Lending and Investment

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 556, 560, 563, 566, 571, 590

[No. 96-87]

RIN 1550-AA94

Lending and Investment

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS or Office) is today

issuing a final rule updating, reorganizing, and substantially

streamlining its lending and investment regulations and policy

statements. These amendments are being made pursuant to the Regulatory

Reinvention Initiative of the Vice President's National Performance

Review (Reinvention Initiative) and section 303 of the Community

Development and Regulatory Improvement Act of 1994 (CDRIA), which

requires OTS and the other federal banking agencies to review,

streamline, and modify regulations and policies to improve efficiency,

reduce unnecessary costs, and remove inconsistent, outmoded, and

duplicative requirements.

EFFECTIVE DATE: October 30, 1996.

FOR FURTHER INFORMATION CONTACT: For general information contact:

William J. Magrini, Senior Project Manager, (202) 906-5744, Supervision

Policy; Ellen J. Sazzman, Counsel (Banking and Finance), (202) 906-

7133; or Deborah Dakin, Assistant Chief Counsel, (202)

[[Page 50952]]

906-6445, Regulations and Legislation Division, Chief Counsel's Office.

For information about preemption, contact Evelyne Bonhomme, Counsel

(Banking and Finance), (202) 906-7052, Regulations and Legislation

Division, Chief Counsel's Office, Office of Thrift Supervision, 1700 G

Street, NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

B. Section-by-Section Analysis

1. Existing Lending and Investment Sections

2. New Part 560--Lending and Investment

III. Disposition of Existing Lending and Investment Regulations

IV. Administrative Procedure Act

V. Paperwork Reduction Act of 1995

VI. Executive Order 12866

VII. Regulatory Flexibility Act Analysis

VIII. Unfunded Mandates Act of 1995

IX. Effective Date

I. Background

In a comprehensive review of its regulations, beginning in the

spring of 1995, pursuant to section 303 of the CDRIA 1 and the

Administration's Reinvention Initiative, OTS identified its lending and

investment regulations as an important area for updating and

streamlining. Lending and investment are key areas of thrift operations

and these regulations had not been comprehensively reviewed in a number

of years. Each lending and investment regulation was reviewed to

determine whether it was current and understandable; could be

eliminated without endangering safety and soundness, diminishing

consumer protection or violating statutory requirements; addressed

subject matter more suited for handbook guidance; and was consistent

with the regulations of the other banking agencies. OTS also sought

industry input regarding staff's initial recommendations through an

industry focus group meeting among seven thrift representatives, an

industry trade association and OTS staff. As a result of this review,

OTS identified a number of ways in which its lending and investment

regulations could be revised to reduce regulatory burden. On January

17, 1996, OTS issued a notice of proposed rulemaking.2

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\1\ 12 U.S.C. 4803(a)(1).

\2\ 61 FR 1162 (January 17, 1996).

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Today's final rule is substantially similar to the January

proposal. Readers will note, however, that the final rule also sets

forth, for ease of reference, the full text of OTS's regulations on

lending limits, real estate lending standards, disclosures on

adjustable-rate mortgages, and the reappraisal of real estate owned

(REO). These regulations have been moved, with only technical and

conforming changes, into new Part 560, Lending and Investment, so that

all lending regulations will be grouped together and more easily

located. The final rule also incorporates technical corrections to fix

cross-references in other regulations to regulations that are being

modified, moved, or removed as part of this final rule.

The final rule reduces the number of lending and investment

regulations from 43 to 23 and results in a net reduction of 11 pages of

CFR text. As it proposed, OTS has removed unnecessary, duplicative, and

outdated lending and investment regulations such as Sec. 563.97 (loans

in excess of 90% of value), Sec. 545.44 (mortgage transactions with the

Federal Home Loan Mortgage Corporation (Freddie Mac)), and Sec. 545.37

(combination loans). OTS has also revised certain regulations to be

less burdensome, e.g., amending the scope of commercial loans under

current Sec. 545.46(b) to exclude commercial loans made by service

corporations from its parent's percentage-of-assets limitations and

removing restrictions on manufactured home loans and investments in

government securities and state housing corporations.

OTS has also converted the detail in some regulations into guidance

to give thrifts more flexibility in addressing safety and soundness

concerns in a particular area, e.g., current Sec. 563.160 (loan

classification) and current Sec. 563.170(c) (loan documentation). OTS's

movement toward a more guidance-oriented approach in the lending and

investment area brings OTS's regulations into greater uniformity with

those of the other federal banking agencies consistent with the

objectives of section 303 of the CDRIA.

OTS's objective in removing the detail from some regulations and

relying on a more general set of regulations and safety and soundness

standards is to allow institutions greater flexibility in their lending

and investment operations. However, OTS still insists that an

association maintain adequate loan documentation, classify its assets,

and establish appropriate valuation allowances consistent with

generally accepted accounting principles and safety and soundness.

OTS is also sensitive to commenters' concerns regarding the

potential for examiners to treat guidelines as binding regulations. OTS

will emphasize the proper interpretation of supervisory guidance in its

examiner training programs to ensure that guidance is not treated in

the same manner as binding regulations.

OTS has also reorganized its lending and investment regulations to

make them easier to locate and use. First, all lending and investment

regulations have been moved to a new Part 560, ``Lending and

Investment,'' that specifies which regulations apply to all savings

associations (such as loan documentation, disclosure, and real estate

lending standards) and which apply only to federal savings associations

(such as specific lending powers.) This part incorporates provisions

currently located in Parts 545 and 563 that are being modified as part

of today's final rule. It also incorporates sections currently located

in Part 563 that are being transferred to Part 560 without change.

These regulations--real estate lending standards, disclosure

requirements for adjustable-rate mortgages, lending limits, and

appraisal requirements for real estate owned--are being moved to Part

560 for the convenience of those using OTS's lending regulations.

OTS has also removed unnecessary restatements of statutory

authority and limitations from various sections of Part 545 and

replaced them with a regulation in chart format that provides easy

reference to the statutory authority for, and limitations on, federal

associations' lending and investment powers.

OTS has added a general lending preemption provision in new Part

560. This provision (discussed more fully in the section-by-section

analysis in Sec. II.B. below) restates long-standing preemption

principles applicable to federal savings associations, as reflected in

earlier regulations, court cases, and numerous legal opinions issued by

OTS and the Federal Home Loan Bank Board (FHLBB), OTS's predecessor

agency. In those opinions, OTS has consistently taken the position

that, with certain narrow exceptions, any state laws that purport to

affect the lending operations of federal savings associations are

preempted. None of the changes implemented today should be construed as

evidencing in any way an intent by OTS to change this long held

position: OTS still intends to occupy the field of lending regulation

for federal savings associations. OTS believes that the new lending

preemption regulation is clearer and should significantly reduce the

instances in which institutions need to request interpretive guidance

from OTS.

In summary, OTS believes that regulations that address safety and

[[Page 50953]]

soundness requirements should generally be limited to those

requirements necessary for OTS to carry out its supervisory

responsibilities. If regulations are unnecessarily detailed and rigid,

regulated entities may find themselves unable to respond to market

innovations. Today's final rule achieves what OTS believes is the right

balance by placing essential safety and soundness requirements in

binding regulations and putting more expansive guidance on sensible

practices in handbooks.

II. Summary of Comments and Description of the Final Rule

A. General Discussion of the Comments

The public comment period on the January 17 proposal closed on

April 16, 1996. Fourteen commenters responded to the notice of proposed

rulemaking. Seven federal savings associations, three national

financial institution trade associations, two law firms, one national

bank, and one state appraiser trade association submitted comments.

All but one of the commenters generally supported OTS efforts to

update, streamline, and reorganize its lending and investment

regulations. Commenters praised OTS's proposed elimination of

unnecessary and burdensome lending and investment restrictions and

indicated that the proposed modifications would be helpful. Commenters

believed that the proposed changes would significantly reduce the

compliance burden on the thrift industry and facilitate greater

operational flexibility and product innovation. Commenters generally

concurred with OTS's view that many of the proposed amendments would

provide savings associations with the flexibility needed to compete

with other financial institutions, particularly commercial banks, to

engage in new lending activities made possible by technological

changes, and to respond more quickly to market innovation. Most

commenters also supported the consolidation of all lending and

investment regulations into a new Part 560.

Commenters also generally supported OTS's proposal to shift some of

its regulations to guidance in the Thrift Activities Handbook

(Handbook). Commenters noted that moving specific loan documentation

requirements currently found in Sec. 563.170, specific loan

classification requirements currently in Sec. 563.160, and restrictions

on investments in commercial paper and corporate debt securities

currently in Sec. 545.75 into the Handbook was appropriate, given that

OTS now has more sophisticated examination and reporting methods and

better trained examiners to monitor thrift activities. Commenters

recognized that OTS regulations traditionally have been more detailed

and less flexible than those applicable to banks. They agreed that

OTS's proposal to move from a somewhat regulation-specific to a more

guidance-oriented approach would give thrifts more flexibility to

address safety and soundness concerns in a manner best suited to each

individual institution. Commenters also believed that shifting OTS

regulations into the Handbook would reduce the costs of regulatory

compliance by increasing a thrift's operational flexibility.

At least one commenter was concerned, however, that the Handbook

could become so detailed that it would stifle product innovation and

management judgment or duplicate provisions that remained in the

regulations. Commenters also expressed the concern that examiners might

view guidelines in the Handbook as binding requirements with no

resulting relief in regulatory burden. To prevent this, commenters

supported OTS's plan to provide examiner training that would emphasize

the intended flexibility of supervisory guidance. Additionally, OTS is

reviewing the text of regulations being repealed today to determine

what portions will provide helpful guidance and what portions should be

disposed of altogether. The process of converting regulatory text to

guidance will be done thoughtfully, recognizing the different roles

performed by regulations and guidance.

A number of commenters raised concerns that the proposed changes on

preemption of state laws affecting lending might be misunderstood as a

narrowing of OTS's traditional preemption position. These concerns are

discussed in detail in the section-by-section analysis below in

reference to Sec. 560.2.

B. Section-by-Section Analysis

1. Existing Lending and Investment Sections

Section 545.31 Election Regarding Classification of Loans or

Investments

OTS proposed retaining in modified form paragraph (a) of

Sec. 545.31, which set forth OTS's general rule that where a loan or

investment meets the requirements of more than one authorizing

provision, the association may elect to place it in any applicable

category. OTS received no comments on this paragraph, which is retained

as proposed, in modified form, as new Sec. 560.31.

OTS also proposed retaining paragraph (b) of Sec. 545.31, which

provided that loan commitments are included in total assets and

accounted for as an investment for purposes of determining applicable

statutory or regulatory investment authority limitations only to the

extent that funds are advanced and not repaid.3 OTS received no

comments on this paragraph, which is retained as proposed as part of

new Sec. 560.31(a).

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\3\ Today's final rule carries forward this longstanding

treatment of loan commitments for purposes of HOLA section 5(c)

investment limitations. OTS notes, however, that contractual

commitments to advance funds continue to be considered ``loans and

extensions of credit'' under the loans-to-one borrower regulation

(existing Sec. 563.93, now Sec. 560.93).

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OTS proposed retaining paragraphs (c) and (d) of Sec. 545.31, which

addressed respectively the treatment of loans sold to third parties for

purposes of calculating percentage-of-assets investment limitations and

treatment of loans secured by assignment of loans. OTS received no

comments on these paragraphs, which are retained in new Sec. 560.31.

