Risk-Based Capital: Multifamily Housing Loans

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 94-03]

RIN 1557-AB14

Risk-Based Capital: Multifamily Housing Loans

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is issuing

this final rule to amend the risk-based capital guidelines to include

in the 50% risk weight category certain loans secured by qualifying

multifamily residential properties, to clarify that privately-issued

mortgage-backed securities (MBS) may qualify for a 50% risk weight,

provided the MBSs are secured by qualifying multifamily residential

property loans, and to provide that the portion of a multifamily

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

sharing arrangement may be treated by the selling bank as sold 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 final rule does not make any changes with respect to

the capital treatment of multifamily residential property loans sold

subject to forms of recourse other than on a pro rata loss sharing

basis. The OCC believes that the issue of non-pro rata recourse for

multifamily residential property loans is best addressed in a

comprehensive manner by the banking agencies in the Federal Financial

Institutions Examination Council (FFIEC) study on recourse.

The purpose of this final rule is to permit national banks to hold

less capital against certain loans secured by qualifying multifamily

residential property. This final rule implements the Resolution Trust

Corporation Refinancing, Restructuring, and Improvement Act of 1991

(RTCRRIA) and the Federal Deposit Insurance Corporation Improvement Act

of 1991 (FDICIA). The OCC also believes that this final regulation will

help developers, including nonprofit developers, to provide low- and

moderate-income multifamily housing.

EFFECTIVE DATE: March 9, 1994.

FOR FURTHER INFORMATION CONTACT: Robert J. Hemming, National Bank

Examiner, Office of the Chief National Bank Examiner, (202) 874-5170;

James Wright, Community Development Specialist, Community Development

Division, (202) 874-4930; Roger Tufts, Senior Economic Advisor, Office

of the Chief National Bank Examiner, (202) 874-5070; Elizabeth Milor,

Financial Economist, Regulatory and Statistical Analysis, (202) 874-

5240; or Ronald Shimabukuro, Senior Attorney, Banking Operations and

Assets Division, (202) 874-4460.

SUPPLEMENTARY INFORMATION:

Background and Purpose

The OCC's risk-based capital guidelines were adopted in 1989

(codified at 12 CFR part 3, appendix A). See 54 FR 4168 (January 27,

1989). The risk-based capital guidelines establish capital requirements

based on the credit risk profiles of the assets and off-balance sheet

activities of a financial institution. The risk-based capital

guidelines implement the Agreement on International Convergence of

Capital Measurement and Capital Standards of July 1988, as reported by

the Basle Committee on Banking Supervision (the Basle Agreement) and

were developed in cooperation with the Federal Deposit Insurance

Corporation (FDIC) and the Federal Reserve Board (FRB).

The risk-based capital guidelines assign all assets to the 100%

risk weight category unless an asset specifically qualifies for some

lower risk weight category. See 12 CFR part 3, appendix A, section

3(a)(4). Under the current risk-based capital guidelines, loans secured

by a first lien on multifamily rental properties are risk weighted at

100%. However, a loan secured by a first mortgage on a one-to-four

family residential property may qualify for a 50% risk weight.1

See 12 CFR part 3, appendix A, section 3(a)(3)(iii).

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\1\Under section 3(a)(3)(iii) of this appendix A residential

property may be either owner occupied or rented; however, the

mortgage cannot be more than 90 days past due, on nonaccrual or

restructured.

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The purpose of this final rule is to implement section 618(b) of

RTCRRIA, Public Law 102-233, 105 Stat. 1761 (December 12, 1991), and

section 305(b)(1)(B) of FDICIA, Public Law 102-242, 105 Stat. 2236

(December 19, 1991), by lowering the risk weight for certain qualifying

multifamily housing loans to 50%. Section 618(b) of RTCRRIA required

regulations to be implemented by April 10, 1992. Because of the nature

of the issues involved and the need to coordinate this final rule with

the FRB, the FDIC and the Office of Thrift Supervision (OTS), this

final rule could not be promulgated by that deadline.

The main purpose of RTCRRIA was to recapitalize the Resolution

Trust Corporation. However, RTCRRIA also contains provisions relating

to the capital treatment of certain single-family and multifamily

residential property loans. Specifically, section 618(b) of RTCRRIA

requires the OCC to promulgate regulations assigning a 50% risk weight,

with certain conditions, to loans secured by multifamily residential

properties.

Under section 618(b)(1)(B) of RTCRRIA, in order for a multifamily

residential property loan to qualify for a 50% risk weight: (1) The

loan must be secured by a first lien on a multifamily residential

property consisting of five or more dwelling units, (2) if the loan has

a rate of interest that does not change over the term of the loan, then

(A) the loan-to-value ratio cannot exceed 80%, and (B) the ratio of

annual net operating income generated by the property (before payment

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

cannot be less than 120%, (3) if the loan has a variable rate, then:

(A) The loan-to-value ratio cannot exceed 75%, and (B) the ratio of

annual net operating income generated by the property (before payment

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

cannot be less than 115%, (4) the amortization of principal and

interest occurs in not more than 30 years, (5) the loan must have a

minimum original maturity for repayment of principal of not less than

seven years, (6) the loan must have been performing according to its

terms for at least one year, and (7) the loan must satisfy prudent

underwriting standards as established by the appropriate federal

banking agency.

