Real Estate Lending and Appraisals

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. 95-16]

RIN 1557-AB48

Real Estate Lending and Appraisals

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) proposes

to revise its rules governing real estate lending. This proposal is

another component of the OCC's Regulation Review Program to update and

streamline OCC regulations and to reduce unnecessary regulatory costs

and other burdens. The proposal would modernize and clarify the real

estate lending rules, reduce unnecessary regulatory burdens, and,

consistent with statutory requirements, impose regulatory requirements

only where needed to address safety and soundness concerns or

accomplish other statutory responsibilities of the OCC.

DATES: Comments must be received by September 5, 1995.

[[Page 35354]]

ADDRESSES: Comments should be directed to: Office of the Comptroller of

the Currency, Communications Division, 250 E Street SW., Washington, DC

20219, Attention: Docket No. 95-16. Comments will be available for

public inspection and photocopying at the same location.

FOR FURTHER INFORMATION CONTACT: Mark Tenhundfeld, Senior Attorney,

Legislative and Regulatory Activities, (202) 874-5090; Laura Goldman,

Attorney, Bank Activities and Structure, (202) 874-5300; Thomas Watson,

National Bank Examiner, Credit and Management Policy, (202) 874-5170;

Frank R. Carbone, National Bank Examiner, Credit and Management Policy,

(202) 874-5170; or Roland G. Ullrich, National Bank Examiner, Consumer

and Fiduciary Compliance, (202) 874-4866.

SUPPLEMENTARY INFORMATION:

Background

Summary of Regulation Review Program

The OCC proposes to revise 12 CFR part 34 as another component of

its Regulation Review Program (Program). The goal of the Program is to

review all of the OCC's rules and to eliminate provisions that do not

contribute significantly to maintaining the safety and soundness of

national banks or to accomplishing the OCC's other statutory

responsibilities. Another goal of the Program is to clarify regulations

so that they more effectively convey the standards the OCC seeks to

apply.

The OCC intends for this proposal to reduce regulatory costs and

other burdens on national banks by eliminating regulatory requirements

that are neither essential to maintaining the safety and soundness of

national banks nor needed to accomplish the OCC's statutory

responsibilities. The proposal also would simplify and clarify the

OCC's real estate lending regulations.

Discussion

Part 34 consists of the following five subparts: Subpart A--

General; Subpart B--Adjustable-Rate Mortgages (ARMs); Subpart C--

Appraisals; Subpart D--Real Estate Lending Standards; and Subpart E--

Other Real Estate Owned (OREO). The OCC proposes to amend subparts A,

B, and E. The OCC is not proposing to amend subpart C or D at this time

because they recently were adopted on an interagency basis and the OCC

wishes to gather additional information on their effectiveness before

deciding whether to recommend an interagency effort to revise those

subparts. Nevertheless, commenters are welcome to include comments on

subparts C and D in addition to their comments on this proposal.

Section 303 of the Riegle Community Development and Regulatory

Improvement Act of 1994 (12 U.S.C. 4803) requires the OCC to conduct a

review of, among other things, the standards adopted by the OCC for

real estate lending by national banks. These standards are set forth in

subpart D of part 34. Pursuant to section 303, the OCC is to ``consider

the impact that such standards have on the availability of credit for

small business, residential, and agricultural purposes, and on low- and

moderate-income communities.'' Id. The OCC welcomes comments on the

impact that the standards, including the Guidelines for Real Estate

Lending set forth at appendix A to subpart D, are having on the

availability of the types of credit and communities noted previously.

Most of the proposed changes in subparts A, B, and E clarify and

simplify the current rule. The proposal removes provisions that merely

repeat statutes or that are otherwise redundant, and reorders or

renumbers certain other provisions to improve clarity. The proposal

also adds a new provision to summarize the OCC's general approach to

questions of Federal preemption of State laws governing real estate.

(That provision does not expand the scope of State law preemption

beyond what appears in the current rule.) Finally, the proposal amends

the provisions governing disposition of leases that are treated as OREO

to suspend the running of the divestiture period under certain

circumstances.

The following discussion identifies and explains material proposed

changes to part 34. The OCC invites general comments on all aspects of

the proposed regulation as well as specific comments on the proposed

changes. The OCC also welcomes any additional comments relevant to this

proposal.

A derivation table comparing the sections of proposed part 34 to

those of current part 34 follows this section of the preamble.

Subpart A--General

Purpose and Scope (Section 34.1)

A national bank may make real estate loans under the authority

provided in 12 U.S.C. 371 and 12 U.S.C. 24(Seventh). Part 34 currently

identifies (in Sec. 34.3) loans that are not considered ``real estate

loans'' for purposes of 12 U.S.C. 371 but which national banks

nevertheless may make pursuant to 12 U.S.C. 24(Seventh). The proposal

removes the list in Sec. 34.3 because it is unnecessary (see discussion

of ``Loans not constituting real estate loans,'' infra). The proposal

also eliminates cross-references in Sec. 34.1 to that list. However,

since current paragraphs (f) and (g) of Sec. 34.3 contain an exception

to the regulation's scope, the proposal incorporates the substance of

those provisions into the proposed ``Scope'' section of the revised

regulation.

The proposal also relocates the text that currently appears in

Sec. 34.1(a), authorizing national banks to engage in real estate-

related transactions, to proposed Sec. 34.3. This conforms the order of

subpart A of part 34 to that of other OCC rules. Finally, the proposal

sets forth a statement of the purpose of part 34.

Definitions (Proposed Section 34.2)

The proposal places definitions used in subpart A in one location.

