a

consequence, may not encourage banks that sell multifamily housing

loans with recourse to limit their exposure to risk. However, these

concerns extend to asset sales with recourse in general because of the

broad scope of the Call Report instructions in this area and their

relationship to the risk-based capital framework. The FDIC and the

other banking agencies, under the auspices of the Federal Financial

Institutions Examination Council, have been pursuing a more

comprehensive resolution of the capital issues surrounding asset sales

with recourse and other forms of credit enhancement. This interagency

effort is seeking to develop revisions to the agencies' risk-based

capital standards that will better distinguish between the degrees of

risk in loss sharing arrangements involving asset sales in general, not

just those involving multifamily housing loans. The FDIC expects that

these revisions would be more likely to fully satisfy the intent of

section 618(b)(3) with respect to other loss sharing arrangements than

the approach taken in the proposed rule. Nevertheless, the FDIC does

not wish to further delay the issuance of a final rule that lowers the

risk weight for certain multifamily housing loans and provides guidance

on the risk-based capital treatment of pro rata loss sharing

arrangements while the interagency effort to address recourse issues is

proceeding. Therefore, as an interim measure, the FDIC is adopting the

treatment of other loss sharing arrangements as originally proposed.

Other Issues

Several commenters suggested changes to the proposed rule that

would conflict with the requirements set forth in the statute. These

suggestions included a lower debt service coverage ratio requirement, a

shorter minimum maturity requirement, and a 75 percent rather than 50

percent risk weight for multifamily housing loans. These suggestions

have not been adopted.

IV. Final Rule

After considering the comments received and consulting with the

other agencies, the FDIC is adopting a final rule to implement section

618(b) of the RTCRRIA. The final rule will also satisfy that portion of

section 305 of the FDICIA relating to the application of the FDIC's

risk-based capital guidelines to multifamily housing loans.

The final rule adds a new paragraph on multifamily housing loans to

the discussion of the types of assets accorded a 50 percent risk weight

in the section of the FDIC's risk-based capital guidelines on risk

weights for balance sheet assets (section II.C.). The new paragraph

enumerates the criteria that a multifamily housing loan must satisfy in

order to be eligible for this favorable risk weight. A conforming

change has been made to the summary of risk weights and risk categories

in table II of the guidelines.

The eligibility criteria contained in the final rule include those

set forth in section 618(b) and two added by the FDIC based on the

authority granted in the statute. These criteria are that the loan must

be secured by a first lien on a multifamily residential property, the

loan-to-value ratio for the property must not exceed 80 percent (75

percent if the rate of interest on the loan changes over the term of

the loan), the ratio of annual net operating income generated by the

property (before debt service) to annual debt service on the loan must

not be less than 120 percent (115 percent if the rate of interest on

the loan changes over the term of the loan), the amortization period

for principal and interest on the loan must not exceed 30 years, the

loan must have a minimum original maturity for principal repayment of

not less than seven years, the loan must have had timely payment of

principal and interest in accordance with the loan terms for at least

one year before the loan is placed in the 50 percent risk weight

category, the loan must not be 90 days or more past due or carried in

nonaccrual status, and the loan must have been made in accordance with

prudent underwriting standards.

For purposes of satisfying the one year's timely repayment

performance criterion in the case where the existing owner of a

multifamily residential property refinances a loan on that property,

the final rule provides that all principal and interest payments on the

loan being refinanced must have been made on a timely basis in

accordance with the terms of the loan for at least the preceding year.

In this situation, all of the other eligibility criteria must also be

met in order for the new loan to qualify for the 50 percent risk

weight. For example, the annual debt service required on the new loan

would be used when determining whether the debt service coverage

requirement has been satisfied.

Under the final rule, the loan-to-value ratio requirement must be

met based on the most current appraisal or evaluation of the property,

whichever may be appropriate, and, at the origination of loans to

purchase an existing property, the term ``value'' means the lesser of

the actual acquisition cost or the estimate of value for the property.

In addition, the final rule explains that, to satisfy the debt service

coverage requirement, a property owned by a cooperative housing

corporation or nonprofit organization must generate sufficient cash

flow to provide protection to the bank comparable to that specified in

the statute.