Section 618(b)(1) or RTCRRIA also provides that any security

collateralized by a qualifying multifamily residential property loan

shall be considered as a loan or security within the 50% risk weight

category. In addition, section 618(b)(2) of RTCRRIA requires that the

portion of any loan fully secured by a first lien on a multifamily

housing property that is sold by a bank subject to a pro rata loss

sharing arrangement shall be treated as a sale to the extent that loss

is incurred by the purchaser of the loan. Furthermore, section

618(b)(3) of RTCRRIA directs the OCC to amend its risk-based capital

guidelines to take into account other loss sharing arrangements to

determine the extent to which such loans should be treated as sold. In

addition to the requirements in RTCRRIA, section 305(b)(1)(B) of

FDICIA, among other things, requires the OCC to revise the risk-based

capital guidelines to reflect the actual performance and expected risk

of loss of multifamily mortgages.

The OCC published a notice of proposed rulemaking (NPRM) on

September 17, 1992. Consistent with sections 618(b) of RTCRRIA and

305(b)(1)(B) of FDICIA, the NPRM proposed to include in the 50% risk

weight category certain loans secured by qualifying multifamily

residential properties. In addition, the NPRM proposed that MBSs also

qualify for a 50% risk weight provided the MBSs are secured by

qualifying multifamily residential property loans. Consistent with the

current OCC policy on recourse arrangements, the NPRM also proposed

that the portion of multifamily residential property loans that is sold

subject to a pro rata loss sharing arrangement may be treated by the

selling bank as sold 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. As for multifamily

residential property loans subject to recourse other than on a pro rata

loss sharing arrangements, the NPRM did not propose to adopt any

special non-pro rata recourse rule specifically for multifamily

residential property loans at that time.

Discussion

In the NPRM, the OCC requested comments on several specific issues

related to the implementation of section 618(b) of RTCRRIA. The OCC

received nine comments in response to the NPRM. Comments were received

from trade associations representing both the banking and housing

industries, as well as from financial institutions. One commenter

opposed the NPRM, while the eight other commenters generally indicated

support. After careful consideration of all the comments, the OCC

adopts this final rule to amend the risk-based capital guidelines to

include in the 50% risk weight category certain loans secured by

qualifying multifamily residential properties. This final rule is

substantially similar to the rule as proposed in the NPRM. Any

significant changes from the proposed rule are discussed below.

A. 50% Risk Weight for Multifamily Housing Loans

This final rule amends the risk-based capital guidelines to include

in the 50% risk weight category certain loans fully secured by a first

lien on multifamily residential properties. Specifically, loans secured

by multifamily residential properties may qualify for a 50% risk weight

subject to the following conditions:

(1) The loan must be secured by a first mortgage on a multifamily

residential property consisting of five or more dwelling units;

(2) The original amortization of principal and interest must not

exceed 30 years;

(3) The original minimum maturity for repayment of principal must

not be less than seven years;

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

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

year immediately preceding the risk weighting of the loan in the 50%

risk weight category;

(5) The loan cannot be otherwise 90 days or more past due, or

carried in nonaccrual status;

(6) The loan must be in accordance with applicable lending limit

requirements and prudent underwriting standards; and

(7) If the rate of interest does not change over the term of the

loan, then the current loan amount must not exceed 80% of the current

value of the property, as measured by either the value of the property

at origination of the loan (which is the lower of the purchase price or

the value as determined by the initial appraisal, or if appropriate,

the initial evaluation) or the most current appraisal, or if

appropriate, the most current evaluation, and in the 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 must not be less than 120%; or

(8) If the rate of interest changes over the term of the loan, then

the current loan amount must not exceed 75% of the current value of the

property, as measured by either the value of the property at

origination of the loan (which is the lower of the purchase price or

the value as determined by the initial appraisal, or if appropriate,

the initial evaluation) or the most current appraisal, or if

appropriate, the most current evaluation, and in the 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 must not be less than 115%.

As indicated above, most of the commenters indicated general

support for the NPRM; however, two commenters questioned whether

multifamily housing loans should be permitted to qualify for the 50%

risk weight category considering the greater delinquency rates on

multifamily residential properties compared to single-family owner-

occupied residential properties. The OCC shares this concern. However,

the 50% risk weight is mandated by section 618(b) of RTCRRIA, and as

discussed in the NPRM, the OCC believes that subject to the conditions

imposed by this final rule, a 50% risk weight for multifamily housing

loans can be justified.

1. Definition of Multifamily Residential Property

In the NPRM, the term ``multifamily residential property'' was

defined as residential property2 consisting of five or more

dwelling units. The NPRM did not place any upper limit on the number of

units that could be in a multifamily residential property. However, in

view of the OTS risk-based capital rules, which limit qualifying

multifamily residential property to 5 to 36 units, see 12 CFR 567.1(v)

and 567.6(a)(1)(iii)(B), the OCC requested specific comments on whether

a similar limit on the number of units should be adopted.

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\2\12 CFR part 3, appendix A, section 1(c)(21) defines

residential property to mean houses, condominiums, cooperative

units, and manufactured homes but does not include boats or motor

homes, even if used as a primary residence.