The definition of ``due-on-sale clause'' is moved from current

Sec. 34.4 to proposed Sec. 34.2 without any change to the definition's

substance. The proposal adds definitions of ``State'' and ``State law

limitations'' to avoid restating of the full scope of preemption in

every section that refers to preemption. These definitions effect no

substantive changes.

General Rule (Proposed Section 34.3)

Current Sec. 34.1(a) sets forth the general rule authorizing

national banks to engage in real estate lending and related

transactions. The proposal relocates this general rule to a new section

to conform the order of subpart A of part 34 to that followed in other

OCC regulations.

Loans Not Constituting Real Estate Loans (Current Sec. 34.3--Removed)

Current Sec. 34.3 lists several types of loans that are not

considered real estate loans for purposes of part 34, but are

permissible for national banks under 12 U.S.C. 24(Seventh). The current

provision is confusing and unnecessary. Therefore, the proposal removes

Sec. 34.3 in its entirety.

After 12 U.S.C. 371 was amended in 1982, the OCC added the list in

question to part 34 (48 FR 40701 (September 9, 1983)) to insure that

any restrictions resulting from further amendment of 12 U.S.C. 371

would not apply to the types of loans identified as permissible

pursuant to 12 U.S.C. 24(Seventh). If Congress amends 12 U.S.C. 371

again, the OCC will consider whether it is necessary to amend part 34

to identify types of loans that are deemed by the OCC not to be real

estate loans for purposes of that section.

[[Page 35355]]

Applicability of Law (Proposed Sec. 34.4)

The current rule states specific areas where Federal law preempts

State law governing real estate lending by national banks. The proposal

retains this statement of preemption in order to provide continued

guidance about specific areas where Federal law preempts State law.

However, the proposal removes the unnecessary reminder, found at

current Sec. 34.2(b), that national banks must comply with applicable

laws.

Proposed Sec. 34.4(b) adds a general statement of the OCC's

position with respect to preemption to clarify that the list of areas

where State law is preempted, carried over from the current rule, is

not exhaustive. The proposed rule clarifies that the OCC will apply

traditional principles of Federal preemption when determining whether a

State law affecting real estate lending is preempted. Under these

principles, State laws apply to national banks unless the State law

expressly or impliedly conflicts with Federal law, the State law stands

as an obstacle to the accomplishment of the full purposes and

objectives of the Federal law, or Federal law is so comprehensive as to

evidence a Congressional intent to occupy a given field.1

\1\ The Supreme Court's most recent discussion of the principles

of Federal preemption may be found in Gade v. National Solid Wastes

Management Ass'n, 120 L. Ed. 2d 73 (1992), in which the Court

stated:

As both the majority and dissent acknowledge, we have identified

three circumstances in which a federal statute pre-empts state law:

First, Congress can adopt express language defining the existence

and scope of pre-emption. Second, state law is pre-empted where

Congress creates a scheme of federal regulation so pervasive as to

leave no room for supplementary state regulation. And third, ``state

law is pre-empted to the extent that it actually conflicts with

federal law.'' This third form of pre-emption, so-called actual

conflict pre-emption, occurs either ``where it is impossible for a

private party to comply with both state and federal requirements . .

. or where state law 'stands as an obstacle to the accomplishment

and execution of the full purposes and objectives of Congress.' ''

120 L. Ed. 2d at 91 (Kennedy, J., concurring; citations omitted).

The plurality and dissenting opinions in Gade contain essentially

the same formulation. See id. at 84 and 95, respectively.

Due-On-Sale Clauses (Proposed Section 34.5)

Current Sec. 34.4 authorizes a national bank to make or acquire a

loan secured by a lien on real property that includes a due-on-sale

clause, and preempts State law to the contrary. The rule also states

that due-on-sale clauses in transfers described in 12 U.S.C. 1701j-3(d)

are not enforceable.

The OCC proposes to modify this section to improve clarity and to

remove unnecessary restatements of statutory provisions. The proposed

descriptions of the terms ``real property'' and ``lender'' remove

provisions that merely restate the statute. However, the proposal

intends no change in the substance of those descriptions.

Subpart B--ARMs

The proposal renumbers current sections in subpart B, beginning

with proposed Sec. 34.20, in order to permit future additions to

subpart A with minimum disruption.

Definitions (proposed Section 34.20)

Current Sec. 34.5 contains definitions of ``adjustable-rate

mortgage loan'' (ARM loan) and ``consumer credit.'' Proposed Sec. 34.20

amends the definition of ``ARM loan'' by deleting the provisions, found

in current Sec. 34.5(a)(2), that exempt fixed-rate extensions of credit

that are payable either on demand or without any interim amortization.

Earlier OCC definitions of ``ARM loan'' included certain fixed-rate

loan transactions, unless a lender gave the disclosures required to

exempt the transaction from the regulation's coverage. (See, e.g., 48

FR 9506 (March 7, 1983).) The OCC amended its rule in 1988 (53 FR 7885

(March 11, 1988)) to remove those disclosure requirements, and

clarified that the fixed-rate extensions in question would not be

considered to be ARM loans. While the express exemptions were helpful

when the disclosure requirement was removed in 1988, such exemptions no

longer are necessary.

The OCC seeks comment on whether it remains necessary or

appropriate to exempt from the definition of ``ARM loan'' fixed-rate

loans that are payable at the end of a term that, when added to all

terms for which the bank has promised to refinance the loan, is shorter

than the term of the amortization schedule. This exemption is similar,

but not identical, to the treatment of variable-rate transactions in

Regulation Z (Reg. Z, 12 CFR part 226) of the Board of Governors of the

Federal Reserve System (the Federal Reserve). For instance, a loan that

a bank has guaranteed to renew for a total period that is shorter than

the life of the mortgage is not an ARM loan under part 34. (See 12 CFR

34.5(a)(2)(ii).) It is, however, a variable-rate transaction under Reg.