One commenter addressing the treatment of commercial loans did suggest

that OTS explicitly state that commercial loans sold or participated

out do not count toward a thrift's 10 percent commercial loan limit.

OTS believes that new Sec. 560.31(b), which provides that loans sold to

a third party are only included in calculating a percentage-of-assets

investment limitation to the extent that they are sold with recourse,

addresses this point. In response to the commenter, OTS is adding the

phrase ``or portions of loans'' to the regulation to clarify that any

portion of participation loans sold without recourse need not be

aggregated when calculating loans subject to any percentage-of-assets

investment limit.

The January proposal indicated that the definitions of ``real

estate loan'' and ``loan commitment'' would be addressed in a later

rulemaking that would review the overall structure of OTS's regulations

and might move OTS regulatory definitions into a common part of the

Code of Federal Regulations (CFR) (the Regulatory Structure

rulemaking). In order to avoid confusion pending that rulemaking,

however, OTS has decided to incorporate these definitions,

substantially unchanged, into a new ``Definitions'' section,

Sec. 560.3. The future Regulatory Structure rulemaking may review these

definitions to determine if they should be modified, removed, or

relocated to another location in the regulations.

[[Page 50954]]

Section 545.32 Real Estate Loans

Consistent with its regulatory streamlining efforts, OTS proposed

deleting paragraph (a) of Sec. 545.32 and moving its statutory

reference into the new lending and investment powers chart. Paragraph

(a) reiterated the Home Owners' Loan Act's (HOLA's) general grant of

authority for federal savings associations to make or invest in

residential (home) or nonresidential real estate loans 4 and

explicitly authorized federal savings associations to ``originate,

invest in, sell, purchase, service, participate or otherwise deal in

(including brokerage and warehousing) [real estate] loans.'' One

commenter did suggest that OTS clarify that deletion of paragraph (a)

is not intended to eliminate any of the activities in which federal

savings associations may engage with respect to real estate loans. OTS

is deleting paragraph (a) as proposed. However, OTS wishes to emphasize

that it does not intend any change in federal thrifts' authority to

conduct these activities. OTS is moving the statutory reference in

paragraph (a) into the new lending and investment powers chart at

Sec. 560.30.

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\4\ 12 U.S.C. 1464(c)(1)(B), (c)(2)(B).

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OTS also proposed to delete paragraphs (b)(1) and (b)(2) of

Sec. 545.32, because these sections duplicated more comprehensive

interagency-developed real estate lending standards and appraisal

standards set forth at 12 CFR 563.100-563.101 and 12 CFR Part 564,

respectively. OTS received no comments on these paragraphs and is

deleting them as proposed. As part of today's rulemaking, the real

estate lending standards are being moved into Part 560 as new

Sec. 560.100-560.101.

OTS also proposed deleting paragraphs (b) (3), (4), (5), and (6) of

Sec. 545.32. These paragraphs discussed federal savings associations'

authority to adjust the terms of real estate loans, to amortize real

estate loans, to charge certain initial fees for real estate loans, and

to establish escrow accounts. OTS believes that the authority to

adjust, amortize, establish escrow accounts for, and charge fees for

loans properly falls within the scope of a federal savings

association's statutory authority to originate loans pursuant to the

HOLA,5 and these particular aspects of lending do not need to be

specifically identified or restricted in the CFR. Although commenters

generally supported elimination of these paragraphs, one commenter

raised the concern that if OTS removed specific regulatory language

referring to the authority of federal thrifts to adjust terms,

amortize, charge certain fees, and establish escrow accounts for real

estate loans, states may challenge whether OTS continues to occupy the

field of federal thrift lending regulation and may attempt to impose

their own lending regulations on thrifts. However, by removing these

paragraphs, OTS does not intend any narrowing of federal thrifts'

authority to conduct these activities, but rather to enhance

associations' flexibility in lending. Each of these areas is

specifically cited in the new Sec. 560.2 as an area in which state law

is preempted. Whether OTS continues to have a specific regulation or

chooses to remove a federal regulation to streamline its regulations

and reduce regulatory burden, the agency still intends to occupy the

entire field of lending regulation for federal savings associations.

Accordingly, OTS is deleting paragraphs (b) (3), (4), (5), and (6) as

proposed.

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\5\ 12 U.S.C. 1464(c)(1)(B), (c)(2)(B).

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Paragraph (c) of Sec. 545.32 defined the phrase ``loan made on the

security of real estate.'' In its proposal OTS sought comment on

whether the current definition of secured real estate loan has provided

adequate guidance for savings associations. One commenter indicated

that the current definition does not adequately deal with situations

involving state single action rules. OTS will consider this comment

when the agency proceeds with the definitional portion of the

Regulatory Structure rulemaking. In the interim, this definition is

being included in Sec. 560.3, ``Definitions.''

OTS proposed deleting paragraph (d) of Sec. 545.32, which addressed

loan-to-value ratios, because it duplicates more comprehensive

interagency real estate lending standards. Commenters supported

elimination of this paragraph and OTS is deleting paragraph (d) as

proposed.

Section 545.33 Home Loans

In the proposal, OTS indicated that it was considering moving the

introductory paragraph of Sec. 545.33 to a common definitional section

of the regulations as part of the Regulatory Structure Proposal. OTS

received no comments on this language, which generally describes home

loans and will retain this paragraph as part of Sec. 560.3

``Definitions,'' until its reconsideration during the definitional

rulemaking.

OTS proposed to delete paragraph (a) of Sec. 545.33. This section

described the authority of federal savings associations to amortize

home loans. One commenter did raise a concern that deletion of this

section could throw into question federal preemption of state laws

prohibiting balloon payments. As discussed under Sec. 545.32(b) (3)-

(6), the authority to amortize home loans properly falls within the

scope of savings associations' statutory authority to originate loans

and does not need to be specifically identified in the CFR. New

Sec. 560.2 specifically confirms that states cannot regulate how

federal savings associations amortize their loans. Accordingly, OTS is

deleting paragraph (a) as proposed.

OTS proposed to delete paragraph (b), which addressed loan-to-value

ratios (LTV) for home loans. Commenters agreed with OTS's view that the

interagency real estate lending standards address the same issues in a

more comprehensive and current manner and supported deletion of this

paragraph. OTS is deleting paragraph (b) as proposed.

One commenter did contend that some language in paragraph (b)

should be retained to make clear that home loans that comply at

origination with the LTV ratios set forth in the interagency real

estate lending standards but thereafter exceed them due to negative

amortization should not require special recordkeeping or reporting to a

thrift's board of directors. OTS has no requirement in either the real

estate lending guidelines or its regulations that such loans be

reported to a thrift's board and so removing this paragraph does not

impose any new reporting requirements on thrifts.

OTS proposed to delete paragraph (c), which set forth limitations

on the adjustments that may be made to the terms of residential

mortgages. It requires that adjustments to rates, payments, or loan

balances be tied to a national or regional index beyond the control of

the savings association or a formula or schedule set forth in the loan

contract. These limitations on federal savings associations are

generally much more restrictive than those applicable to state-

chartered lenders offering mortgages and have not been revised since

1983, when adjustable rate mortgage (ARM) loans were still relatively

new in the marketplace. Federal savings associations must also comply

with the notice and disclosure requirements of current Sec. 563.99.

OTS proposed to delete paragraph (c), including the external index

requirement, to give thrifts and consumers greater flexibility in

structuring ARM transactions. Most commenters supported the proposed

deletion, agreeing that it would give thrifts additional flexibility to

compete with other mortgage lenders not subject to similar

requirements. These commenters also agreed that the competitive market

place makes such

[[Page 50955]]

requirements unnecessary given the wide variety of possible sources for

home mortgage loans. Commenters also confirmed that consumers have

become familiar with ARM loans and receive detailed disclosures when

requesting such loans. The majority of commenters addressing the issue

concluded that as long as information about adjustments is clearly

disclosed to purchasers, the terms of the ARM loan should be a matter

of contract between the savings association and the purchaser.6

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\6\ One commenter suggested removing all caps on ARM loans. The

OTS notes that 12 U.S.C. 3806, which applies to all creditors,

including savings associations, requires that all ARM loans, as

defined in that section, include limitations on the maximum interest

rate applicable during the loan term.

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One commenter, a bank trade association, opposed the removal of

this requirement, arguing that it would be inconsistent with the Office

of the Comptroller's decision to retain such a requirement for national

banks.7 Another commenter, a trade association representing

savings associations and banks, suggested further study before removing

the requirement. Both commenters suggested that consumers might be

better protected by retaining this requirement. The second commenter

emphasized the importance of adequate disclosure.

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\7\ See 61 FR 11294, 11297 (March 20, 1996).

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Upon review of the comments received, OTS has decided to adopt a

new section, Sec. 560.35, ``Adjustments to Home Loans,'' requiring that

a federal savings association generally use a national or regional

index for ARM loans. Examples of such acceptable indices include the

Eleventh District's Cost of Funds Index and indices tied to one-year

Treasury bills. OTS has also decided, however, to give an association

the flexibility to use alternative indices after notifying OTS. The

notice should address how indices will be derived, how the association

will ensure the indices' availability and verifiability, and how the

indices will be disclosed to borrowers. Additionally, the notice should

outline the internal controls and processes that the association will

put in place to administer and monitor such indices. Once OTS has

reviewed and not objected to an institution's internal procedures for

the use of alternative indices, subsequent notices need only address

how new indices are derived. If OTS does not object within 30 days, the

association may proceed with using alternative indices. Use of

alternative indices will also be reviewed as part of the agency's

safety and soundness and compliance examinations.

The foregoing changes do not affect the requirement that any index

used must be readily available, independently verifiable, and

adequately disclosed in accordance with the Truth in Lending Act, any

applicable regulations, and new Sec. 560.210, which replaces existing

Sec. 563.99. Associations still may use one or more indices or a

formula or schedule set forth in the loan contract to adjust the

interest rate, payments, or loan balance.

OTS believes that this change will allow institutions potentially

greater flexibility in structuring and managing their loan portfolios

while allowing the agency the opportunity to review an association's

proposed ARM loan program, structure, and safeguards to determine

whether they would result in a suitable index to use for ARM

transactions. Consumers will continue to have the protection of a

verifiable and disclosed index and of OTS review. In response to the

commenters who noted that the Office of the Comptroller of the Currency

(OCC) has recently taken a different position on this issue, OTS notes

that the external indices issue is more important for federal thrifts

than it is for national banks. Unlike banks, thrifts are subject to the

Qualified Thrift Lender (QTL) rule. That statutorily mandated rule, 12

CFR 563.50-563.52, requires thrifts to hold an average of 65% or more

of their assets in residential mortgage loans. Because national banks

have no such requirement, they often originate such loans, but then

sell them in the secondary mortgage market. They rarely would have the

occasion to develop an alternative index because the secondary market

usually requires the use of an outside index.

Because thrifts must hold the majority of their assets in

residential mortgages, they are more vulnerable to interest rate risk

than national banks. Enabling thrifts to tie their yields on 1-4 family

residential loans with the rates they pay on deposits would help

thrifts to manage this risk and offset the competitive disadvantage

resulting from the QTL rule.

No commenters addressed the other requirements of Sec. 545.33(c)

(4)-(5), which are being removed as proposed.

OTS proposed to delete paragraph (d) of Sec. 545.33, which

addressed loans on cooperatives. Commenters agreed with OTS's view that

the interagency real estate lending standards address the same issues

in a more comprehensive and flexible manner and that this paragraph was

duplicative of those lending standards. OTS is deleting paragraph (d)

as proposed.