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The OCC received five comments on this issue. All five commenters

opposed any restriction on the number of units for qualifying

multifamily residential property. Several commenters noted the absence

of any evidence suggesting that multifamily residential properties with

a large number of units pose an inherently greater risk than those with

fewer units.

The OCC agrees with these commenters. At this time there is no

evidence to justify any limitation on the total number of units for

qualifying multifamily residential properties. Consequently, the OCC

adopts the definition of multifamily residential properties without any

restriction on the maximum number of units. As for regulatory

uniformity with the OTS, the OCC notes that the OTS is presently

considering deletion of the 36 unit restriction on qualifying

multifamily residential property for savings and loan associations. See

57 FR 40143 (September 2, 1992).

In addition, this final rule further clarifies the definition of

multifamily residential property by adding a separate definition for

multifamily residential property. In the NPRM, multifamily residential

property was not separately defined, but instead the NPRM made

reference to the current definition of residential property. The new

definition in this final rule is not intended to change the meaning of

multifamily residential property. The purpose of the new definition is

to make clear that while multifamily residential property would include

apartment buildings, condominiums, cooperatives, and other similar

structures primarily for residential use, it would not include such

facilities as nursing homes and hospitals. Because multifamily

residential property is defined as property primarily for residential

use, this definition also clarifies that some limited commercial use

would be permitted. Therefore, a commercial establishment, such as a

convenience store located in an apartment building, would not

automatically disqualify the apartment building as a multifamily

residential property.

2. 80% Occupancy Rate

In the NPRM, the OCC proposed an additional 80% occupancy rate

requirement, which would have required that the multifamily residential

property securing the loan have a sustained average annual occupancy

rate of at least 80% of the total units. The OCC received 3 comments on

this issue. All of the commenters generally believe that the 80%

occupancy rate requirement was unnecessary because of the annual net

income requirement which requires timely payment of all principal and

interest for one year and the loan-to-value requirements. As one

commenter explained, any decrease in income resulting from declining

occupancy would be reflected in the annual cash flows and would be

captured by the annual net income requirement. In addition, the

commenter also indicated that the 80% occupancy requirement only

relates to the degree of physical space leased and is not dispositive

of the ability to service the debt.

The OCC has considered these comments and agrees with the

commenters. Therefore, the 80% occupancy requirement has been removed

from this final rule. The OCC agrees that a high occupancy rate, in

itself, does not guarantee sufficient cash flow to service the debt.

The OCC believes that the annual net income requirement in conjunction

with the loan-to-value requirements and the 90-day past due requirement

should provide sufficient prudential safeguards. In addition, the OCC

believes that removing the 80% occupancy requirement will also benefit

developers renovating older buildings for low- and moderate-income

occupants. These developers frequently encounter difficulty in

achieving 80% occupancy during project startup. Removal of the

requirement will enable more loans for these types of projects to

qualify for the 50% risk weight.

3. One-Year Timely Payment Requirement

As required by section 618(b)(1)(B)(iii)(III) of RTCRRIA, the NPRM

required that 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 multifamily residential property loan can qualify for

the 50% risk weight. In addition, for prudential reasons, the OCC

proposed to require that the multifamily residential property loan

could not be more than 90 days past due or on nonaccrual status.

This final rule adopts both the one-year timely payment requirement

and the 90-day past due requirement. With respect to the one-year

timely payment requirement, this final rule clarifies that the one-year

timely payment requirement must be satisfied in the year immediately

preceding the risk weighting of the loan in the 50% risk weight

category. It also should be noted that the one-year timely payment

requirement is a one-time only requirement. Once the multifamily

residential property loan has performed in accordance with its terms

for at least one year immediately preceding the risk weighting of the

loan in the 50% risk weight category, the loan may continue to qualify

for the 50% risk weight without any further regard to that requirement.

Unlike the one-year timely payment requirement, the 90-day past due

requirement is an ongoing requirement. As such, the OCC does not

believe that it is necessary to apply the one-year timely payment

requirement on a continuous basis.

It also should be noted that this final rule slightly changes the

wording of the 90-day past due requirement. In the NPRM this

requirement was stated as a loan ``not more than 90 days past due.''

This final rule revises the wording of the 90-day past due requirement

to a loan ``not otherwise 90 days or more past due.'' Under this

revised language, a loan would be considered past due on the ninetieth

day, instead of the ninety-first day. Adoption of this language will

make the 90-day past due requirement in the risk-based capital

guidelines more consistent with the Instructions to the Reports of

Condition and Income (Call Report).

4. Loan-to-Value Requirements

In the NPRM, the OCC expressed concern that sections

618(b)(1)(B)(ii) (I) and (II) of RTCRRIA are unclear as to when the

specified loan-to-value ratios for qualifying multifamily residential

property loans would have to be satisfied. The OCC requested comment on

the application of these loan-to-value requirements. Specifically, the

OCC requested comment on: (1) Whether a multifamily residential

property loan that does not satisfy the loan-to-value requirements at

the time of origination should be permitted to do so at some later

time, and (2) whether a multifamily residential property loan that

satisfies the loan-to-value requirements at the time of origination,

but subsequently does not, thereafter should be ineligible for a 50%

risk weight.