Z. (See Commentary to Sec. 226.17(c)(1), Comment 11, first bullet.)

This distinction requires lenders to understand and apply two different

standards, depending on the purpose being served.

The practical effect of this distinction is that national banks

making balloon notes that are renewable for a total period shorter than

the amortization schedule do not have to use an independent index in

adjusting the interest rate on such loans. The distinction also raises

the issue of whether banks find it unnecessarily burdensome to comply

with the different rules.

Whatever burden that is created by the current difference could be

eliminated by deleting all current exemptions from the OCC's definition

of ARM loan and clarifying that a balloon note that a bank guarantees

to renew will be treated as an ARM loan if the bank may adjust the

interest rate upon renewal. This would result, however, in more loans

being considered to be ARM loans, thereby increasing the number of

loans for which a bank would have to use an index beyond the bank's

control.

The OCC seeks comment on (1) whether the current difference between

part 34 and Reg. Z poses an unnecessary burden, and (2) whether banks

favor amending part 34 to eliminate the difference, notwithstanding

that such approach would result in more loans being subject to the

requirement that a bank use an index beyond its control.

In addition to the changes noted, the proposal makes stylistic

changes to the definition of ``ARM loan.'' The proposal also deletes

the definition of ``consumer credit,'' because other changes make the

definition unnecessary (see discussion of ``Rate changes (current

Sec. 34.8)'' and ``Disclosure (current Sec. 34.10)''). In order to

consolidate all definitions used in subpart B, the proposal relocates

to proposed Sec. 34.20 the definitions of ``affiliate'' and

``subsidiary'' currently found in Sec. 34.6(b). Finally, the proposal

uses the term ``renewal'' instead of ``refinance'' as that term is used

in current Sec. 34.5(a)(2) in order to avoid creating the impression

that the OCC rule applies to refinancings as that term is narrowly

defined in Reg. Z.

General Rule (Proposed Section 34.21)

Current Sec. 34.6 provides that national banks and their

subsidiaries may make, sell, purchase, participate, or otherwise deal

in ARM loans, notwithstanding any State law to the contrary. National

banks may purchase or participate in ARM loans that were not made in

accordance with the OCC's regulations, except that loans purchased from

an affiliate or subsidiary must comply with part 34. The proposal makes

only minor changes to simplify the general rule.

Index (Proposed Section 34.22)

Current Sec. 34.7 requires ARM loans that are subject to 12 CFR

226.19(b) to specify an index to which changes in the interest rate

shall be linked. The

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index is to be readily available to, and verifiable by, the borrower.

It also must be beyond the control of the lending bank. Proposed

Sec. 34.22 makes no changes to the substance of current Sec. 34.7.

Rate changes (Current Section 34.8)

Current Sec. 34.8 sets forth the limitation found in section 1204

of the Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86,

100 Stat. 552 (12 U.S.C. 3806(a)), which requires a consumer credit ARM

loan to include a limitation on the maximum rate of interest that may

apply during the term of the loan. The proposal removes Sec. 34.8

because it is an unnecessary restatement of the statute. Moreover, CEBA

vests rulemaking authority with the Federal Reserve, which has

implemented section 1204 of CEBA at 12 CFR 226.30.

Prepayment Fees (Proposed Section 34.23)

Current Sec. 34.9 provides that national banks may impose fees for

prepayments of ARM loans, notwithstanding any State law to the

contrary. The proposal makes no substantive change to this section.

Disclosure (Current Section 34.10)

This section requires a national bank that offers consumer ARM

loans to provide the disclosures required by the Truth-in-Lending Act

(15 U.S.C. 1601, et seq.), as implemented by the Federal Reserve in

Reg. Z.

Earlier versions of the OCC rule regarding disclosure requirements

made this statement appropriate at one time. Previously, the OCC's rule

required specific ARM loan disclosures that were similar to that now

required by Reg. Z. See, e.g., 48 FR 9506 (March 7, 1983); 46 FR 18943

(March 27, 1981). In 1987, the OCC proposed to amend its rule to

eliminate those disclosure requirements since they were redundant in

light of Reg. Z, but also proposed to include a reminder to national

banks that documents evidencing ARM loans, as that term was defined in

the proposal, still were to contain the Reg. Z disclosures. 52 FR 36958

(October 2, 1987). Ultimately, this proposal was adopted (53 FR 7885

(March 11, 1988)), thereby eliminating overlap between the two

regulations.

The proposed rule that was promulgated in 1987 defined ``ARM loan''

in a way that made it appropriate to clarify that only ARM loans to

consumers needed to comply with the disclosure requirements set forth

in Reg. Z. The 1987 proposal defined ``ARM loan'' as applying to an

``extension of consumer credit,'' which raised questions concerning the

permissibility under part 34 of making ARM loans to businesses. To

address this concern, the final rule adopted in 1988 used the

definition of ``ARM loan'' that appears in the current regulation and

clarified in Sec. 34.10 that the disclosures required under Reg. Z must

be provided only to consumers in ARM loan transactions.

The OCC believes that the reminder to comply with Reg. Z

disclosures when making a consumer ARM loan was appropriate when the

OCC-imposed disclosure requirements were removed, but now is

unnecessary. Accordingly, the proposal removes this section in its

entirety. The proposal also removes the term ``consumer credit,'' since

it was used only in Sec. 34.10.

Nonfederally Chartered Commercial Banks (Proposed Section 34.24)

Section 807(b) of the Garn-St Germain Act (Pub. L. 97-320, 96 Stat.