OTS proposed deleting paragraph (e) of Sec. 545.33, which addressed

loans to facilitate trade-in or exchange, because the interagency real

estate lending standards cover the same issues in a more comprehensive

and flexible manner. Commenters supported deletion of this paragraph.

OTS is deleting paragraph (e) as proposed.

Paragraph (f) of Sec. 545.33 specifies which OTS regulations must

be followed by state savings associations and certain other state

lenders who elect to make loans under the Alternative Mortgage Parity

Act.8 The Alternative Mortgage Parity Act preempts state laws that

might otherwise limit certain state creditors' ability to offer

alternative mortgage instruments if they comply with the OTS

regulations identified in this paragraph. OTS proposed moving paragraph

(f) in order to make it more accessible and easier to locate and to

clarify that all OTS lending regulations apply to loans originated

under the Parity Act. OTS received no comments on this proposed change.

Accordingly, OTS is moving the provisions of this paragraph, as

modified to reflect changes elsewhere in today's final rule, into new

Sec. 560.220, as part of a subpart specifically dealing with

alternative mortgages. The title of that subpart and Sec. 560.220, will

highlight the content, making it easier for those unfamiliar with OTS's

regulations to locate.

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\8\ The Alternative Mortgage Parity Act, Pub. L. 97-320, Title

VII (Parity Act), 12 U.S.C. 3801 et seq., authorizes certain housing

creditors to make alternative mortgage transactions notwithstanding

any contrary state law under certain conditions. Housing creditors

that rely on the Parity Act and are not commercial banks or credit

unions must comply with applicable OTS lending regulations.

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Section 545.34 Limitations for Home Loans Secured by Borrower-Occupied

Property

OTS proposed removing paragraph (a) of Sec. 545.34 and

incorporating its provisions into the new consolidated lending

preemption regulation at Sec. 560.2. Paragraph (a) confirmed that

federal savings associations may include due-on-sale clauses in loan

instruments to the extent authorized under federal statutes and

regulations regardless of state prohibitions of due-on-sale

clauses.9 OTS received no comments on this proposed change, which

is adopted as proposed.

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\9\ 12 U.S.C. 1701j-3; 12 CFR Part 591.

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Paragraphs (b) and (c) permitted federal savings associations to

include provisions imposing late fees and prepayment penalties in loan

contracts on home loans subject to certain conditions. OTS proposed

removing these paragraphs and incorporating their limitations into new

Sec. 560.34. The three commenters who discussed these

[[Page 50956]]

paragraphs supported this reorganization. Upon further review, however,

OTS believes that separating these two paragraphs into two separate,

more specifically identified, regulations will make them easier for

users to locate. New Sec. 560.33 will cover late charges and new

Sec. 560.34 will address prepayment penalties.

Two commenters also suggested that OTS reduce or eliminate the

required fifteen-day grace period for borrowers before imposition of a

late charge. The commenters noted that only OTS, among federal bank

regulators, has such a lengthy grace period, and suggested at least

reducing the period to ten days to put savings associations on a more

level playing field with other mortgage lenders. OTS believes that the

fifteen-day grace period does not impose a hardship on institutions.

OTS is retaining the fifteen-day grace period in the final rule.

One commenter also suggested that OTS delete the reference to

``monthly'' billing in Sec. 545.34(b) (now incorporated into

Sec. 560.33), inasmuch as some creditors offer bi-weekly or other

mortgage plans. OTS is adopting this suggestion and deleting the word

``monthly'' from the final rule in order to afford institutions and

consumers more flexibility in structuring payment plans.

Section 545.35 Other Real Estate Loans

Section 545.35 set forth federal savings associations' authority to

lend and invest in nonresidential real estate subject to certain

statutory and regulatory limitations. Paragraph (a) required compliance

with real estate lending standards. Paragraph (b) reiterated the

statutory limit of 400 percent of an association's total capital

imposed on investments in nonresidential real estate. Pursuant to its

streamlining efforts, OTS proposed to delete this section, incorporate

the reference to federal savings associations' statutory authority to

invest in nonresidential real estate into the lending and investment

powers chart, and place related limitations into an accompanying

endnote. OTS received no comments on Sec. 545.35 and is making the

changes proposed.

Section 545.36 Loans To Acquire or To Improve Real Estate

OTS proposed to delete Sec. 545.36, which set forth regulatory

investment limitations pertaining to acquisition, development, and

construction loans. The one commenter addressing this proposed change

supported OTS's view that the interagency real estate lending standards

and interagency safety and soundness standards dealt with the same

issues in a more comprehensive and current manner. Accordingly, OTS is

deleting this section as proposed. OTS intends to incorporate

paragraphs (c) and (d) of Sec. 545.36 into the Handbook to provide

guidance beyond that contained in the interagency real estate lending

standards to thrifts making development loans.

Section 545.37 Combination Loans

OTS is deleting Sec. 545.37 as proposed. This section allowed

thrifts to combine sequentially different types of loans authorized by

Part 545 and made at different stages of a project, with the term of

each loan beginning at the end of the previous loan. This provision was

useful when OTS regulations limited the number of years for which

certain types of loans could be made. OTS removed those restrictions in

1992. OTS believes this section is therefore no longer necessary. The

sole commenter addressing this section supported its deletion.

Section 545.38 Insured and Guaranteed Loans

Paragraphs (a) and (b) of Sec. 545.38 authorized federal thrifts to

make insured and guaranteed residential real estate loans,

notwithstanding other provisions of Part 545 but subject to certain

limitations. OTS proposed deleting these paragraphs as unnecessary.

Federal savings associations may make an unlimited percentage of

residential real estate loans, subject to the interagency real estate

lending standards. Other regulatory restrictions have already been

removed or are being deleted from Part 545 today. OTS received no

comments on these proposed deletions, which are adopted as proposed.

Paragraph (c) addressed nonresidential real estate loans that are

guaranteed by the Economic Development Administration, the Farmers Home

Administration, or the Small Business Administration. OTS proposed

deleting this paragraph and incorporating the HOLA's statutory grant of

authority for federal thrifts to make guaranteed nonresidential real

estate loans in the endnotes to the lending and investment powers

chart. The sole commenter addressing Sec. 545.38 supported deletion of

the section as unnecessary and duplicative of the interagency real

estate lending standards.

Accordingly, OTS is deleting this paragraph as proposed and

incorporating the statutory reference into the lending and investment

powers chart.

Section 545.39 Loans Guaranteed Under the Foreign Assistance Act of

1961

OTS proposed deleting Sec. 545.39, which reiterated the HOLA's

grant of authority 10 to federal thrifts to make loans guaranteed

under the Foreign Assistance Act,11 and incorporating its

provisions into the lending and investment powers chart. OTS received

no comments on this section. OTS is incorporating the provisions of

Sec. 545.39 into the lending and investment powers chart and endnotes

and new Sec. 560.43.

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\10\ 12 U.S.C. 1464(c)(4)(C).

\11\ 22 U.S.C. 2181, 2184.

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Section 545.40 Loans on Low-Rent Housing

OTS proposed to delete Sec. 545.40, which exempted loans made

pursuant to certain low rent housing programs of the Department of

Housing and Urban Development from regulatory maximum loan term and

loan-to-value limitations. OTS believes that this section is

unnecessary because the loan term and loan-to-value ratio limitations

referred to in the section have already been or are now being removed

from OTS regulations. The one commenter who addressed this section

supported its elimination. Accordingly, OTS is deleting this section as

proposed. By deleting this section, OTS does not intend to limit

federal thrifts' authority to make low-rent housing loans pursuant to

applicable statutory and regulatory provisions, but rather to remove

obsolete restrictions that only serve to confuse those using OTS's

regulations.

Section 545.41 Community Development Loans and Investments

OTS proposed to delete Sec. 545.41 because it simply reiterated the

HOLA's grant of authority to federal savings associations to make

direct community development loans and investments, subject to an

overall five percent of assets limitation.12 OTS received no

comments on this proposed change. OTS is deleting this section as

proposed and incorporating the statutory authority reference into the

lending and investment powers chart.

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\12\ 12 U.S.C. 1464(c)(3)(B).

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Section 545.42 Home Improvement Loans

Section 545.42 reiterated the HOLA's grant of authority to federal

thrifts to make home improvement loans subject to prudent lending

standards.13 OTS

[[Page 50957]]

proposed deleting this section and incorporating the reference to

federal thrifts' statutory authority to make home improvement loans

into the lending and investment powers chart. OTS received no comments

on Sec. 545.42 and is making the proposed changes.

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\13\ 12 U.S.C. 1464(c)(1)(J).

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

Section 545.43 State Housing Corporation Investment-Insured

OTS proposed to delete Sec. 545.43 because it reiterated the HOLA's

grant of authority to federal thrifts to invest in state housing

corporation loans 14 subject to a regulatory 30 percent of assets

limitation. This section also duplicates restrictions in current

Sec. 563.95, which regulates investment in state housing corporations

for all savings associations.15 OTS received no comments on this

section. OTS is deleting Sec. 545.43, as proposed, including the 30

percent of assets limitation. The reference to the HOLA's grant of

authority to federal thrifts to invest in state housing corporation

loans has been incorporated into the lending and investment powers

chart.

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\14\ 12 U.S.C. 1464(c)(1)(P).

\15\ Section 563.95, as discussed later, is being modified and

moved into new Part 560.

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Section 545.44 Mortgage Transactions With the Federal Home Loan

Mortgage Corporation

Section 545.44 provided, in accordance with HOLA section 5(c)(1)(E)

and the Federal Home Loan Mortgage Corporation Act, that federal

thrifts may enter into or perform mortgage transactions with Freddie

Mac. It did not impose any additional regulatory restrictions. OTS

proposed to delete this section as an unnecessary reiteration of

statutory authority and of savings associations' inherent power to

enter into business contracts. The sole commenter addressing

Sec. 545.44 supported its deletion as unnecessary. OTS is deleting

Sec. 545.44 as proposed. HOLA section 5(c)(1)(E) is now referenced in

the lending and investment powers chart.

Section 545.45 Manufactured Home Financing

OTS proposed to delete paragraph (a) of Sec. 545.45, which

contained definitions relating to manufactured home financing. The

proposed deletion of other paragraphs of this section made these

definitions unnecessary. OTS received no comments on this paragraph and

is deleting it as proposed.

OTS proposed to delete paragraph (b) of Sec. 545.45, which

reiterated the HOLA's grant of authority to federal thrifts to invest

in or make manufactured home loans.16 The two commenters

addressing this section supported these streamlining efforts, and OTS

is deleting paragraph (b) as proposed. OTS is incorporating the

statutory reference to federal thrifts' authority to invest in

manufactured home loans into the lending and investment powers chart.

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\16\ 12 U.S.C. 1464(c)(1)(J).

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

Paragraphs (c) and (d) of Sec. 545.45 addressed inventory financing

and retail financing for manufactured home chattel paper and

established term and loan-to-value limits for such loans. OTS proposed

deleting these paragraphs because they describe underwriting standards

for manufactured homes that are more suitable as guidance. The two

commenters addressing these paragraphs supported removing loan-to-value

and maximum term limits on manufactured homes to eliminate

micromanagement of the lending process. Accordingly, OTS is deleting

these paragraphs as proposed.

However, the commenters disagreed as to the extent to which these

paragraphs should be transferred to the Handbook. One commenter

suggested that underwriting guidance in the Handbook pay particular

attention to the unique risk characteristics associated with

manufactured home financing. The second commenter believed that

limitations in the Handbook would not necessarily produce better

manufactured home loan performance but rather would only limit credit

availability for low and medium income borrowers and leave thrifts at a

competitive disadvantage with regard to other types of institutions.