The OCC received four comments on this issue. Three commenters

supported the reclassification of multifamily residential property

loans into the 50% risk weight category if the loans subsequently

satisfy the loan-to-value requirements. However, these commenters did

not believe that multifamily residential property loans that already

qualify for the 50% risk weight category should be reclassified in the

100% risk weight category even if the loans subsequently failed to

satisfy the loan-to-value requirements. The commenters generally

believed that once a multifamily residential property loan qualifies

for the 50% risk weight category, any deterioration in the loan-to-

value ratio should be addressed through the loan loss reserve and not

through reclassification of the loan to the 100% risk weight category.

One commenter specifically expressed caution against establishing a

regulatory requirement for the periodic reappraisal of multifamily

residential property that would determine if the loan can continue to

qualify for the 50% risk weight category.

The OCC agrees that a multifamily residential property loan that

does not satisfy the loan-to-value requirements at the time of the

origination of the loan should be permitted to do so at some later

time. Therefore, this final rule has been changed to make clear that

multifamily residential property loans that do not satisfy the

appropriate loan-to-value ratio at origination, may still qualify for

the 50% risk weight category if the loan-to-value requirements are

satisfied subsequently. However, the OCC does not believe that once a

multifamily residential property loan qualifies for the 50% risk weight

category the loan should never be reclassified into the 100% risk

weight category if the loan subsequently fails to satisfy the loan-to-

value requirements or any other relevant requirement. Such treatment

would be inconsistent with the general principles and application of

the risk-based capital guidelines.

Under the risk-based capital guidelines, an asset may qualify for a

lower risk weight only if all requirements imposed for that risk weight

have been satisfied. The requirements generally must be met

continuously and not only on a one time basis. Failure to satisfy the

requirements for a lower risk weight could be indicative of an increase

in risk for that asset. Therefore, the risk-based capital guidelines

would properly require more capital to be held against that asset. For

these reasons, the OCC believes that a multifamily residential property

loan, like any other asset under the risk-based capital guidelines, may

be reclassified into the 100% risk weight category if the loan

subsequently fails to satisfy the requirements established by this

final rule.

The OCC agrees that any deterioration in a multifamily residential

property loan also should be managed through the loan loss reserve.

However, this does not mean that multifamily residential property loans

that no longer satisfy the loan-to-value ratio requirements should

continue to have the benefit of a preferential risk weight. While the

loan loss reserve and the capital requirements strive to achieve

similar results, the purpose of the two are distinct. The loan loss

reserve recognizes estimated inherent losses, whereas the risk-based

capital guidelines recognize relative risk in the portfolio.

In the NPRM the loan-to-value ratio calculation was based on the

ratio of the loan amount at origination to the appraised value of the

multifamily residential property. Limiting the calculation of the loan-

to-value ratio requirement to the loan amount at origination suggested

that the loan-to-value ratio was a static requirement. However, the

loan-to-value ratio requirement is intended to be an ongoing

requirement, which must be satisfied on a continuous basis in order for

a multifamily residential property loan to qualify for the 50% risk

weight. Therefore, this final rule makes clear that the calculation of

the loan-to-value ratio requirement is not limited to the loan amount

at origination and the initial appraised value of the property, but

instead is based on both the current loan amount outstanding and the

current value of the property. In determining the current value of a

multifamily residential property, the final rule specifies that current

value may be measured by either the value of the property at

origination of the loan (which is the lower of the purchase price or

the value as determined by the initial appraisal, or if appropriate,

the initial evaluation) or the most current appraisal, or if

appropriate, the most current evaluation.

Two points should be emphasized. First, while appraisals serve an

important role in the determination of the loan-to-value ratio, this is

not to imply that periodic appraisals are required. Rather, the OCC

believes that with prudent management of the loan portfolio, a bank

would be aware of changes in market conditions which could negatively

impact the loan-to-value ratio. Second, in some instances a less formal

evaluation of the multifamily residential property may be more

appropriate than a full appraisal.

In addition to the loan-to-value requirements, sections

618(b)(1)(B)(ii) I and II of RTCRRIA also specified certain net

operating income-to-debt service coverage ratios that must be

satisfied. The OCC recognizes that certain multifamily residential

properties developed as low- to moderate-income multifamily housing may

not be able to generate sufficient income to satisfy the net operating

income-to-debt service requirements. The OCC believes that

organizations that develop low- to moderate-income multifamily

residential properties may meet the net operating income-to-debt

service requirements by generating sufficient cash flows to provide

comparable protection to the institution. Therefore, this final rule

permits other forms of debt service coverage that generate sufficient

cash flows to provide comparable protection to the institution to be

considered for multifamily residential property loans, if the purpose

of the loan is for the development or purchase of residential property

primarily intended to provide low- to moderate-income housing. Forms of

comparable debt service coverage that may be considered include, but

are not limited to, special operating reserve accounts or special

operating subsidies provided by federal, state, local or private

sources. However, the OCC does reserve the right to review, on a case-

by-case basis, the adequacy of any other form of comparable debt

service coverage relied on by the bank.

5. Other Legal Requirements and Prudent Underwriting Standards

In addition to the requirements specified by section 618(b) of

RTCRRIA, the NPRM also proposed that a multifamily residential property

loan must be in accordance with applicable lending limit requirements

and prudential underwriting standards. This final rule does not contain

any reference to the legal lending limit. As explained in the NPRM, the

reference to the legal lending limit was intended to impose an

additional prudential requirement by using the legal lending limit as a

proxy for a general concentration limitation.