The final rule also revises the existing paragraph addressing

privately-issued mortgage-backed securities in the discussion of the

types of assets assigned to the 50 percent risk weight category. The

amendment clarifies that in order for a security backed by a pool of

conventional mortgages on multifamily residential properties to be

accorded a 50 percent risk weight, each underlying mortgage must meet

the eligibility criteria described above at the time the pool is

originated. A bank that purchases such a security will not be required

to monitor the eligibility of each underlying mortgage on an ongoing

basis to ensure that a 50 percent risk weight remains appropriate for

the security. Instead, the security may remain in the 50 percent risk

weight category as long as principal or interest payments on the

security are not 30 days or more past due.

Finally, the final rule amends the FDIC's risk-based capital

guidelines by stating in a footnote that a multifamily housing loan

that is sold subject to a pro rata loss sharing arrangement is to be

treated by the selling bank as sold (and excluded from balance sheet

assets) to the extent that the sales agreement provides for the

purchaser of the loan to share in any loss incurred on the loan on a

pro rata basis with the selling bank. This means that, in such a

transaction, the portion of the loan that is treated as sold by the

selling bank is not subject to the risk-based capital standards. This

footnote also provides explicit guidance on the risk-based capital

treatment of sales of multifamily housing loans in which the purchaser

of a loan shares in any loss incurred on the loan with the selling

institution on other than a pro rata basis. It states that these other

loss sharing arrangements are taken into account for purposes of

determining the extent to which such loans are treated by the selling

bank as sold (and excluded from balance sheet assets) under the risk-

based capital framework in the same manner as prescribed for reporting

purposes in the instructions for preparation of the Consolidated

Reports of Condition and Income. The instructions applicable to such

transactions are contained in the Glossary entry for ``sales of

assets.''

This final rule is effective January 27, 1994. The FDIC has

determined that good cause exists to waive the customary 30-day delayed

effective date since the rule relieves a restriction on insured state

nonmember banks by permitting them to utilize a lower risk weight for

eligible multifamily housing loans and securities collateralized by

such loans in calculations of their risk-based capital ratios. In

addition, insured state nonmember banks may choose to utilize this

lower risk weight in their Consolidated Reports of Condition and Income

for December 31, 1993.

V. Regulatory Flexibility Act Analysis

The FDIC certifies that the adoption of this amendment to its risk-

based capital guidelines will not have a significant economic impact on

a substantial number of small business entities within the meaning of

the Regulatory Flexibility Act (5 U.S.C. 601 et seq). Accordingly, a

regulatory flexibility analysis is not required.

The amendment will benefit insured state nonmember banks by

reducing the minimum amount of capital that they are required to

maintain for certain multifamily housing loans and securities

collateralized by such loans. The proposal would apply equally to all

insured state nonmember banks, regardless of size, and should not

disproportionately affect a substantial number of small banks.

List of Subjects in 12 CFR Part 325

Bank deposit insurance, Banks, banking, Capital adequacy, Reporting

and recordkeeping requirements, State nonmember banks.

For the reasons set forth in the preamble, the Board of Directors

of the Federal Deposit Insurance Corporation amends 12 CFR part 325 as

follows:

PART 325--CAPITAL MAINTENANCE

1. The authority citation for part 325 is revised to read as

follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),

1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),

1828(o), 1831o, 3907, 3909; Pub. L. 102-233, 105 Stat. 1761, 1789,

1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355,

2386 (12 U.S.C. 1828 note).

2. In appendix A to subpart A of part 325, footnotes 29 through 37

are redesignated as footnotes 32 through 40, respectively; a new

paragraph is added between the first and second paragraphs of section

II.C. category 3 and the existing second paragraph is revised;

paragraphs (2) through (4) of table II. category 3 are redesignated as

paragraphs (3) through (5), respectively; and a new paragraph (2) is

added to table II. category 3 to read as follows:

Appendix A to Subpart A of part 325--Statement of Policy on Risk-

Based Capital

* * * * *

II. * * *

C. * * *

Category 3 * * *

This category also includes loans fully secured by first liens

on multifamily residential properties,29 provided that:

---------------------------------------------------------------------------

\2\9The types of loans that qualify as loans secured by

multifamily residential properties are listed in the instructions

for preparation of the Consolidated Reports of Condition and Income.