1545 (12 U.S.C. 3801 note)) requires the OCC to identify those

provisions of its ARM regulation that are inappropriate for

nonfederally chartered banks. In implementing section 807(b), the OCC

determined that all of the provisions of subpart B were appropriate,

and so stated in current Sec. 34.11. Proposed Sec. 34.25 retains this

statement in order to comply with the statute, and removes certain

unnecessary citations to statutory authority.

Transition Rule (Proposed Section 34.25)

Current Sec. 34.12 provides that national banks were authorized to

make or administer loans during a ``window period'' beginning on the

date the current rule was adopted (March 11, 1988) and ending October

1, 1988, if the loans complied with the OCC rules in effect before the

March 11, 1988 amendment. Following October 1, 1988, all ARM loans have

been required to comply with part 34, as revised.

The proposed changes remove what are now unnecessary references to

the window period. The proposal retains the remainder of this section

to assist the reader who wishes to determine if a given loan complied

with applicable laws in effect when the loan was made. Commenters are

requested to address whether retention of this provision is still

useful.

Subpart C--Appraisals

The OCC is not proposing any changes to the rules governing the use

of appraisals.

Subpart D--Real Estate Lending Standards

The OCC is not proposing any changes to the real estate lending

standards.

Subpart E--OREO

Definitions (Section 34.81)

Current Sec. 34.81 contains the definitions used in subpart E. The

proposal makes two changes to these definitions in addition to

stylistic edits. First, proposed Sec. 34.81 defines OREO to include

only ``debts previously contracted'' (DPC) real estate and former

banking premises. The proposal removes the term ``covered transactions

real estate'' from the definition of OREO, thereby rendering the

definition of covered transactions real estate unnecessary. Second, the

proposal removes the term ``transaction value'' and corresponding

definition. These proposed changes are addressed in order, below.

The current rule defines covered transactions real estate as DPC

property or former banking premises that a national bank is in the

process of selling in accordance with current Sec. 34.83(a)(6) (i.e.,

receiving at least 10 percent of the property's sales price through

cash, principal and interest payments, and/or private mortgage

insurance). However, there is no special rule for the divestiture or

disposition of covered transactions real estate. The regulation treats

such real estate as OREO, and imposes the same requirements as are

imposed on other forms of OREO. Accordingly, there is no reason to

identify covered transaction real estate as a special class of OREO

property.

This proposed change to the definition of OREO is not intended to

change the ability of national banks to dispose of OREO through the

means specified in current Sec. 34.83(a)(6). Rather, it is intended

simply to remove a term that is unnecessary and potentially confusing.

The proposal also removes the term ``transaction value'' because

it, too, is unnecessary and potentially confusing. Current subpart E of

part 34 defines transaction value as ``the recorded investment

amount,'' a term that also is defined. However, subpart C defines

``transaction value'' differently, creating potential confusion. Since

``transaction value'' is used only once in part 34 (in current

Sec. 34.84(a)(1)(ii)) outside of the current definition section in

subpart E, and since the entire substance of that term's definition is

``the recorded investment amount,'' the OCC proposes to replace

``transaction value'' with

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``recorded investment amount'' in Sec. 34.85(a)(1)(ii).

Holding Period (Section 34.82)

Current Sec. 34.82 restates those provisions of the statute that

govern how long a national bank may hold OREO. It also identifies when

the holding period begins, and clarifies that a statutory redemption

period imposed by State law will delay the beginning of when the

holding period runs.

Proposed Sec. 34.82 is similar to current Sec. 34.82. The proposed

rule clarifies, in Sec. 34.82(b)(2), that the holding period begins on

the date that a national bank abandons former banking premises without

relocating to another site (such as might happen when a branch is

closed). The proposed rule also makes changes to improve clarity and to

remove provisions that are redundant in light of 12 U.S.C. 29. The

proposal relocates the requirement that a national bank dispose of OREO

when prudent judgment dictates from Sec. 34.83 (which addresses the

method of disposition) to Sec. 34.82 (which addresses timing of

disposition). Finally, proposed Sec. 34.82 retains a statement

regarding a bank's obligation to dispose of OREO. This statement

clarifies that OREO, as defined in the regulation, is subject to the

divestiture provisions. Without such a statement, questions might

remain concerning whether the five-year holding period (and any

extension thereof) would be available for the disposition of certain

types of properties (such as former banking premises that become OREO).

Disposition of Real Estate (Section 34.83)

Currently, Sec. 34.83(a)(5) permits disposition of leases only

through assignment or a ``coterminous sublease'' (i.e., a lease with

the same duration as the remainder of the master lease). Many national

banks hold long-term leases and are unable either to assign them or to

find a coterminous sublessee, notwithstanding the bank's best efforts

to do so. As industry consolidation and technological advances further

reduce the need for branch office space, this problem likely will

become more severe.

A bank has the option of entering into non-coterminous subleases in

order to minimize financial losses stemming from a long-term lease.

However, the OCC currently does not recognize the entering into a non-

coterminous sublease as a ``disposition'' of the OREO for purposes of

part 34, thus resulting in a bank being cited for a violation of law

even though the bank is attempting in good faith to comply. To address

this problem, proposed Sec. 34.83(a)(3) permits the divestiture period

to be suspended for the duration of a non-coterminous sublease.

The following example illustrates how this change would work.

Assume that a national bank holds a 30-year lease and, after one year

from the date the lease becomes OREO, the bank finds a sublessee

willing to sublease the property for ten years. At the end of that 10-

year sublease, the bank, under the proposed rule, would have four years

remaining in the initial 5-year divestiture period within which to

assign the lease or find a sublessee. If the bank enters into another

non-coterminous sublease, then, at the expiration of that sublease, the

bank would have the unused portion of the divestiture period in which

to dispose of the property or enter into another sublease.