This commenter contended that a prudent underwriting program that

balanced creditworthiness and payment capacity of a borrower along with

product parameters, pricing differentials, and reserve requirements

provided a better means for managing risk than a program containing

strict limits on particular factors.17 OTS will review these

suggestions prior to issuing any guidance regarding mobile home

lending.

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\17\ This commenter also suggested expanding the definition of

residential property in existing Sec. 563.101 (now Sec. 560.101) of

the interagency real estate lending standards to include

manufactured homes placed on real property regardless of whether the

home is permanently affixed as determined by state law. The OTS

believes that modifying the substance of that section, which was

developed on an interagency basis, is not within the scope of this

rulemaking and defers consideration of this suggestion until a later

date.

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OTS proposed to delete paragraph (e) of Sec. 545.45, which provided

that a federal thrift's sale of manufactured home chattel paper must be

sold without recourse. Since that paragraph was first adopted, OTS has

adopted a capital regulation that requires thrifts to hold appropriate

levels of capital against all sales with recourse.18 OTS received

no comments on this proposed change and is deleting paragraph (e) as

proposed.

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\18\ See 12 CFR 567.1(kk), 567.6(a)(2)(i)(C).

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Section 545.46 Commercial Loans

OTS proposed to delete paragraph (a) of Sec. 545.46, which simply

reiterated the HOLA's grant of authority to federal thrifts to invest

in and make commercial loans not to exceed 10 percent of their

assets.19 OTS also proposed to incorporate the authority and

statutory limitation in paragraph (a) into the lending and investment

powers chart. Commenters generally supported these proposed changes,

which are adopted as proposed.

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

\19\ 12 U.S.C. 1464(c)(2)(A). The language in Sec. 545.46(a)

regarding pre-1984 investment limits is obsolete and has been

deleted.

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

OTS also proposed deleting paragraph (b), which defined commercial

loans to include commercial overdrafts related to demand accounts and

commercial unsecured loans by service corporations. OTS proposed to

incorporate paragraph (b)(1) (commercial overdrafts) into an endnote to

the lending and investment powers chart. OTS received no comments on

this proposed change, which is adopted as proposed.

OTS also proposed to remove the requirement that commercial loans

made at the service corporation level be aggregated with the 10 percent

of assets limit on commercial lending. Commenters generally agreed with

OTS's view that the statutory maximum aggregate 3 percent of assets

that federal savings associations may invest in service corporations

20 generally provides a sufficient safeguard for savings

associations investing in service corporations engaged in commercial

lending as it does for all other types of activities conducted in

service corporations. Under the current regulations, only a service

corporation's commercial loans are aggregated with its parent's loans

for purposes of statutory percentage-of-assets limitations on general

investment authority, while other service corporation investments are

not.21 Most commenters agreed with

[[Page 50958]]

OTS that such a distinction is not warranted and that such loans should

no longer be subject to the 10 percent of assets limitation on

commercial lending set forth in HOLA section 5(c)(2)(A).

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

\20\ 12 U.S.C. 1464(c)(4)(B).

\21\ 12 CFR 545.74(c)(1)(1996). For purposes of some other

regulations, such as loans to one borrower (12 CFR 563.93, to be

recodified at 12 CFR 560.93) and transactions with affiliates (12

CFR 563.41 and 563.42), investments at the service corporation level

are aggregated with investments of the parent savings association.

This final rule does not affect those regulatory provisions.

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

These commenters also agreed that by removing this aggregation

requirement federal thrifts will be afforded modest additional

flexibility to expand their commercial lending. This incremental

enhancement of thrifts' lending authority will benefit both thrifts and

their customers, without endangering safety and soundness or thrifts'

primary mission of providing mortgage lending.

One bank trade association commenter did express a concern that

removing the requirement to aggregate commercial loans made by a

service corporation with its parent's loans might circumvent the HOLA

ceiling on commercial loans. However, the HOLA does not require that a

service corporation's commercial loans be aggregated with its parent's

loans for purposes of statutory percentage-of-assets limitations on

general investment authority. Service corporations do not fall within

the definition of savings association for purposes of applying HOLA's

investments limits. As noted above, the HOLA imposes an aggregate limit

on investments in service corporations of 3 percent of assets, but does

not impose sublimits on service corporation investments. The FHLBB's

original inclusion of a service corporation's commercial loans within

its parent savings association's commercial lending authority was done

in 1983 when commercial lending was a new activity for savings

associations. Given the levels of capital now required for such loans

and OTS's experience in regulating this activity, OTS believes that

allowing this modest increase in commercial lending authority is

appropriate. OTS therefore will follow the plain statutory language of

HOLA sections 5(c)(2)(A) and 5(c)(4)(B), which do not require

aggregation of a service corporation's commercial loans with those made

by its parent.

Section 545.47 Overdraft Loans

OTS proposed to delete Sec. 545.47, because it simply reiterated

the HOLA's grant of authority to federal thrifts to make loans

specifically related to transaction accounts, including overdraft

loans. OTS also proposed to incorporate the reference to federal

thrifts' statutory authority to make overdraft loans into the lending

and investment powers chart accompanied by an endnote specifying that

commercial overdraft loans formerly covered by Sec. 545.46 remain

subject to the same commercial lending limits. OTS received no comment

on these proposed changes, which are adopted as proposed.

Section 545.48 Letters of Credit

Section 545.48 authorized federal thrifts to issue letters of

credit in conformance with the Uniform Commercial Code or the Uniform

Customs and Practices for Documentary Credits and subject to certain

general standards. As already discussed, the HOLA expressly authorizes

federal thrifts to invest in or make loans, and this express

authorization to make loans necessarily includes within it the

authority to make loan commitments and issue letters of credit. For

ease of reference, OTS proposed to reference the authority of federal

thrifts to issue letters of credit in the lending and investment powers

chart. OTS also proposed to incorporate the substance of Sec. 545.48(a)

into new Sec. 560.120 as prudent standards for the issuance of letters

of credit. OTS solicited comment on whether transferring the substance

of Sec. 545.48(a) to the new Part 560 would provide needed uniform

standards for all savings associations.

The two commenters to address this section both supported OTS's

efforts to update Sec. 545.48 to reflect current market standards and

industry usage for letters of credit. Both commenters also supported

OTS's adoption of regulatory requirements for the issuance of letters

of credit for all savings associations in order to provide uniform

standards for all thrifts. While applauding OTS's efforts to modernize

its letters of credit regulation, however, one commenter contended that

the specific language of the proposed rule was not crafted to address

some of the regulatory issues raised by contemporary letters of credit

practice. This commenter suggested that OTS review the most recent

interpretive ruling on letters of credit issued by the OCC, which was

published after OTS issued its notice of proposed rulemaking.22

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\22\ See Interpretive Ruling: Independent Undertakings To Pay

Against Documents (12 CFR 7.1016) (61 FR 4849, 4852-3, 4865,

February 9, 1996, effective April 1, 1996).

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

Having reviewed the OCC's interpretive ruling, OTS has determined

to substantially adopt the approach taken by the OCC with respect to

the regulation of letters of credit. OTS believes that the OCC ruling

incorporates many of the modern market standards and industry usage

applicable to letters of credit. Furthermore, by substantially adopting

the OCC's approach, OTS is acting consistent with Section 303 of the

CDRIA, which encourages the federal banking agencies to move towards

greater uniformity in regulations on common supervisory issues.

In its February 9, 1996 ruling, the OCC treats letters of credit

and independent undertakings as equivalent transactions for regulatory

purposes. The OCC uses the term ``independent undertakings'' to

encompass letters of credit as well as all such unilateral commitments

under which a bank's obligation to honor its commitment is dependent

solely on the proper presentation of specified documents regardless of

extrinsic factors (except fraud, forgery, or an overriding public

policy issue).23 As the OCC points out, the term ``independent

undertakings'' is used by the United Nations Commission on

International Trade Law to cover a broad array of transactions

including commercial letters of credit, standby letters of credit, and

other undertakings that are functionally identical or equivalent to

letters of credit.24

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\23\ See Notice of Proposed Rulemaking: Interpretive Rulings, 60

FR 11924, 11926 (March 3, 1995).

\24\ 61 FR at 4852.

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The new Sec. 560.120 states that a thrift may issue and commit to

issue letters of credit. The new section also allows thrifts to issue

and commit to other independent undertakings approved by OTS. OTS also

believes that, in the thrift context, the broad scope of the term

``independent undertaking'' and its recent evolution require closer

supervision of such transactions when they fall outside the more

traditional activities generally known as letters of credit. National

banks have traditionally been more involved in international banking

transactions and may be more familiar than most thrifts with

nontraditional activities that fall within the term ``independent

undertakings''. OTS believes that allowing thrifts to issue independent

undertakings of a type specifically approved by OTS strikes the

appropriate balance between giving thrifts greater flexibility to

potentially engage in new types of transactions while at the same time

ensuring that thrifts have properly evaluated the risks posed by a

particular transaction consistent with prudent banking practice. OTS

anticipates that its approval may take the form of legal opinions,

general guidance, or case-by-case approvals, depending upon how the

undertakings are presented to the agency.

[[Page 50959]]

Paragraph (a) of the new Sec. 560.120 explains that a savings

association may issue and commit to issue a letter of credit or other

approved independent undertaking. Paragraph (a) also provides a non-

exclusive list of sample laws and rules of practice 25 and

explains that non-documentary conditions on the thrift's undertaking

are not relevant to the thrift's obligation to honor its commitment.

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\25\ See footnote to the new Sec. 560.120(a).

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Paragraph (b) of the final rule requires that thrifts evaluate

certain safety and soundness factors when issuing letters of credit and

approved independent undertakings. Paragraph (b) also requires that

thrifts possess the operational expertise commensurate with the

sophistication of their letter of credit and independent undertaking

activities. The final rule also permits a thrift to issue a letter of

credit or other approved undertaking without an express expiration

date, provided that the thrift retains the right not to renew the

transaction and to cancel the transaction upon notice to the parties.

OTS also proposed to delete paragraph (b) of Sec. 545.48, which

addressed the treatment of funds advanced under a letter of credit

without compensation from the account party, because it duplicates

Sec. 545.31(b), which OTS proposes to incorporate into Sec. 560.31(a).

OTS received no comment on this proposed deletion, which is adopted as

proposed.

Because issuing a letter of credit is not in and of itself a loan

or investment, the reference to letters of credit has been removed from

the lending and investment powers chart. When a savings association

advances funds under the terms of a letter of credit or independent

undertaking, those funds will then constitute a loan and will be

counted toward the appropriate HOLA section 5(c) investment category.

Section 545.49 Loans on Securities

OTS proposed to delete Sec. 545.49, which simply reiterated the

HOLA's grant of authority to federal thrifts to invest in loans to

financial institutions and brokers secured by obligations backed by the

United States government or certain agencies or instrumentalities

thereof.26 OTS also proposed to incorporate a reference to

thrifts' statutory authority to invest in such loans secured by U.S.

government or agency-backed obligations into the lending and investment

powers chart. The agency also proposed to remove as unnecessary the

introductory paragraph limiting permissible investments in agencies or

instrumentalities of the United States to those entities named in

Sec. 566.1(g)(3). OTS received no comments on this section and

accordingly deletes this section as proposed.

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\26\ 12 U.S.C. 1464(c)(1)(L).