The OCC still believes that any particular multifamily residential

property loan must be within the legal lending limit and that the

overall concentration of multifamily residential property loans by any

bank should be reasonable and not excessive. However, after further

consideration of this issue, the OCC believes that a specific reference

in the risk-based capital guidelines to the legal lending limit is

unnecessary. The legal lending limit already would apply to all loans,

including multifamily residential property loans provided for in this

final rule.

6. Treatment of Refinanced Loans

This final rule amends the risk-based capital guidelines to clarify

the treatment of multifamily residential property loans that have been

refinanced by the borrower. This final rule clarifies that the prior

payment history of a refinanced loan and previous net operating income

of the multifamily residential property are considered in determining

whether the one-year timely payment requirement and the annual debt

service requirement have been satisfied. Specifically, this final rule

provides that if the loan was refinanced by the borrower then: (1) All

principal and interest payments on the loan being refinanced, which

were made in the preceding year prior to refinancing, shall apply in

determining the one-year timely payment requirement, and (2) the net

operating income generated by the property in the preceding year prior

to refinancing shall apply in determining the applicable annual debt

service ratio requirements.

The OCC believes that a multifamily residential property loan that

otherwise would qualify for the lower 50% risk weight category under

this final rule should not be disqualified simply because the loan has

been refinanced by the borrower. The OCC generally believes that a

multifamily residential property loan that has been refinanced by the

same borrower typically would not result in any increase in risk with

respect to either the one-year timely payment requirement or the

applicable annual debt service ratio requirement. Therefore, under this

final rule, if a borrower refinances a multifamily residential property

loan that previously qualified for the 50% risk weight category, the

refinanced loan generally should not be disqualified by virtue of the

one-year timely payment requirement or the applicable annual debt

service ratio requirement.

7. Optional Capital Treatment

One commenter expressed concern that the final rule should be

amended to make clear that the lower 50% risk weight category, with its

attendant requirements for multifamily residential property loans, is

optional and not mandatory. The OCC agrees, and reiterates that a bank

can always decide to risk weight any asset in a higher risk weight

category. As explained by the commenter, this could be particularly

relevant to a multifamily residential property loan where a bank might

determine that it would be more prudent to keep the loan in the 100%

risk weight category than having to justify a 50% risk weight at some

later date.

8. Credit Enhancements

One commenter suggested that credit enhancements, such as letters

of credit, certificates of deposit, and other enhancements provided by

the borrower, should be considered in determining whether a multifamily

residential property loan qualifies for the lower 50% risk weight. As

an example, the commenter cited the situation where a borrower may

offer some credit enhancement to cover an income shortfall. The OCC

agrees that in some instances credit enhancements should be considered

in determining the proper risk weight of multifamily residential

property loans. Under the current risk-based capital guidelines, claims

that otherwise would be required to be in a higher risk weight category

may qualify for a 20% risk weight if supported by a credit enhancement

such as a financial guarantee-type letter of credit from an OECD

financial institution. Therefore, to a degree, credit enhancements

issued by OECD financial institutions are already considered. However,

as with other types of credit enhancements generally issued by private

sector entities, the OCC does not believe that a lower risk weight for

multifamily residential property loans supported by credit enhancements

issued by non-OECD financial institutions is warranted at this time.

See 54 FR 4168, 4172 (January 27, 1989).

9. Cooperative Housing

One commenter raised the issue of whether the 50% risk weight for

multifamily residential property loans would include a cooperative

housing loan in which the master mortgage is a joint obligation of the

shareholders in the cooperative. The OCC believes that the final rule,

as adopted, would include loans to cooperatives.

As discussed above, this final rule provides a separate definition

of multifamily residential housing which includes both condominiums and

cooperatives. Therefore, a loan consisting of a master mortgage on a

cooperative would be included within the definition of a multifamily

residential property loan and would qualify for the 50% risk weight

category, if the loan otherwise satisfies the requirements of this

final rule. It should be noted, however, that with respect to the debt

service requirement, this final rule would also permit other forms of

debt service coverage to be considered, if the other form of debt

service coverage generates sufficient cash flows to provide comparable

protection to the institution.

As explained by one commenter, the unique structure of financing

for cooperative housing would normally make it impossible for the

cooperative borrower to satisfy the debt service requirements in the

conventional sense. The OCC does not believe that a cooperative housing

loan should be automatically disqualified from the 50% risk weight

category for this reason alone. Therefore, this final rule would also

permit comparable debt service coverage to be considered for

cooperative housing loans as well as loans for the development or

purchase of multifamily residential property housing intended to

provide low- to moderate-income housing.

B. Mortgage-Backed Securities

This final rule amends the risk-based capital guidelines to clarify

that privately-issued mortgage-backed securities (MBS) may qualify for

a 50% risk weight, if at the time of origination of the MBSs, the MBSs

are secured by or otherwise represent a sufficiently secure interest in

qualifying multifamily residential property loans. Absent this change

in the risk-based capital guidelines, MBSs secured by multifamily

residential property loans generally could never have qualified for a

50% risk weight.