The OCC believes that this proposal is consistent with 12 U.S.C.

29. The statute precludes the ``possession of any real estate under

mortgage, or the title and possession of any real estate purchased to

secure any debts due to it,'' for a period exceeding five years (or ten

years, if the initial period is extended by the OCC). This mandatory

divestiture provision is silent with respect to leases. The OCC

previously concluded that it is appropriate, for safety and soundness

reasons, to treat leases as OREO and require their disposition within

the same divestiture period as applies to other types of OREO property.

Experience has shown, however, that implementation of 12 U.S.C. 29 can

produce an unnecessarily harsh result when the property in question is

a long-term lease. The OCC has reexamined its current position and has

determined that when property is leased pursuant to a bona fide lease,

the element of ``possession'' that is key to the limitations of 12

U.S.C. 29 may not be present. Therefore, the OCC believes that when a

bank leases premises pursuant to a bona fide lease, 12 U.S.C. 29

provides a basis to take a more flexible approach to leaseholds that

become OREO.

This option would be available, however, only if the bank in

question acts in good faith in acquiring the lease. The OCC remains

concerned about banks speculating in real estate, and, therefore, would

retain the discretion under the proposed rule to require a bank to take

immediate steps to divest a lease if the OCC determines that the bank

is engaged in speculation. Thus, for instance, if a bank originates

several long-term leases ostensibly for future bank use but soon

thereafter converts the leases to OREO and subleases them to non-

coterminous sublessees, the OCC would have the right under the proposed

rule to deem the divestiture period not to have been suspended. In such

a situation, the bank also risks being cited for acquiring real estate

in violation of 12 U.S.C. 29.

The OCC seeks comment on the appropriateness of permitting the

suspension of the divestiture period in the manner described above.

The proposal makes numerous stylistic changes to Sec. 34.83 that

simplify the current regulation and eliminate unnecessary repetition.

The proposal modifies Sec. 34.83(b) to clarify that disposition efforts

must be ongoing throughout the disposition period. Finally, as

previously noted, the proposal relocates the provision in current

Sec. 34.83 (requiring disposition when prudent judgment dictates) to

proposed Sec. 34.82.

Future Bank Expansion (Proposed Section 34.84)

Proposed Sec. 34.84 creates a new section for the OCC's rule on

future bank expansion that currently appears as part of Sec. 34.83. The

OCC intends for this new section to make the future bank expansion rule

easier to locate.

Appraisal Requirements (Proposed Section 34.85)

Current Sec. 34.84 provides that a national bank should obtain

either an appraisal or evaluation, as appropriate under 12 CFR part 34,

subpart C, when real estate is transferred to OREO or when OREO is

sold. The current rule provides an exception to this requirement if a

national bank already has a valid appraisal or evaluation for the

property in question. Banks are to monitor the value of each parcel of

OREO in a manner consistent with prudent banking practice.

The proposal makes no substantive change to this section. As noted

above in the discussion of the definition section of subpart E, the

proposal removes the term ``transaction value'' and uses ``recorded

investment amount'' in lieu thereof.

Additional Expenditures and Notification (Proposed Section 34.86)

The current rule, which is set out in Sec. 34.85, specifies that

national banks are to notify the OCC at least 30 days prior to

implementing a development or improvement plan for OREO when the

estimated cost of the plan exceeds a specified threshold. The rule

makes exceptions to this notice requirement for re-fitting existing

buildings and for normal repairs. The rule also specifies that national

banks may make ``prudent advances'' to complete a project

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involving OREO if the advances are reasonably calculated to reduce any

shortfall between the parcel's market value and the bank's recorded

investment amount, and if they are not made for the purpose of

speculating in real estate. The remaining provisions of Sec. 34.86

clarify the procedures to be followed under this subsection.

The proposal moves the exceptions to the notice requirements to

proposed Sec. 34.85(b)(1). No change in the substance of the procedures

is proposed, however. The proposal rewords current Sec. 34.85(b)(3)

(proposed new Sec. 34.86(b)(3)) to simplify the procedures for

informing banks of the OCC's decision regarding proposed additional

expenditures.

The OCC also seeks comment on whether the current standard

regarding completion of OREO development or improvement projects

provides sufficient guidance, or whether a different standard would be

appropriate for additional expenditures made in connection with OREO

development or improvement.

Accounting Treatment (Proposed Section 34.87)

The current rule specifies that OREO reporting should conform to

instructions in the Consolidated Report of Condition and Income. The

proposal retains this provision.

Application (Current Section 34.88)

Current Sec. 34.88 provides that subpart E is applicable to all

OREO held by a national bank, including OREO in existence since

September 17, 1993. The proposal removes this provision since it is

unnecessary and potentially confusing.

The following table directs readers to the provision(s) of the

current regulation, if any, upon which the proposed provision is based,

and identifies generally the action taken.

Derivation Table

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

Revised section Original section Comments

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

34.1(a)..................... ........................ Added.

34.1(b)..................... 34.1(b)................. Modified.

34.2(a)..................... 34.4(a)................. Modified.

34.2(b)..................... ........................ Added.

34.2(c)..................... ........................ Added.

34.3........................ 34.1(a)................. Modified.

34.4(a)..................... 34.2(a)................. Modified.

34.4(b)..................... ........................ Added.

34.2(b)................. Removed.

34.3.................... Removed.

34.5........................ 34.4(a)................. Modified.

34.5........................ 34.4(b)................. Modified.

34.20(a).................... 34.5(a)................. Modified.

34.20(b).................... 34.6(b)................. No change.

34.20(c).................... 34.6(b)................. No change.

34.21(a).................... 34.6(a)................. Modified.

34.21(b).................... 34.6(b)................. Modified.