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Section 545.50 Consumer Loans

Section 545.50 reiterates the HOLA's grant of authority to federal

thrifts to make consumer loans subject to a 35 percent of assets

limit.27 For purposes of determining compliance with this limit,

federal thrifts must aggregate their consumer loans with any

investments in corporate debt securities and commercial paper.28

In other words, a federal thrift's aggregate investments in consumer

loans, corporate debt securities, and commercial paper may not exceed

35 percent of its assets.

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\27\ 12 U.S.C. 1464(c)(2)(D).

\28\ Id.

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OTS proposed to delete paragraph (a) of Sec. 545.50 and to

incorporate the reference to federal thrifts' statutory authority to

make consumer loans, subject to the statutory asset limit, into the

lending and investment powers chart. OTS also proposed to include an

endnote incorporating the provisions of paragraph (c) of Sec. 545.50,

which addressed loans to dealers in consumer goods. Commenters were

generally supportive of these changes and OTS is making the proposed

changes.

OTS also solicited comment on how the definition of consumer loan

set forth in paragraph (b) of Sec. 545.50 could be clarified and

coordinated with other OTS regulations that address consumer credit.

Several commenters pointed out the inconsistency between paragraph

(b)'s definition of ``consumer loan,'' which expressly excludes credit

cards, and Sec. 561.12, which defines ``consumer credit'' to include

credit cards. OTS recognizes the ambiguity that arises from the use of

these similar, but not identical, terms in different regulatory

provisions. For purposes of HOLA investment limits and Part 560, the

term ``consumer loan'' will continue to be defined in the Definitions

section, new Sec. 560.3, as it has been in Sec. 545.50. As part of a

later Regulatory Structure rulemaking, OTS will consider how best to

minimize or eliminate the potential for confusion presented by

differing definitions of similar terms.

Under current OTS regulations, credit card loans are not subject to

the 35 percent of assets investment limit applicable to consumer loans,

corporate debt securities, and commercial paper. Section 545.51,

discussed below, governs credit card activity of federal savings

associations and imposes no percentage of assets limits on credit

cards. This approach mirrors the HOLA. HOLA section 5(b)(4) authorizes

federal thrifts to invest in consumer loans, corporate debt securities,

and commercial paper subject to a 35 percent of assets limit is

separate from the statutory provision that authorizes thrifts to invest

in credit cards. The statutory provision authorizing credit cards

contains no percentage of assets limit. The legislative history does

not provide any clear guidance regarding whether any linkage was

intended. The sole commenter addressing this issue agreed with OTS's

position that the plain language of the HOLA imposes no percentage of

assets limit on credit card operations.

The final rule carries forward the structure of OTS's existing

regulations. Under the final rule, ``consumer loan'' will continue to

be defined in a manner that excludes credit card loans. Thus, credit

card loans are not subject to the 35 percent of assets limit on

consumer loans. However, the regulation notes, at endnote 5 to

Sec. 560.30, that OTS may impose a case-by-case limit on this or any

type of lending activity if the association's concentration in such

investments presents a safety and soundness concern.

Section 545.51 Credit Cards

OTS proposed to delete paragraph (a) of Sec. 545.51, which

reiterated the HOLA's grant of statutory authority to federal thrifts

to engage in credit card operations.29 OTS proposed to incorporate

a reference to federal savings associations' statutory authority to

engage in credit card operations into the lending and investment powers

chart. OTS received no comments on this paragraph and adopts these

changes as proposed.

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\29\ 12 U.S.C. 1464(b)(4).

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OTS also proposed to delete paragraph (b) of Sec. 545.51, which

addressed the confidentiality of personal security identifiers in

conjunction with credit card operations, because it is redundant with

the provisions of the Electronic Funds Transfer Act and Regulation

E.30 The one commenter addressing this paragraph supported this

reasoning. OTS is deleting this paragraph as proposed.

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\30\ See 15 U.S.C. 1693 et seq. and 12 CFR Part 205

respectively.

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Section 545.52 Loans on Savings Accounts

OTS proposed to delete Sec. 545.52, which reiterated the HOLA's

grant of authority to federal thrifts to make loans

[[Page 50960]]

on the security of savings accounts and sets forth regulatory limits on

such loans.31 OTS proposed to incorporate the reference to federal

thrifts' statutory authority to make loans on savings accounts into the

lending and investment powers chart and retain the limitation on such

loans to the withdrawal amount of the savings account as an endnote to

the chart. OTS received no comments on this section and the proposed

changes to Sec. 545.52 are adopted as proposed.

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\31\ 12 U.S.C. 1464(c)(1)(A).

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Section 545.53 Finance Leasing

Paragraph (a) of Sec. 545.53 authorized federal thrifts to engage

in various leasing activities that are the functional equivalent of

lending, subject to certain regulatory limitations.32 OTS proposed

to reference federal thrifts' finance leasing authority in the proposed

lending and investment powers chart, with an endnote cross-referencing

applicable regulatory limitations. OTS received no comment on this

proposed change, which is adopted as proposed.

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\32\ Section 545.53 cited several HOLA lending provisions, 12

U.S.C. 1464 (c)(1)(B), (c)(2)(A), and (c)(2)(D), as the basis for

federal thrifts' finance leasing authority.

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OTS also proposed to consolidate the finance leasing requirements

of Sec. 545.53 with the general leasing requirements of Sec. 545.78

into one streamlined section, new Sec. 560.41. In connection with this

consolidation, OTS proposed to delete the term limits for finance

leases and to increase the minimum residual value requirement for

finance leases from 20 to 25 percent. The one commenter addressing

these proposed changes supported the proposed consolidation and agreed

with OTS's reasoning that institutions should be free to establish

their own term limits based on prudent underwriting criteria and market

conditions. The commenter also supported the increase in residual value

requirement because it enhanced the flexibility of thrifts' leasing

operations. Because of the complexity of leasing activities, this

commenter also suggested that OTS provide clear underwriting guidance

for various types of leasing activities in the Handbook as well as

additional examiner training on leasing arrangements. A second

commenter requested a clearer definition of ``full-payout lease'' in

Sec. 560.41(c).

In this final rule, OTS is consolidating its leasing regulations

into the newly adopted Sec. 560.41. The section has been revised to

clarify its scope and definitions. OTS is also eliminating the term

limits and increasing the minimum residual value requirement for

finance leases to 25 percent. OTS notes that the OCC allows national

banks to make finance leases with a residual value of 25 percent of the

original cost of the property to the lessor.33 OTS plans to add

underwriting guidance to the Handbook addressing leasing arrangements.

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\33\ The OCC has recently proposed amendments to its leasing

regulation at 60 FR 46246 (September 6, 1995).

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OTS is also consolidating the salvage powers provisions in

Sec. 545.53 into the new Sec. 560.41. Paragraph (e) of that new section

outlines a thrift's salvage powers on all types of leases.

Section 545.72 Government Obligations

Section 545.72 reiterated the HOLA's grant of authority to federal

thrifts to invest in obligations of any state, territory, or political

subdivision thereof.34 OTS proposed to delete this section and

incorporate the reference to federal thrifts' statutory authority to

invest in government obligations into the lending and investment powers

chart. OTS also proposed incorporating the provisions of Sec. 545.72(a)

regarding investments in obligations meeting investment grade

requirements into a new Sec. 560.42 entitled ``State and local

government obligations.'' The lending and investment powers chart would

cite the new Sec. 560.42 in its endnotes. OTS received no comments on

these proposed changes, which are adopted as proposed.

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\34\ 12 U.S.C. 1464(c)(1)(H).

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In order to encourage additional sound community-related

investments, OTS also proposed modifying regulatory restrictions in

Sec. 545.72(b) before their incorporation into the new Sec. 560.42. OTS

proposed to clarify that the 1 percent of assets limitation for

investments in obligations of a state or political subdivision where a

savings association has its home or a branch office that do not meet

the rating or full faith and credit requirements of Sec. 545.72(a) is

an aggregate limit. However, OTS also proposed to allow savings

associations to invest additional amounts in such obligations, without

geographic restrictions, if the obligation is specifically approved for

investment by OTS.

The two commenters addressing this section supported OTS's

reasoning that this change would afford savings associations additional

flexibility to invest in government obligations without any threat to

the associations' safety and soundness. One commenter noted that the

obligations of local municipalities often are rated noninvestment grade

or are unrated, yet these communities could benefit from local savings

associations' increased investment in municipal bonds. Both commenters

believed that thrifts with strong capital, sound underwriting

standards, and broadly diversified investment portfolios should have

the discretion to invest in government obligations. One commenter

argued that OTS should not require prior approval before an association

is permitted to invest in government obligations in a locality in which

the association does not have a home or branch office. OTS, however,

believes that such prior approval is appropriate because the purchase

of noninvestment grade or unrated obligations is potentially risky, and

associations should be prepared to demonstrate that their decision to

invest in such obligations does not pose any threat to the

association's safety or soundness.

OTS believes that the proposed changes will give savings

associations additional flexibility while still allowing the agency to

monitor the risks presented by investments in government obligations.

The proposed rule gives thrifts the option to invest in unrated

government securities, exceed the 1 percent of assets limit for unrated

securities of localities where the thrift has an office, or invest in

obligations in localities where they do not have an office if the

thrifts obtain prior OTS approval. Accordingly, OTS adopts the proposed

modifications to paragraphs (a) and (b) of Sec. 545.72 and incorporates

those modified provisions into the new Sec. 560.42.

OTS also proposed to remove the restriction on gold-related

obligations contained in paragraph (c) of Sec. 545.72 as obsolete. OTS

received no comment on the proposed deletion, which is adopted as

proposed.

Section 545.73 Inter-American Savings and Loan Bank

Section 545.73 reiterated federal savings associations' authority

to invest in the share capital and capital reserve of the Inter-

American Savings and Loan Bank, subject to statutory and regulatory

limitations on the amount of investment.35 OTS proposed to remove

this section and incorporate this authority and limitations into the

new lending and investment powers chart, endnotes, and new Sec. 560.43,

which addresses foreign assistance investments. OTS received no comment

on these proposed changes, which are adopted as proposed.

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\35\ 12 U.S.C. 1464(c)(4)(C).

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[[Page 50961]]

Section 545.74 Service Corporations

OTS proposed, as discussed under Sec. 545.46 above, to no longer

aggregate commercial loans made by a savings association's service

corporation with commercial loans made by the savings association

itself for purposes of the statutory 10 percent of assets limitation.

The agency proposed a conforming change to Sec. 545.74(c)(1)(vi), where

this regulatory aggregation is repeated. The remaining provisions of

Sec. 545.74 are currently under separate review as part of the agency's

reinvention of its subsidiaries regulations.36 The one commenter

specifically addressing the conforming change to Sec. 545.74 supported

excluding any commercial loan booked by a service corporation from the

10 percent commercial loan limit for federal savings associations. The

commenter noted, as did the OTS proposal, that this modification would

make the treatment of commercial loans owned by service corporations

consistent with the treatment of noncommercial loans owned by service

corporations. Accordingly, OTS has modified this paragraph as proposed.

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\36\ See Notice of Proposed Rulemaking, Subsidiaries and Equity

Investments, 61 FR 29976 (June 13, 1996).

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Section 545.75 Commercial Paper and Corporate Debt Securities

Section 545.75(a) reiterated the HOLA's grant of authority to

federal thrifts to invest in commercial paper and corporate debt

securities.37 OTS proposed to delete this paragraph and to

reference federal thrifts' statutory authority to invest in commercial

paper and corporate debt securities in the lending and investment

powers chart. The agency also proposed to retain the limitations on

these investments contained in paragraphs (b) and (c) and to move them

into the new Sec. 560.40 on commercial paper and corporate debt

securities in Part 560.38

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\37\ 12 U.S.C. 1464(c)(2)(D).