As explained in the NPRM, section 3(a)(3)(iv) of RTCRRIA of the

current risk-based capital guidelines would assign a risk weight to

privately issued MBSs based on the risk weight of the underlying

mortgage loans at the time of origination of those loans. Under this

final rule all loans secured by a multifamily residential property are

assigned to the 100% risk weight at origination, and may be reassigned

to the 50% risk weight only after one year, if the loans satisfy the

one-year timely payment requirement and are not otherwise 90 days or

more past due or on nonaccurual status. Thus, MBSs secured by

multifamily residential loans would all be assigned to the 100% risk

weight category absent any change to the risk-based capital guidelines.

In the NPRM the OCC requested specific comment on the proper

treatment for MBSs secured by qualifying multifamily residential

property loans. The OCC received two comments on this issue. Both of

the commenters supported the proposed change.

As required by section 618(b) and for prudential reasons, the OCC

believes that multifamily residential property loans should be required

to perform in accordance with the terms of the loans for at least one

year before qualifying for the lower 50% risk weight. However, the OCC

does not believe that this requirement should prohibit MBSs secured by

multifamily residential property loans from ever qualifying for the 50%

risk weight. Consequently, the OCC adopts this final rule to amend

section 3(a)(3)(iv) of this appendix A to permit MBSs to qualify for a

50% risk weight if fully secured by or otherwise represent a

sufficiently secure interest in qualifying multifamily residential

property loans that have performed in accordance with their terms for

at least one year and the loan is not otherwise 90 days or more past

due, or on nonaccrual status.3 The OCC believes that permitting

MBSs to qualify for the 50% risk weight will benefit low- to moderate-

income housing projects. The lower 50% risk weight will enhance the

attractiveness of these MBSs. As a result, this should assist in the

expansion of the secondary market for the sale of loans on low- to

moderate-income multifamily properties.

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\3\Generally, once a MBS qualifies for a lower risk weight, the

MBS would not have to be reclassified to the 100% risk weight

category unless it subsequently fails to perform as provided for in

the agreement. Similarly, MBSs secured by multifamily residential

property loans that qualify for the 50% risk weight category would

not have to be reclassified to the 100% risk weight category even if

the underlying multifamily residential property loans subsequently

fail to satisfy the requirements for the 50% risk weight, provided

that the MBSs themselves continue to perform as agreed and are not

otherwise 30 days or more past due.

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C. Recourse Arrangements

This final rule amends the risk-based capital guidelines to permit

the portion of multifamily residential property loans that is sold

subject to a pro rata loss sharing arrangement to be treated by the

selling bank as sold 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 amendment is required

by section 618(b)(2) of RTCRRIA, which provides that any loan fully

secured by a first lien on a multifamily housing project 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.4

In addition, the OCC notes that while sales treatment is required by

section 618(b)(2) of RTCRRIA for that portion of multifamily

residential property loans sold on a pro rata loss sharing basis, this

amendment is consistent with, and merely restates the current OCC

policy on assets sold with recourse on a pro rata basis as applied to

multifamily residential property loans. Under the risk-based capital

guidelines, the definition of the sale of assets with recourse is

adopted from the definition contained in the Instructions to the Call

Report. See 12 CFR part 3, appendix A, section 3(b)(1)(iii) (footnote

14). Specifically, the Instructions to the Call Report state:

\4\Section 618(b)(2) of RTCRRIA further defines 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.

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[I]f the risk retained by the seller is limited to some fixed

percentage of any loss 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.

See Call Report, Glossary--Sale of Assets: Interpretation and

illustrations of the general rule 2, A-50 (5-89). Therefore, the sale

of a loan fully secured by a first lien on a multifamily residential

property is accorded sales treatment and is not treated as recourse to

the extent that loss is shared proportionately by the purchaser of the

loan.

Section 618(b)(3) of RTCRRIA also requires the OCC to take into

account other loss sharing arrangements (besides pro rata loss sharing

arrangements) for the purpose of determining the extent to which

multifamily residential property loans shall be treated as sold.

As for other recourse arrangements (not on a pro rata basis), the

OCC has decided not to adopt any rule for other loss sharing

arrangements specifically relating to the sale of multifamily

residential property loans at this time. As explained in the NPRM, the

OCC, as part of the Federal Financial Institutions Examination Council

(FFIEC), is currently studying the overall treatment of asset sales

with recourse. See 55 FR 26766 (June 29, 1990). In this context, the

OCC will also be considering the possible adoption of other recourse

arrangements for the sale of multifamily residential property loans.

Until the FFIEC study is complete, the OCC believes that any adoption

of other recourse arrangements specifically for the sale of multifamily

residential property loans would be premature.

In the NPRM, the OCC requested specific comment on this issue. The

OCC received two comments. Both commenters generally supported the

proposed rule on recourse based on a pro rata loss sharing arrangement.

However, with respect to other loss sharing arrangements, one commenter

believed that the proposed rule did not fully satisfy the requirement

in section 618(b) of RTCRRIA to take into account other risk sharing

arrangements.

The OCC has reviewed the statutory requirement in section 618(b) of

RTCRRIA and believes that the OCC has discretion with respect to the

adoption of other loss sharing arrangements. In pertinent part, section

618(b) provides that the OCC shall amend the regulations to take into

account other loss sharing arrangements for the purposes of determining

the extent to which such loans shall be treated as sold. The OCC

believes that section 618(b) of RTCRRIA only requires that the OCC

determine the extent to which multifamily residential property loans

sold on a non-pro rata recourse basis should be afforded sales

treatment but that section 618(b) of RTCRRIA does not automatically

require sales treatment for such loans. In this regard, the OCC

believes that the capital treatment of multifamily residential property

loans sold on a non-pro rata basis should be considered in a

comprehensive manner by the banking agencies in the broad context of

the FFIEC recourse study.