In addition, as provided in those instructions, a multifamily

residential property loan that is sold subject to a pro rata loss

sharing arrangement is treated by the selling bank as sold (and

excluded from balance sheet assets) to the extent that the sales

agreement provides for the purchaser of the loan to share in any

loss incurred on the loan on a pro rata basis with the selling bank.

In such a transaction, from the standpoint of the selling bank, the

portion of the loan that is treated as sold is not subject to the

risk-based capital standards. In connection with sales of

multifamily residential property loans in which the purchaser of a

loan shares in any loss incurred on the loan with the selling

institution on other than a pro rata basis, these other loss sharing

arrangements are taken into account for purposes of determining the

extent to which such loans are treated by the selling bank as sold

(and excluded from balance sheet assets) under the risk-based

capital framework in the same manner as prescribed for reporting

purposes in the instructions for preparation of the Consolidated

Reports of Condition and Income.

---------------------------------------------------------------------------

(1) The loan amount does not exceed 80 percent of the

value30 of the property securing the loan as determined by the

most current appraisal or evaluation, whichever may be appropriate

(75 percent if the interest rate on the loan changes over the term

of the loan);

---------------------------------------------------------------------------

\3\0At the origination of a loan to purchase an existing

property, the term ``value'' means the lesser of the actual

acquisition cost or the estimate of value set forth in an appraisal

or evaluation, whichever may be appropriate.

---------------------------------------------------------------------------

(2) For the property's most recent fiscal year, the ratio of

annual net operating income generated by the property (before

payment of any debt service on the loan) to annual debt service on

the loan is not less than 120 percent (115 percent if the interest

rate on the loan changes over the term of the loan) or, in the case

of a property owned by a cooperative housing corporation or

nonprofit organization, the property generates sufficient cash flow

to provide comparable protection to the bank;

(3) Amortization of principal and interest on the loan occurs

over a period of not more than 30 years;

(4) The minimum original maturity for repayment of principal on

the loan is not less than seven years;

(5) All principal and interest payments have been made on a

timely basis in accordance with the terms of the loan for at least

one year before the loan is placed in this category;31

---------------------------------------------------------------------------

\3\1In the case where the existing owner of a multifamily

residential property refinances a loan on that property, all

principal and interest payments on the loan being refinanced must

have been made on a timely basis in accordance with the terms of

that loan for at least the preceding year. The new loan must meet

all of the other eligibility criteria in order to qualify for a 50

percent risk weight.

---------------------------------------------------------------------------

(6) The loan is not 90 days or more past due or carried in

nonaccrual status; and

(7) The loan has been made in accordance with prudent

underwriting standards.

Also included in this category are privately-issued mortgage-

backed securities provided that: (1) The structure of the security

meets the criteria described above for ``Mortgage-Backed

Securities;'' (2) if the security is backed by a pool of

conventional mortgages on one-to-four family residential or

multifamily residential properties, each underlying mortgage meets

the criteria described in this section for inclusion in the 50

percent risk weight category at the time the pool is originated; (3)

if the security is backed by privately-issued mortgage-backed

securities, each underlying security qualifies for inclusion in the

50 percent risk category; and (4) if the security is backed by a

pool of multifamily residential mortgages, principal or interest

payments on the security are not 30 days or more past due.32

---------------------------------------------------------------------------

\3\2 Privately-issued mortgage-backed securities that do not

meet these criteria or that do not qualify for a lower risk weight

generally are assigned to the 100 percent risk weight category.

---------------------------------------------------------------------------

* * * * *

Table II.--Summary of Risk Weights and Risk Categories

* * * * *

Category 3 * * *

(2) Loans fully secured by first liens on multifamily

residential properties that have been prudently underwritten and

meet specified requirements with respect to loan-to-value ratio,

level of annual net operating income to required debt service,

maximum amortization period, minimum original maturity, and

demonstrated timely repayment performance.

* * * * *

By order of the Board of Directors.

Dated at Washington, DC, this 14th day of December, 1993.

Federal Deposit Insurance Corporation.

Patti C. Fox,

Acting Deputy Executive Secretary.

[FR Doc. 94-1709 Filed 1-26-94; 8:45 am]

BILLING CODE 6714-01-P