\38\ The agency also solicited comment on whether these

provisions should, alternatively, be removed from the regulations

and incorporated as guidance in the Handbook.

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The only commenter to address this section questioned why paragraph

(b) requires a thrift's investments in commercial paper and corporate

debt securities to be denominated in dollars. OTS agrees with this

commenter's position that the HOLA, 12 U.S.C. 1464(c)(2)(D), does not

require such denomination, and previous OTS opinions have stated that

such investments are permissible as long as foreign currency risks are

properly hedged. Accordingly, OTS adopts Sec. 560.40 as proposed with

the modification that commercial paper and corporate debt securities

are no longer required to be denominated in dollars.

OTS also proposed to delete paragraph (d) of Sec. 545.75 as no

longer having any practical application for thrifts in light of

Sec. 28(d) of the Federal Deposit Insurance Act 39 (FDIA).

Paragraph (d) authorized a federal savings association to invest in

commercial paper and corporate debt securities not meeting the rating

and marketability requirements of paragraphs (b) and (c), so long as

such investments are not otherwise prohibited by Sec. 28(d) of the

FDIA, which prohibits investments by thrifts in unrated corporate

bonds. Although OTS solicited comment as to whether there was any

scenario under which an investment authorized by paragraph (d) would

not violate Sec. 28(d) of the FDIA, OTS received no responsive

comments. Because OTS believes that paragraph (d) has no practical

application for thrifts, it is deleting paragraph (d) as proposed.

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\39\ 12 U.S.C. 1831e(d).

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Section 545.78 Leasing

Paragraph (a) of Sec. 545.78 reiterated the HOLA's grant of

authority to federal thrifts to invest in tangible personal property

for leasing purposes.40 OTS proposed to incorporate a reference to

this statutory authority into the proposed lending and investment

powers chart. As already discussed under Sec. 545.53 earlier, OTS also

proposed to consolidate the general leasing restrictions applicable to

federal savings associations in Sec. 545.78 with the finance leasing

restrictions in Sec. 545.53 into a new Sec. 560.41. The one commenter

addressing these proposed changes supported the consolidation, and OTS

is adopting these changes as proposed.

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\40\ 12 U.S.C. 1464(c)(2)(C).

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OTS also proposed to delete paragraph (b) of Sec. 545.78, which

imposes a maximum 70 percent residual value limit for general leasing

activities. OTS believes that such an underwriting restriction may be

unduly restrictive if applied in all cases and that such lease

underwriting considerations are better addressed within each

association's prudent leasing policies, which will be subject to review

by OTS examiners. Furthermore, OTS plans to provide underwriting

guidance on leases in its Handbook. The one commenter addressing this

section supported the proposed deletion because it would give

additional flexibility to thrifts in structuring lease arrangements.

The commenter also suggested that additional underwriting guidance be

included in the Handbook because of the complexity of leasing

activities.

OTS is deleting the maximum 70 percent residual value limit as

proposed and replacing that requirement with more flexible underwriting

guidance in the Handbook. As discussed earlier under Sec. 545.53, the

new Sec. 560.41 addresses both general leasing and finance leasing

authority.

Section 556.2 Power To Engage in Escrow Business

Section 556.2 addressed federal thrifts' power to engage in the

escrow business. OTS proposed to delete this policy statement, because

OTS believes that the authority to establish escrow accounts is

subsumed within the authority of federal savings associations to make

loans and does not need to be specifically identified in the CFR. See

discussion above with regard to Sec. 545.32(b)(6). Although one

commenter supported the proposed elimination of this section as

unnecessary, a second commenter raised a concern that elimination of

this section might raise preemption concerns. For the reasons discussed

above with regard to Sec. 545.32(b)(6), OTS believes that a thrift's

power to establish escrow accounts does not need to be specifically

identified in the CFR. Furthermore the new preemption regulation at

Sec. 560.2 specifically cites escrow accounts as an area in which state

law is preempted. Accordingly, OTS is deleting Sec. 556.2, as proposed.

Section 556.3 Real Estate

Section 556.3(a) addressed the treatment of motels as either

improved nonresidential real estate or combination home and business

property for real estate categorization purposes. OTS proposed to

delete this paragraph and incorporate it into guidance. Section

556.3(b) permitted federal thrifts to purchase paving certificates that

constitute a lien on property securing an association's loan. OTS

proposed to delete this section and transfer the language of the policy

statement to the Handbook. OTS received no comment on these proposed

deletions, which are adopted as proposed.

Section 556.10 First Liens on Properties Sold by the Secretary of HUD

Section 556.10 reiterated federal thrifts' authority to make

mortgage loans insured by the Federal Housing Administration and

secured by first liens on improved real estate and discussed the

treatment and documentary evidence of such loans after disposal by the

Secretary of

[[Page 50962]]

Housing and Urban Development. OTS proposed to delete this policy

statement and move it to guidance in the Handbook. OTS received no

comment on this proposed deletion, which is adopted as proposed.

Section 563.93 Lending Limitations

Section 563.93 contained lending limits on all loans and extensions

of credit made by all savings associations and their subsidiaries. This

section and its accompanying Appendix are being redesignated and moved

unchanged into new Part 560 as Sec. 560.93, for ease of reference.

Section 563.95 Investment in State Housing Corporations

Section 563.95 covered investments in or loans to state housing

corporations by all savings associations. It imposed certain

conditions, including percentage-of-asset limitations, depending on the

type of loan or investment and the savings association's capital level.

OTS proposed to modify and update this section and move it into a new

Sec. 560.121 in new Part 560.

Paragraph (a) dealt with loans to, and investments in obligations

of, state housing corporations that are secured, directly or

indirectly, by first liens on federally insured improved real estate.

OTS proposed to remove percentage-of-asset investment limitations in

this paragraph (a). Commenters supported OTS's reasoning that removing

the percentage-of-assets limit would allow thrifts to exercise business

judgment in determining the amount they wished to invest in such loans

and obligations, subject, as always, to overall safety and soundness

considerations.

OTS proposed to update the language in paragraph (b), which covers

investments in obligations of state housing corporations that do not

fall under paragraph (a), in several ways. First, the agency proposed

to remove the outdated limitation based on a thrift's level of

``general reserves surplus and undivided profits.'' Instead, any thrift

that is adequately capitalized under 12 CFR Part 565 may make such

investments. Second, OTS proposed to allow investments under paragraph

(b) to be made in obligations of state housing corporations located in

any state in which the association has its home or a branch office.

Third, OTS proposed to revise the aggregate limit on such investments

to equal a thrift's total capital under 12 CFR Part 567 (rather than

its general reserves, surplus, and undivided profits) and to move this

requirement into a new paragraph (b)(2). Finally, the agency proposed

to delete the requirement that a thrift may make no more than 25

percent of its aggregate investment in this type of obligation in the

obligations of any one state housing corporation. This requirement

effectively required an institution to invest in four state housing

corporations any time it wished to invest in one.

Commenters believed that revisions to restrictions on investments

in state housing corporations would encourage institutions to make

additional sound community related investments. Savings associations'

increased participation in community-related investments could

potentially benefit communities and their affordable housing programs

without undermining thrifts' safety and soundness. Commenters also

agreed that elimination of the 25 percent limit on investments to a

single state housing corporation should cause no problem because

thrifts will be protected by the cap on aggregate investments and by

examiners' asset concentration review. One commenter urged OTS to go

further and make additional revisions, such as allowing thrifts to

invest in obligations of state housing corporations throughout the

country, not just where the thrift has a home or branch office. This

commenter also suggested removing the aggregate cap on total

investments, subject to OTS approval, under certain circumstances. OTS,

however, believes that the proposed regulatory language strikes the

appropriate balance between giving thrifts additional flexibility with

respect to investment in state housing corporations and ensuring safe

and sound operations. Accordingly, OTS adopts the proposed revisions to

paragraphs (a) and (b) of Sec. 563.95 and incorporates those revisions

into the new Sec. 560.121.

The agency also proposed to delete existing paragraph (c), which

allows thrifts (that otherwise have the legal authority to do so) to

make direct equity investments in equity securities of state housing

authorities. Federal thrifts currently do not have authority to invest

in equity securities of state housing corporations, and section 28 of

the FDIA constrains state chartered thrifts from making, or retaining

past July 1, 1994, any equity investment not permissible for federal

thrifts.41 Although OTS solicited comment as to whether there was

any scenario under which paragraph (c) was still relevant, no

commenters responded to this request. OTS deletes paragraph (c) of

Sec. 563.95 as proposed.

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\41\ See 12 U.S.C. 1831e(c), which states that a state chartered

savings association ``may not directly acquire or retain any equity

investment of a type or in an amount that is not permissible for a

Federal savings association,'' with a limited exception for service

corporation investments.

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The agency proposed to move paragraph (d), substantially unchanged,

into new Sec. 560.121 as paragraph (c). This paragraph addresses a

thrift's obligation, before making an investment in a state housing

corporation, to obtain the corporation's agreement to make information

available to OTS upon request. OTS received no comment on this

provision which is adopted as proposed.

Section 563.97 Loans in Excess of 90 Percent of Value

OTS proposed to delete Sec. 563.97, which authorized thrifts to

make loans on the security of residential real estate with loan-to-

value ratios in excess of 90 percent of value, consistent with the

interagency real estate lending standards. Commenters agreed that the

interagency real estate lending standards address the same issue in a

more comprehensive manner. OTS is deleting Sec. 563.97 as proposed.

Section 563.99 Fixed-Rate and Adjustable-Rate Mortgage Loan

Disclosures, Adjustment Notices, and Interest Rate Caps

Section 563.99 defined fixed and adjustable-rate mortgage loans and

required thrifts to make certain disclosures to applicants of

adjustable-rate mortgage loans. In order to establish parity in

coverage with other lenders, OTS proposed to add a new paragraph (g) to

exclude from Sec. 563.99's coverage adjustable-rate loans that are

primarily for a business, commercial, or agricultural purpose,

consistent with the Federal Reserve Board's (FRB) Truth in Lending

regulation, Regulation Z.42

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\42\ Regulation Z exempts from its disclosure requirements

extensions of credit primarily for business, commercial, or

agricultural purposes. See 12 CFR 226.3(a)(1).

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Commenters generally favored making Sec. 563.99's coverage

consistent with that of Regulation Z. Section 563.99 covered all

adjustable-rate loans with a term of more than one year, secured by

property occupied or to be occupied by the borrower. Unlike

Sec. 563.99, Regulation Z's coverage is not determined by the nature of

the secured property but rather by other criteria, e.g., the extension

of credit must be primarily for personal, family, or household

purposes.43 As the regulations interacted, certain transactions

were encompassed by Sec. 563.99 but not by Regulation Z. By adopting

the proposed changes to Sec. 563.99, OTS will be minimizing the

differences between that section and Regulation Z. For example, a

savings

[[Page 50963]]

association that makes a business purpose ARM loan secured by a home

will no longer be subject to the disclosure requirements set forth at

Sec. 563.99; nor would any disclosures be required under Regulation Z.

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\43\ 12 CFR 226.1(c)(1)(iv).

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Several commenters recommended deleting the disclosure portions of

Sec. 563.99 in their entirety because those provisions were duplicative

of Regulation Z. Commenters argued that two sets of disclosure

regulations confused lenders and required them to search two places to

figure out applicable regulatory requirements. OTS will undertake a

comprehensive review of Sec. 563.99 in conjunction with the FRB's

review of Regulation Z pursuant to section 303 of the CDRIA.44

Pending that review, Sec. 563.99 is being redesignated as Sec. 560.210,

so that all lending regulations will be grouped together in Part 560.