D. Section 305(b)(1)(B) of FDICIA

Section 305(b)(1)(B) of FDICIA, among other things, requires the

OCC to revise the risk-based capital guidelines to reflect the actual

performance and expected risk of loss of multifamily mortgages. This

final rule satisfies the requirement of section 305(b)(1)(B) of FDICIA.

As indicated by the table published in the NPRM, the overall credit

risk for multifamily residential property loans is significantly

greater than the credit risk for qualifying single-family residential

property loans. While multifamily residential property loans generally

may have more credit risk than single-family residential property

loans, the OCC believes that multifamily residential property loans

merit a 50% risk weight if they are well-secured, demonstrate

consistent good performance, conform with prudent underwriting

standards and otherwise satisfy the requirements imposed by this final

rule.

E. Impact on Low- and Moderate-Income Multifamily Housing

In implementing this final rule, the OCC is particularly concerned

with the impact of this amendment on low- and moderate-income

multifamily housing. In the NPRM, the OCC requested comment on whether

the proposed rule would assist organizations in their ability to

provide low and moderate-income multifamily housing (rehabilitated or

new construction). The OCC received five comments on this issue. Three

of the commenters believed that the proposed rule would provide a

needed stimulus to the housing sector and the economy. However, one

commenter expressed concerns about credit allocation through bank

capital requirements. Another commenter indicated support for sound

minority and low- and moderate-income mortgage lending but cautioned

against using the capital rule as the only means to accomplish those

goals.

The OCC has carefully considered these comments and basically

agrees with the commenters. The OCC believes that this final rule

strikes a balance between the support for affordable housing and

prudent lending.

F. Technical and Conforming Amendments

In addition to the substantive changes, this final rule makes two

technical and conforming amendments to the risk-based capital

guidelines. First, the cross-references to section 3(a)(3)(iv) in the

introductory text and footnote 10 of section 3 are revised to cross-

reference section 3(a)(3)(vi). This amendment is necessary to correct

an error created when a new paragraph was added to section 3(a)(3)

relating to residential construction loans secured by presold homes.

See 57 FR 40302 (September 3, 1992). These cross-references should

refer to the paragraph on privately issued mortgage-backed securities

and not to the paragraph on residential construction loans.

Second, the wording of the 90-day past due requirement is changed

to conform to the language adopted elsewhere in this final rule.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, it is

hereby certified that this final rule will not have a significant

economic impact on a substantial number of small entities. Accordingly,

a regulatory flexibility analysis is not required.

This final rule reduces the amount of capital required to be

maintained by national banks for qualifying multifamily residential

property loans. While the exact overall impact of this final rule will

depend on the amount of qualifying multifamily residential property

loans that are held by any particular bank, the OCC does not believe

that lowering the capital requirements for these types of loans should

significantly impact national banks, regardless of size. In addition,

while this final rule would apply to all national banks, this final

rule should not have a disproportionate effect on small banks.

Executive Order 12866

The OCC has determined that this final rule is not a significant

regulatory action. This final rule will reduce the amount of capital

required to be maintained by national banks for qualifying multifamily

residential property loans. Although the exact overall impact of this

final rule will depend on the amount of qualifying multifamily

residential property loans held by any particular bank, the OCC does

not believe that lowering the capital requirements for these types of

loans should significantly impact national banks. Additionally, the OCC

believes that this final rule will generally benefit banks and the

housing industry by reducing somewhat the cost of bank operations and

by encouraging multifamily housing lending.

Immediate Effective Date

Section 4(c) of the Federal Administrative Procedure Act (12 U.S.C.

553(d)) requires a final rule to be published 30 days prior to its

effective date unless the agency provides otherwise for good cause

found and published with the rule. This amendment to the capital

adequacy rule is needed immediately to foster lending for the

reconstruction of multifamily housing in areas of the country recently

devastated by natural disaster. For this reason, the OCC finds good

cause to waive the usual 30-day delay in effectiveness of a final rule.

Accordingly, this final rule is effective immediately upon publication

in the Federal Register.

List of Subjects in 12 CFR Part 3

Administrative practice and procedure, Capital, National banks,

Reporting and recordkeeping requirements, Risk.

Authority and Issuance

For the reasons set forth in the preamble, appendix A of part 3 of

chapter I of title 12 of the Code of Federal Regulations is amended as

set forth below.

PART 3--AMENDED

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

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

and 3909.

2. In appendix A, section 1, paragraphs (c)(14) through (c)(28) are

redesignated as paragraphs (c)(15) through (c)(29), respectively, and a

new paragraph (c)(14) is added to read as follows:

Appendix A--Risk-Based Capital Guidelines

* * * * *

Section 1 Purpose, Applicability of Guidelines, and Definitions

* * * * *

(c) * * *

(14) Multifamily residential property means any residential

property consisting of five or more dwelling units including

apartment buildings, condominiums, cooperatives, and other similar

structures primarily for residential use, but not including

hospitals, nursing homes, or other similar facilities.