34.22....................... 34.7.................... Modified.

34.8.................... Removed.

34.23....................... 34.9.................... Modified.

34.10................... Removed.

34.24....................... 34.11................... Modified.

34.25....................... 34.12................... Modified.

34.81(a).................... ........................ Added.

34.81(b)................ Removed.

34.81(b).................... 34.81(c)................ No change.

34.81(c).................... 34.81(d)................ No change.

34.81(d).................... 34.81(e)................ No change.

34.81(e).................... 34.81(a)................ Modified.

34.81(f).................... 34.81(f)................ No change.

34.81(g)................ Removed.

34.82(a).................... 34.82(a)................ Modified.

34.82(b).................... 34.82(b)................ Modified.

34.82(c).................... 34.82(c)................ Modified.

34.82(a).................... 34.83(a)................ Modified.

34.83(a)(1)(i).............. 34.83(a)(1)............. Modified.

34.83(a)(1)(ii)............. 34.83(a)(2)............. Modified.

34.83(a)(1)(iii)............ 34.83(a)(3)............. Modified.

34.83(a)(2)................. 34.83(a)(4)............. Modified.

34.83(a)(3)................. 34.83(a)(5)............. Modified.

34.83(a)(4)................. 34.83(a)(6)............. Modified.

34.83(b).................... 34.83(b)................ Modified.

34.84....................... 34.83(c)................ No change.

34.85(a).................... 34.84(a)................ Modified.

34.85(b).................... 34.84(b)................ Modified.

34.85(c).................... 34.84(c)................ Modified.

34.86(a)(1)................. 34.85(a)(2)(i).......... No change.

34.86(a)(2)................. 34.85(a)(2)(ii)......... No change.

34.86(a)(3)................. ........................ Added.

34.86(b).................... 34.85(b)................ Modified.

34.86(b)(1)................. 34.85(a)(1)............. Modified.

[[Page 35359]]

34.87....................... 34.86................... No change.

34.87................... Removed.

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

Regulatory Flexibility Act

It is hereby certified that this regulation will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

regulation will reduce the regulatory burden on national banks,

regardless of size, by simplifying and clarifying current regulatory

requirements.

Executive Order 12866

The OCC has determined that this proposal is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates

Act) requires that an agency prepare a budgetary impact statement

before promulgating a Notice of Proposed Rulemaking (NPRM) likely to

result in a rule that includes a Federal mandate that may result in the

annual expenditure of $100 million or more in any one year by State,

local, and tribal governments, in the aggregate, or by the private

sector. If a budgetary impact statement is required, section 205 of the

Unfunded Mandates Act requires an agency to identify and consider a

reasonable number of alternatives before promulgating an NPRM. The OCC

has determined that the rule will not result in expenditures by State,

local, and tribal governments, or by the private sector, of more than

$100 million in any one year. Accordingly, the OCC has not prepared a

budgetary impact statement or specifically addressed the regulatory

alternatives considered. As discussed in the preamble, the rule will

reduce unnecessary burdens on national banks seeking to engage in real

estate lending.

List of Subjects in 12 CFR Part 34

Mortgages, National banks, Reporting and recordkeeping

requirements.

Authority and Issuance

For the reasons set out in the preamble, the OCC proposes to amend

part 34 of chapter I of title 12 of the Code of Federal Regulations as

set forth below:

PART 34--REAL ESTATE LENDING AND APPRAISALS

1. The authority citation for part 34 is revised to read as

follows:

Authority: 12 U.S.C. 1 et seq., 29, 93a, 371, 1701j-3, 1828(o),

and 3331 et seq.

2. Part 34 is amended by revising subparts A, B, and E to read as

follows:

Subpart A--General

Sec.

34.1 Purpose and scope.

34.2 Definitions.

34.3 General rule.

34.4 Applicability of State law.

34.5 Due-on-sale clauses.

Subpart B--Adjustable-Rate Mortgages

34.20 Definitions.

34.21 General rule.

34.22 Index.

34.23 Prepayment fees.

34.24 Nonfederally chartered commercial banks.

34.25 Transition rule.

Subpart C--Appraisals

* * * * *

Subpart D--Real Estate Lending Standards

* * * * *

Subpart E--Other Real Estate Owned

34.81 Definitions.

34.82 Holding period.

34.83 Disposition of real estate.

34.84 Future bank expansion.

34.85 Appraisal requirements.

34.86 Additional expenditures and notification.

34.87 Accounting treatment.

Subpart A--General

Sec. 34.1 Purpose and scope.

(a) Purpose. The purpose of this part is to set forth standards for

real estate-related lending and associated activities by national

banks.

(b) Scope. For the purposes of 12 U.S.C. 371 and subparts A and B

of this part, loans secured by liens on interests in real estate

include loans made upon the security of condominiums, leaseholds,

cooperatives, forest tracts, land sales contracts, and construction

project loans. Construction project loans are not subject to subparts A

and B, however, if they have a maturity not exceeding 60 months and are

made to finance the construction of either:

(1) A building where there is a valid and binding agreement entered

into by a financially responsible lender or other party to advance the

full amount of the bank's loan upon completion of the building; or

(2) A residential or farm building.

Sec. 34.2 Definitions.

(a) Due-on-sale clause means any clause that gives the lender or

any assignee or transferee of the lender the power to declare the

entire debt payable if all or part of the legal or equitable title or

an equivalent contractual interest in the property securing the loan is

transferred to another person, whether by deed, contract, or otherwise.

(b) State means any State of the United States of America, the

District of Columbia, Puerto Rico, the Virgin Islands, the Northern

Mariana Islands, American Samoa, and Guam.

(c) State law limitations means any State statute, regulation,

ruling, or order of any State agency, or judicial decision regarding a

State statute, regulation, ruling, or order.