The only changes being made to Sec. 563.99 are changing its title to be

more descriptive of its content, adding a new paragraph (g), as

discussed above, and removing paragraph (a)(2), which defined ``fixed

rate mortgage loan,'' a term not used in the regulation. OTS does note

that the disclosure requirements of current Sec. 563.99 and Regulation

Z 45 are substantially similar.

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\44\ Pursuant to section 303(b) of the CDRIA, the FRB is

required to review its regulations with respect to disclosures

pursuant to the Truth In Lending Act with regard to adjustable-rate

mortgages in order to simplify the disclosures, if necessary, and

make the disclosures more meaningful and comprehensible to

consumers. 12 U.S.C. 4803.

\45\ See 12 CFR 226.19(b), 226.20(c).

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Section 563.100-563.101 Real Estate Lending Standards

These sections prescribed real estate lending standards that

require all savings associations to adopt and maintain comprehensive

written real estate lending policies that are consistent with safe and

sound practices and with the Guidelines for Real Estate Lending.46

Savings associations' policies must address certain lending

considerations including loan-to-value limits, loan administration

procedures, portfolio diversification standards, and documentation,

approval, and reporting requirements. OTS did not propose changes to

these sections, but indicated its intent to redesignate and move them

substantially unchanged into a new Part 560. OTS received no comment on

these proposed redesignations and is redesignating them as

Secs. 560.100-560.101 in the final rule issued today. The Appendix

containing the guidelines is also being redesignated.

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\46\ Appendix A to the real estate lending standards at current

Secs. 563.100-101.

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Section 563.160 Classification of Certain Assets

Section 563.160 required thrifts to classify their own assets and

establish valuation allowances. OTS proposed to delete this section in

its entirety.47 The one commenter addressing this section favored

its deletion and suggested placing classification guidance in the

Handbook. This commenter noted that the section's deletion would be

consistent with the stance of the other banking agencies which set

forth their asset classification systems as supervisory guidance, not

as regulations.

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\47\ OTS had already requested comment on deleting the

definitions of ``Substandard,'' ``Doubtful,'' and ``Loss'' set forth

in paragraph (b) and the definition of ``Special Mention'' assets in

paragraph (e) because definitions of those terms are contained in

the Handbook. 58 FR 38730 (July 20, 1993). Commenters supported such

deletions. The OTS proposed deleting paragraph (f) as part of its

regulatory review proposal, 60 FR 44442 (August 28, 1995), and

received no unfavorable comments.

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Upon further consideration, OTS has decided to retain a short

classification regulation simply stating that a savings association

must have an internal system to classify assets and must establish

appropriate valuation allowances or charge-offs, as appropriate. OTS

believes that retaining a short classification regulation at new

Sec. 560.160 will ensure that a thrift's board of directors takes

responsibility for monitoring its classification system. OTS will

transfer more detailed guidance concerning asset classification to the

Handbook consistent with the supervisory guidance of the other federal

banking agencies.

Section 563.170 Examinations and Audits; Appraisals; Establishment and

Maintenance of Records

Paragraph (a) of Sec. 563.170 authorizes OTS to examine thrifts

consistent with OTS policies and to annually assess thrifts for the

costs of such examinations based on the thrifts' assets. OTS proposed

to retain this paragraph. The agency received no comment on this

section, which is retained as proposed in its current location.

Paragraph (b) authorizes OTS to select appraisers to perform

appraisals of real estate in connection with examinations and audits

and requires thrifts to pay for such appraisal services. OTS proposed

to retain this paragraph. The agency received no comment on this

section, which is also retained as proposed.

Paragraph (c) sets forth general record maintenance requirements

for savings associations to ensure that examiners have access to an

accurate and complete record of all business transacted by the thrift.

OTS proposed to retain this general introductory paragraph, with a

modification to incorporate language in current paragraph (c)(9) on

maintaining records required by other laws or regulations.

Paragraphs (c) (1)-(9), however, set forth a list of specific loan

documents that, at a minimum, thrifts must maintain to comply with

Sec. 563.170(c). OTS proposed replacing the specific documentation

requirements listed in paragraphs (c) (1)-(9) with more general

documentation standards in a new Sec. 560.170 in Part 560. These

proposed standards were drawn from the interagency Standards for Safety

and Soundness regulations and attached Guidelines Establishing

Standards for Safety and Soundness.48 These guidelines set forth

loan documentation and credit underwriting requirements to which all

federal insured depository institutions are expected to adhere. These

underwriting and documentation standards minimize the need for OTS to

have a regulation mandating specific documentation requirements.49

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\48\ 12 CFR Part 570 and Appendix A thereto, 60 FR 35674 (July

10, 1995).

\49\ Guidelines appended to the interagency real estate lending

standards also state that an institution should establish loan

administration procedures that address documentation. See 12 CFR

Part 563, Subpart D, Appendix A (redesignated in this rulemaking as

Appendix to Sec. 560.101).

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Commenters unanimously supported OTS's proposal to eliminate the

detailed list of documents required in paragraphs (c) (1)-(9).

Commenters agreed with OTS's reasoning that although the documents

listed were generally appropriate for prudent lending, a rigid

requirement that all documents be present for each loan was too

restrictive and did not necessarily address all safety and soundness

concerns. Commenters believed that elimination of the specific document

list would give lenders more flexibility to tailor loan documentation

to various types of loans and to determine which particular documents

would be most appropriate for a specific loan.

For example, previously Sec. 563.170(c)(1)(v) required either a

financial statement or a credit report for all loans, ostensibly to

justify the borrower's willingness and ability to repay the loan.

However, the ability and willingness of a borrower to repay a consumer

or home loan may be better demonstrated with a verification of

employment (not previously required) and a satisfactory credit report,

rather than a financial statement. For commercial borrowers,

verification by

[[Page 50964]]

the institution that the borrower's financial statements accurately

reflect all assets, liabilities, and any other guarantees or

encumbrances is more important to the decision to extend credit than

the mere presence of a financial statement. The more flexible language

of new Sec. 560.170 will allow thrifts to obtain documentation that

best satisfies safety and soundness concerns raised in a particular

transaction, while at the same time relieving thrifts of the burden of

technical compliance with a document checklist that may not necessarily

be relevant to prudent lending.

Commenters also agreed that deleting paragraphs (c) (1)-(9) would

relieve savings associations of documentation requirements that exceed

those for banks and other financial institutions as well as enable

savings associations to take better advantage of technological

marketplace advances such as telephone and computerized home banking.

New Sec. 560.170 will allow savings associations to participate in

telephone and computerized home banking without running afoul of paper

driven-requirements. Accordingly OTS adopts the changes to

Sec. 563.170(c) as proposed.

In its proposal, OTS also considered transferring the current

document list in paragraphs (c) (1)-(5), and (7) to the Handbook to be

used as a checklist of records generally maintained by prudent lenders

to support a loan. Several commenters raised concerns regarding the

language of the guidance that would be included in the Handbook. One

commenter urged that if OTS includes a document list in the Handbook,

the agency should also clearly state that the list is intended only as

guidance and not as rigid minimum requirements for safety and

soundness. The commenter suggested inserting language to the effect

that the lender (based on borrower creditworthiness, the specific

program and product offering, pricing, project delinquency, loss

profile, and title and appraisal information) should have the

discretion not to require certain documents in any given situation.

Another commenter recommended deletion of the requirement that loan

documents identify a purpose for the loan because lines of credit are

now used for any purpose, the identification of which is not necessary

to proper underwriting. The interagency guidelines establishing

standards for safety and soundness do state that a lender should

identify the purpose of a loan.50 However, OTS will review these

comments prior to issuing any loan documentation guidance to be

included in the Handbook.

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\50\ 60 FR at 35679.

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Paragraph (c)(10) of Sec. 563.170 exempted certain small business

loans from the documentation requirements set forth in paragraphs (c)

(1)-(7). OTS proposed to delete paragraph (c)(10) inasmuch as the

streamlining of the requirements currently located in paragraphs (c)

(1)-(7) eliminates the need for this exemption. OTS received no comment

on this paragraph, which is deleted as proposed.

OTS proposed to retain paragraph (d) of Sec. 563.170, which

addresses changes in the location of accounting or control records. One

commenter questioned whether advances in computer technology rendered

this paragraph obsolete since computerized accounting and control

records could be accessed at many locations. Although OTS recognizes

that computerized records may be read from computer terminals in many

locations, OTS believes that the agency may need to know the location

of the server where computer records are physically stored for

examination purposes. Accordingly, OTS is retaining this paragraph as

proposed.

OTS proposed to retain paragraph (e), which addresses use of data

processing services for maintenance of records. One commenter suggested

that all but the last sentence of this paragraph could be eliminated

inasmuch as maintenance of records by means of data processing services

has become the norm and requiring a thrift to notify the Region in

which its principal office is located of such maintenance creates

unnecessary paperwork. Although OTS agrees that thrifts routinely

maintain records by means of data processing services, the agency

believes that this paragraph serves the purpose of requiring

institutions to identify the particular records to be maintained by a

data processing service and the location where such records are

maintained. This information may be critical to an examination or

enforcement inquiry. Accordingly, OTS is retaining this paragraph as

proposed.

To summarize, Sec. 563.170 is being modified as proposed, by

removing the specific loan documentation requirements of paragraphs (c)

(1) through (10) and by retaining the remainder of the regulation. The

specific loan documentation requirements have been replaced by more

general lending documentation requirements in new Sec. 560.170.

Section 563.172 Reevaluation of Real Estate Owned

Section 563.172 required savings associations to appraise all real

estate owned (REO) at the earlier of in-substance foreclosure or at the

time of acquisition and, thereafter, as dictated by prudent management

policy. In its proposal OTS discussed deleting this section because

thrifts can apply the appraisal regulations and general accounting

principles (GAAP) to determine when an appraisal may be appropriate or

necessary for safety and soundness. Two commenters supported

elimination of this section to give lenders more flexibility with

regard to the timing of an appraisal for property soon to become REO.

Commenters agreed, however, that it is sound policy to require an

appraisal for REO. Upon consideration, OTS has decided to retain this

regulation to specify when, at a minimum, safety and soundness require

an appraisal of REO. Accordingly, it is incorporating Sec. 563.172

unchanged into the new Part 560 as new Sec. 560.172.

Section 571.8 Investment in State Housing Corporations

Section 571.8 limited savings associations' investment authority in

state housing corporations to certain public and private corporations

and agencies. OTS proposed to delete this policy statement as an

unnecessary limitation on the definition of state housing corporation.

The one commenter to address this section supported its deletion. OTS

is deleting Sec. 571.8 as proposed.

Section 571.13 Participation Interests in Pools of Loans

Section 571.13 addressed appropriate documentation for a savings

association's purchase of a participation interest in a pool of loans

(in the nature of mortgage-backed securities) and indicated that

compliance with the documentation requirements of Sec. 563.170 may be

impracticable for such transactions. OTS proposed to delete this

section inasmuch as the proposed revision of Sec. 563.170(c) would

eliminate the need for this policy statement. OTS received no comment

on this section, which is deleted as proposed. OTS plans to transfer

the documentation guidance for purchases of participation interests in

pools of loans to the Handbook.

Section 571.20 Payment for Appraisals

OTS proposed to delete Sec. 571.20, which addressed payment by

savings associations for appraisals obtained as part of an OTS

examination. OTS received no comment on this section, which is deleted

as proposed. OTS expects to transfer this policy statement to the

Handbook.