* * * * *

Appendix A--[Amended]

3. In Appendix A, section 3, paragraph (a)(3)(v) is redesignated as

paragraph (a)(3)(vi), the introductory text of newly designated

paragraph (a)(3)(vi) is revised, a new paragraph (a)(3)(v), including

new footnotes 11a and 11b, is added, the last sentence in the second

paragraph of the introductory text of section 3 and the last sentence

in footnote 10 in paragraph (a)(2)(vii) are amended by replacing the

phrase ``section 3(a)(3)(iv) of this appendix A'' with the phrase

``section 3(a)(3)(vi) of this appendix A'', and the first sentence in

paragraph (a)(3)(iii) is amended by replacing the phrase ``not more

than 90 days past due,'' with the phrase ``not otherwise 90 days or

more past due,'', to read as follows:

* * * * *

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

Off-Balance Sheet Items

* * * * *

(a) * * *

(3) * * *

(v) Loans secured by a first mortgage on multifamily residential

properties :11a

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\1\1aThe portion of multifamily residential property loans that

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

treated by the selling bank as sold 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.

The portion of multifamily residential property loans sold subject

to any loss sharing arrangement other than pro rata sharing of the

loss shall be accorded the same treatment as any other asset sold

under an agreement to repurchase or sold with recourse under section

3(b)(1)(iii) (footnote 14) of this appendix A.

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(A) The amortization of principal and interest occurs in not

more than 30 years;

(B) The minimum original maturity for repayment of principal is

not less than 7 years;

(C) 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 immediately preceding the risk weighting of the loan in the

50% risk weight category, and the loan is not otherwise 90 days or

more past due, or on nonaccrual status;

(D) The loan is made in accordance with all applicable

requirements and prudent underwriting standards;

(E) If the rate of interest does not change over the term of the

loan:

(I) The current loan amount outstanding does not exceed 80% of

the current value of the property, as measured by either the value

of the property at origination of the loan (which is the lower of

the purchase price or the value as determined by the initial

appraisal, or if appropriate, the initial evaluation) or the most

current appraisal, or if appropriate, the most current evaluation;

and

(II) In the 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%;11b

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\1\1bFor the purposes of the debt service requirements in

sections 3(a)(3)(v)(E)(II) and 3(a)(3)(v)(F)(II) of this appendix A,

other forms of debt service coverage that generate sufficient cash

flows to provide comparable protection to the institution may be

considered for (a) a loan secured by cooperative housing or (b) a

multifamily residential property loan if the purpose of the loan is

for the development or purchase of multifamily residential property

primarily intended to provide low- to moderate-income housing,

including special operating reserve accounts or special operating

subsidies provided by federal, state, local or private sources.

However, the OCC reserves the right, on a case-by-case basis, to

review the adequacy of any other forms of comparable debt service

coverage relied on by the bank.

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(F) If the rate of interest changes over the term of the loan:

(I) The current loan amount outstanding does not exceed 75% of

the current value of the property, as measured by either the value

of the property at origination of the loan (which is the lower of

the purchase price or the value as determined by the initial

appraisal, or if appropriate, the initial evaluation) or the most

current appraisal, or if appropriate, the most current evaluation;

and

(II) In the 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 115%; and

(G) If the loan was refinanced by the borrower:

(I) All principal and interest payments on the loan being

refinanced which were made in the preceding year prior to

refinancing shall apply in determining the one-year timely payment

requirement under paragraph (a)(3)(v)(C) of this section; and

(II) The net operating income generated by the property in the

preceding year prior to refinancing shall apply in determining the

applicable debt service requirements under paragraphs (a)(3)(v)(E)

and (a)(3)(v)(F) of this section.

(vi) Privately-issued mortgage-backed securities, i.e. those

that do not carry the guarantee of a government or government-

sponsored agency, if the privately-issued mortgage-backed securities

are at the time the mortgage-backed securities are originated fully

secured by or otherwise represent a sufficiently secure interest in

mortgages that qualify for the 50% risk weight under paragraphs

(a)(3) (iii), (iv) and (v) of this section,12 provided that

they meet the following criteria:

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\1\2If all of the underlying mortgages in the pool do not

qualify for the 50% risk weight, the bank should generally assign

the entire value of the security to the 100% risk category of

section 3(a)(4) of this appendix A; however, on a case-by-case

basis, the OCC may allow the bank to assign only the portion of the

security which represents an interest in, and the cash flows of,

nonqualifying mortgages to the 100% risk category, with the

remainder being assigned a risk weight of 50%. Before the OCC will

consider a request to risk weight a mortgage-backed security on a

proportionate basis, the bank must have current information for the

reporting date that details the composition and cash flows of the

underlying pool of mortgages.

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* * * * *

4. In appendix A, table 1 is amended by adding paragraph 5 to

Category 3 to read as follows:

* * * * *

TABLE 1--SUMMARY OF RISK WEIGHTS AND RISK CATEGORIES

* * * * *

Category 3: 50 Percent

* * * * *

5. Assets secured by a first mortgage on multifamily residential

properties.

* * * * *

Dated: January 14, 1994.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 94-5385 Filed 3-8-94; 8:45 am]

BILLING CODE 4810-33-P