Sec. 34.3 General rule.

A national bank may make, arrange, purchase, or sell loans or

extensions of credit, or interests therein, that are secured by liens

on, or interests in, real estate, subject to terms, conditions, and

limitations prescribed by the Comptroller of the Currency by order,

rule, or regulation.

Sec. 34.4 Applicability of State law.

(a) Specific preemption. National banks may make real estate loans

under 12 U.S.C. 371 and Sec. 34.3 without regard to State law

limitations as to:

(1) The amount of a loan in relation to the appraised value of the

real estate;

(2) The schedule for the repayment of principal and interest;

(3) The term to maturity of the loan;

(4) The aggregate amount of funds that may be loaned upon the

security of real estate; and

(5) The covenants and restrictions that must be contained in a

lease to qualify the leasehold as acceptable security for a real estate

loan.

(b) General standards. The OCC will apply recognized principles of

Federal preemption in considering whether State laws apply to other

real estate lending activities of national banks.

Sec. 34.5 Due-on-sale clauses.

A national bank may make or acquire a loan or interest therein,

secured by a

[[Page 35360]]

lien on real property, that includes a due-on-sale clause. Except as

set forth in 12 U.S.C. 1701j-3(d) (which contains a list of

transactions in which due-on-sale clauses may not be enforced), due-on-

sale clauses in loans, whenever originated, shall be valid and

enforceable for transfers of the secured property occurring after

December 8, 1983, notwithstanding any State law limitations to the

contrary. For the purposes of this section, the term real property

includes residential dwellings such as condominium units, cooperative

housing units, and residential manufactured homes, and the term lender

means a government agency or person, including a corporation,

partnership, trust, or association, making a real property loan, or any

assignee or transferee, in whole or in part, of that person or agency.

Subpart B--Adjustable-Rate Mortgages

Sec. 34.20 Definitions.

(a) Adjustable-rate mortgage (ARM) loan means an extension of

credit made to finance or refinance the purchase of, and secured by a

lien on, a one-to-four family dwelling, including a condominium unit,

cooperative housing unit, or residential manufactured home, where the

lender, pursuant to an agreement with the borrower, may adjust the rate

of interest from time to time. This term does not apply to fixed-rate

extensions of credit that are payable at the end of a term that, when

added to any terms for which the bank has promised to renew the loan,

is shorter than the term of the amortization schedule.

(b) Affiliate has the same meaning as in 12 U.S.C. 371c.

(c) Subsidiary has the same meaning as in 12 U.S.C. 371c.

Sec. 34.21 General rule.

(a) Authorization. National banks and their subsidiaries may make,

sell, purchase, participate in, or otherwise deal in ARM loans and

interests therein without regard to any State law limitations on those

activities.

(b) Purchase of loans not in compliance. National banks may

purchase or participate in ARM loans that were not made in accordance

with this part, except that loans purchased, in whole or in part, from

an affiliate or subsidiary must comply with this part.

Sec. 34.22 Index.

If a national bank makes an ARM loan to which 12 CFR 226.19(b)

applies (i.e., the annual percentage rate of a loan may increase after

consummation, the term exceeds one year, and the consumer's principal

dwelling secures the indebtedness), the loan documents must specify an

index to which changes in the interest rate charged will be linked.

This index must be readily available to, and verifiable by, the

borrower and beyond the control of the bank. A national bank may use as

an index any measure of market rates of interest that meets these

requirements. The index may be either single values of the chosen

measure or a moving average of the chosen measure calculated over a

specified period.

Sec. 34.23 Prepayment fees.

A national bank offering or purchasing ARM loans may impose fees

for prepayments notwithstanding any State law prohibitions of, or

limitations on, those fees. For the purpose of this part, prepayments

do not include:

(a) Payments that exceed the required payment amount to avoid or

reduce negative amortization; or

(b) Principal payments, in excess of those necessary to retire the

outstanding debt over the remaining loan term at the then-current

interest rate, that are made in accordance with rules governing the

determination of monthly payments contained in the loan documents.

Sec. 34.24 Nonfederally chartered commercial banks.

Pursuant to 12 U.S.C. 3803(a), nonfederally chartered commercial

banks may make ARM loans in accordance with the provisions of this

subpart.

Sec. 34.25 Transition rule.

If, on October 1, 1988, a national bank had made a loan or binding

commitment to lend under an ARM loan program that complied with the

requirements of 12 CFR part 29 in effect prior to October 1, 1988 (See

12 CFR Parts 1 to 199, revised as of January 1, 1988) but would have

violated any of the provisions of this subpart, the national bank may

continue to administer the loan or binding commitment to lend in

accordance with that loan program. All ARM loans or binding commitments

to make ARM loans that a national bank entered into after October 1,

1988, must comply with all provisions of this subpart.

Subpart C--Appraisals

* * * * *

Subpart D--Real Estate Lending Standards

* * * * *

Subpart E--Other Real Estate Owned

Sec. 34.81 Definitions.

(a) Capital means:

(1) A bank's Tier 1 and Tier 2 capital included in the bank's risk-

based capital under the OCC's Minimum Capital Ratios in appendix A of

12 CFR part 3; plus

(2) The balance of a bank's allowance for loan and lease losses not

included in the bank's Tier 2 capital, for purposes of the calculation

of risk-based capital under 12 CFR part 3.

(b) Debts previously contracted (DPC) real estate means real estate

(including capitalized and operating leases) acquired by a national

bank through any means in full or partial satisfaction of a debt

previously contracted.

(c) Former banking premises means real estate (including

capitalized and operating leases) for which banking use no longer is

contemplated. This includes real estate originally acquired for future

expansion that no longer will be used for expansion or other banking

purposes.

(d) Market value means the value determined in accordance with

subpart C of this part.

(e) Other real estate owned (OREO) means:

(1) DPC real estate; and

(2) Former banking premises.

(f) Recorded investment amount means:

(1) For loans, the recorded loan balance, as determined by

generally accepted accounting principles; and

(2) For former banking premises, the net book value.

Sec. 34.82 Holding period.

(a) Holding period for OREO. A national bank shall dispose of OREO

at any time that prudent judgment dictates, but not later than the end

of the holding period (or an extension thereof) permitted by 12 U.S.C.

29.

(b) Commencement of holding period. The holding period begins on

the date that:

(1) Ownership of the property is originally transferred to a

national bank;

(2) A bank completes relocation from former banking premises to new

banking premises or ceases to use the former banking premises without

relocating; or

(3) A bank decides not to use real estate acquired for future bank

expansion.

(c) Effect of statutory redemption period. For DPC real estate that

is subject to a redemption period imposed under state law, the holding

period begins at the expiration of that redemption period.

[[Page 35361]]

Sec. 34.83 Disposition of real estate.

(a) Disposition. A national bank may comply with its obligation to

dispose of real estate under 12 U.S.C. 29 in the following ways:

(1) With respect to OREO in general:

(i) By entering into a transaction that is a sale under generally

accepted accounting principles;

(ii) By entering into a transaction that involves a loan guaranteed

or insured by the United States government or by an agency of the

United States government or a loan eligible for purchase by a

Federally-sponsored instrumentality that purchases loans; or

(iii) By selling the property pursuant to a land contract or a

contract for deed;

(2) With respect to DPC real estate, by retaining the property for

its own use as bank premises or by transferring it to a subsidiary or

affiliate for use in the business of the subsidiary or affiliate;

(3) With respect to a capitalized or operating lease, by obtaining

an assignment or a coterminous sublease. If a national bank enters into

a sublease that is not coterminous, the period during which the master

lease must be divested will be suspended for the duration of the

sublease, and will begin running again upon termination of the

sublease. Should the OCC determine that a bank has entered into a lease

for the purpose of real estate speculation in violation of 12 U.S.C. 29

and this part, the OCC will take appropriate measures to address the

violation, including requiring the bank to take immediate steps to

divest the lease; and

(4) With respect to a transaction that does not qualify as a

disposition under paragraphs (a) (1) through (3) of this section, by

receiving or accumulating from the purchaser an amount in cash,

principal and interest payments, and private mortgage insurance

totalling at least 10 percent of the sales price, as measured in

accordance with generally accepted accounting principles.

(b) Disposition efforts and documentation. The national bank shall

make diligent and ongoing efforts to dispose of each parcel of OREO,

and shall maintain documentation adequate to reflect those efforts.

Sec. 34.84 Future bank expansion.

A national bank normally should use real estate acquired for future

bank expansion within five years. After holding such real estate for

one year, the bank shall state, by resolution of the board of directors

or an appropriately authorized bank official or subcommittee of the

board, definite plans for its use. The resolution or other official

action must be available for inspection by national bank examiners.

Sec. 34.85 Appraisal requirements.

(a) In general. (1) Upon transfer to OREO, the national bank shall

substantiate the parcel's market value by obtaining either:

(i) An appraisal in accordance with subpart C of this part; or

(ii) An appropriate evaluation when the recorded investment amount

is equal to or less than the threshold amount in subpart C of this

part.

(2) The national bank shall develop a prudent real estate

collateral evaluation policy that allows the bank to monitor the value

of each parcel of OREO in a manner consistent with prudent banking

practice.

(b) Exception. If a national bank obtained, in accordance with

subpart C of this part, a valid appraisal or an appropriate evaluation

in connection with a real estate loan, then the bank need not obtain

another appraisal or evaluation when it acquires ownership of the

property. However, the bank shall continue to follow the prudent real

estate collateral evaluation policy required in paragraph (a)(2) of

this section.

(c) Sales of OREO. A national bank need not obtain a new appraisal

or evaluation when selling OREO if the sale is consummated based on a

valid appraisal or an appropriate evaluation.

Sec. 34.86 Additional expenditures and notification.

(a) Additional expenditures on OREO. For OREO that is a development

or improvement project, a national bank may make advances to complete

the project if the advances:

(1) Are reasonably calculated to reduce any shortfall between the

parcel's market value and the bank's recorded investment amount;

(2) Are not made for the purpose of speculation in real estate; and

(3) Are consistent with safe and sound banking practices.

(b) Notification procedures. (1) A national bank shall notify the

appropriate supervisory office at least 30 days before implementing a

development or improvement plan for OREO when the sum of the plan's

estimated cost, the bank's current recorded investment amount, and any

unpaid prior liens on the property exceeds 10 percent of the bank's

capital. A national bank need notify the OCC under this paragraph only

once. A national bank need not notify the OCC that the bank intends to

re-fit an existing building for new tenants or to make normal repairs

and incur maintenance costs to protect the value of the collateral.

(2) The required notification must demonstrate that the additional

expenditure is consistent with the conditions and limitations in

paragraph (a) of this section.

(3) Unless informed otherwise, the bank may implement the proposed

plan on the thirty-first day (or sooner, if notified by the OCC)

following receipt by the OCC of the bank's notification, subject to any

conditions imposed by the OCC.

Sec. 34.87 Accounting treatment.

OREO, and sales of OREO, are to be accounted for in accordance with

the Instructions for the preparation of the Consolidated Reports of

Condition and Income.

Dated: June 9, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95-16476 Filed 7-6-95; 8:45 am]

BILLING CODE 4810-33-P