[[Page 50965]]

Section 571.22 Most Favored Lender Status

Section 571.22 implemented section 4(g) of the HOLA, which

authorizes savings associations to charge on any extension of credit an

interest rate equal to the greater of: (a) One percentage point above

the discount rate on 90-day commercial paper in effect at the Federal

Reserve Bank in the Federal Reserve district in which the savings

association is located; or (b) the rate allowed by the laws of the

State in which the savings association is located for the state's most

favored lender. OTS proposed to move Sec. 571.22 into new

Sec. 560.2(d)(1) and requested comment on whether certain provisions in

Sec. 571.22 should be modified. Because HOLA section 4(g) and this

regulation apply to all savings associations, however, Sec. 571.22 is

being moved to a new Sec. 560.110, ``Most Favored Lender, Usury

Preemption'' in Subpart B of Part 560, which applies to all savings

associations. Changes to the text of the regulation are discussed under

Sec. 560.110 below.

2. New Part 560--Lending and Investment

OTS proposed to adopt a new Part 560, Lending and Investment, that

would ultimately include all of the agency's lending and investment

regulations except for Appraisals (Part 564) and subsidiary-related

investments (currently proposed to be located in new Part 559).

Commenters generally agreed with OTS's view that this reorganization

will make it much easier for those using the agency's regulations to

find all relevant lending and investment powers, authorities, and

limitations. Accordingly, OTS is adopting new Part 560 as discussed

below.

Section 560.1 General

This section sets out the basic statutory authority for lending and

indicates which regulations in this part will apply only to federal

savings associations and which regulations apply to all savings

associations. It also briefly sets forth the agency's expectations that

all lending and investment activities are to be conducted prudently,

consistent with safety and soundness, with adequate portfolio

diversification, and in a manner appropriate for the size of the

institution, the nature and scope of its operations, and conditions in

its lending market. OTS received no comment on this section, which is

adopted as proposed, with minor clarifications.

Section 560.2 Applicability of Law

This section sets forth OTS's longstanding position, as developed

in case law and legal opinions by both OTS and its predecessor, the

FHLBB, and as reflected in Sec. 545.2, on the federal preemption of

state laws affecting the lending activities of federal savings

associations. Because the agency proposed to move its lending

regulations out of Part 545 and, thus, separate them from its general

preemption regulation, Sec. 545.2, and because the agency proposed to

remove many of the details of the lending regulations that had been

previously cited in preemption opinions, OTS also proposed new

Sec. 560.2 to confirm and carry forward its existing preemption

position.

It is well established that state laws can be preempted not only by

federal statutes, but also by federal regulations promulgated pursuant

to authority delegated by Congress.\51\ In this regard, the Supreme

Court has recognized that Congress gave the regulator of federal

savings associations broad preemptive authority:

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\51\ Fidelity Federal Savings & Loan Association v. de la

Cuesta, 458 U.S. 141, 153-154 (1982).

Congress enacted the HOLA [as] ``a radical and comprehensive

response to the inadequacies of the existing state systems * * *.''

Thus, in section 5(a) of the [HOLA], Congress gave the [FHLBB and

now the OTS] plenary authority to issue regulations * * *

``providing for the * * * incorporation, examination, operation, and

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regulation of [federal savings] associations * * *.''

Congress directed that, in regulating federal [savings

associations], the [FHLBB and OTS should] consider ``the best

practices of local mutual thrift and home financing institutions in

the United States,'' which were at the time all state-chartered. By

so stating, Congress plainly envisioned that federal savings

[associations] would be governed by what the [FHLBB and now OTS]--

not any particular state--deemed to be the best practices, and

approved the [FHLBB's and OTS's] promulgation of regulations

superseding state law * * *.52

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\52\ Id. at 160-167 (citations omitted).

Consistent with the foregoing, courts have long recognized that

federal savings associations organized under the HOLA are uniquely

federalized financial institutions--even more so than national

banks.53 Prior to enactment of the HOLA, `` `the states had

developed a hodgepodge of savings and loan laws and regulations, and

Congress hoped the [the FHLBB, and now OTS] rules would set an example

for uniform and sound savings and loan regulation.' '' 54

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\53\ People v. Coast Federal Savings & Loan Association, 98 F.

Supp. 311, 319 (S.D. Calf. 1951).

\54\ Conference of Federal Savings and Loan Associations v.

Stein, 604 F.2d 1256 (9th Cir. 1979) (citation omitted).

Thus, OTS is authorized to promulgate regulations that preempt

state laws affecting the operations of federal savings associations

when deemed appropriate to: (i) Facilitate the safe and sound operation

of federal savings associations, (ii) enable federal savings

associations to conduct their operations in accordance with the best

practices of thrift institutions in the United States, or (iii) further

other purposes of the HOLA. Because lending lies at the heart of the

business of a federal thrift, OTS and its predecessor, the FHLBB, have

long taken the position that the federal lending laws and regulations

occupy the entire field of lending regulation for federal savings

associations, leaving no room for state regulation. For these purposes,

the field of lending regulation has been defined to encompass all laws

affecting lending by federal thrifts, except certain specified areas

such as basic real property, contract, commercial, tort, and criminal

law.

As a result, instead of being subject to a hodgepodge of

conflicting and overlapping state lending requirements, federal thrifts

are free to originate loans under a single set of uniform federal laws

and regulations. This furthers both the ``best practices'' and safety

and soundness objectives of the HOLA by enabling federal thrifts to

deliver low-cost credit to the public free from undue regulatory

duplication and burden. At the same time, the interests of borrowers

are protected by the elaborate network of federal borrower-protection

statutes applicable to federal thrifts, including the Truth in Lending

Act, the Real Estate Settlement Procedures Act, the Equal Credit

Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure

Act, the Fair Credit Reporting Act, the Consumer Leasing Act, the Fair

Debt Collection Practices Act, the Community Reinvestment Act, and the

Federal Trade Commission Act.55 In addition, in those instances

[[Page 50966]]

where OTS has detected a gap in the federal protections provided to

borrowers, the agency has promulgated regulations imposing additional

consumer protection requirements on federal thrifts.56

\55\ Several of these statutes contain provisions that expressly

disclaim any intent to preempt non-conflicting state statutes

falling in the same subject area. E.g., 12 U.S.C. 2616 (Real Estate

Settlement Procedures Act); and 15 U.S.C. 1610 (Truth in Lending

Act). The fact that one or several federal statutes do not preempt

certain types of state laws, however, does not preclude the

possibility that other federal statutes or regulations might do so

under more defined or specific circumstances. In this regard, it is

important to note that the above-referenced federal statutes that

contain preemption disclaimers apply to all types of lenders

(including state-chartered lenders), not just federal savings

associations. The fact that Congress did not wish to preempt the

application of state laws to this general universe of lenders

(including lenders chartered and regulated by the very states whose

laws would be preempted), does not preclude the possibility that

Congress may have elsewhere evidenced a specific intent to preempt,

or permit a federal regulator to preempt, the application of state

laws to a particular category of lender--in this case, federal

savings associations. This is precisely the conclusion reached by

the court in First Federal Savings & Loan Association v. Greenwald,

591 F.2d 417 (1st Cir. 1979). There, the court held that OTS's

predecessor, the FHLBB, was authorized by Congress in the HOLA to

preempt state lending laws even when they fall in areas covered by

the preemption disclaimer in the Real Estate Settlement Procedures

Act. We believe the court's holding reflects a correct understanding

of the interplay between the HOLA and the above-referenced statutes,

as evidenced by the legislative history of the HOLA. See, e.g., 124

Cong. Rec. 33848 (Statement of Rep. Minish); 124 Cong. Rec. 36148

(1978) (colloquy between Sen. Proxmire and Sen. Brooke confirming

that federal thrifts are not subject to state truth in lending

requirements); 124 Cong. Rec. 33848-33849 (statement of Rep. St

Germain to the same effect); and 126 Cong. Rec. 6981 (1980)

(colloquy between Rep. St Germain and Rep. Patterson confirming that

thrifts, unlike national banks, are not subject to state lending

laws).

\56\ See, e.g., 12 CFR Part 535 (prohibited consumer credit

practices) and new Secs. 560.33 (late charges), 560.34

(prepayments), and 560.35 (adjustments to home loans).

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

New Sec. 560.2 carries forward this approach to federal preemption.

Although the final form of regulation is similar to what was proposed,

some changes have been made in response to comments received. Several

commenters expressed concern that the statement in proposed

Sec. 560.2(a) that OTS intended to occupy the entire field of lending

regulation for federal thrifts would not be sufficient to restrain

state regulators from asserting jurisdiction, given that OTS was also

proposing to remove some of its more detailed regulatory language

specifically authorizing federal thrifts to engage in various lending-

related practices, e.g., advertising, charging certain fees, and

establishing escrow accounts. One commenter suggested that OTS expand

its noninclusive illustrative list of the types of state laws preempted

to reference additional laws, such as those pertaining to private

mortgage insurance or other credit enhancements, loan servicing,

charging application and overlimit fees, establishing impound and

similar accounts, using credit reports, and setting certain interest

rate ceilings. Other commenters echoed these concerns.

In response to commenters' concerns, OTS has made some changes to

Sec. 560.2. Paragraph (a) still explicitly states the agency's intent

to occupy the field of lending regulation for federal thrifts. However,

the statutory bases and regulatory rationale for this occupation are

more clearly articulated. In addition, to avoid any impression that the

repeal of certain lending regulations is intended to abdicate portions

of the lending field to state regulation, we have added an affirmation

that, ``OTS intends to give federal savings associations maximum

flexibility to exercise their lending powers in accordance with a

uniform federal scheme of regulation.''

Paragraph (b) contains an expanded list of examples of the types of

state laws that are preempted. The introductory text in paragraph (b)

continues to emphasize that the list is not intended to be exhaustive.

Failure to mention a particular type of state law that affects lending

should not be deemed to constitute evidence of an intent to permit

state laws of that type to apply to federal thrifts. To the contrary,

Sec. 560.2 is based on the premise that any state law that affects

lending is preempted unless it clearly falls within the parameters of

paragraph (c).

Paragraph (b) also continues to contain an exception clause

indicating that certain state laws that would not ordinarily apply to

federal savings associations may nevertheless apply when an association

elects to utilize a state's most favored lender usury rate. When

utilizing a state's most favored lender rate, a federal savings

association must comply with all laws of its ``location'' state that

fall within the ambit of the term ``interest,'' as used in section 4(g)

of the HOLA, as well as any other state laws ``material to the

determination of the interest rate.'' For a fuller discussion of these

issues, see the description below of new Sec. 560.110 (most favored

lender).

Paragraph (c) describes certain types of state laws that OTS does

not intend to preempt. Several commenters urged deletion of this

paragraph. Commenters expressed concern that states seeking to avoid

federal preemption of their laws or regulations might attempt to

characterize those laws as falling within paragraph (c). Commenters

contended that the language used to describe the categories of non-

preempted laws was too broad and could create ambiguity about which

state laws federal thrifts would be required to follow. For example,

states might place laws purporting to regulate lending-related fees in

the portions of state codes dealing with general contract or real

property laws in an effort to avoid preemption.

OTS believes that paragraph (c) should be retained in order to

provide guidance regarding the scope of preemption intended by

paragraph (a). OTS wants to make clear that it does not intend to

preempt basic state laws such as state uniform commercial codes and

state laws governing real property, contracts, torts, and crimes. To

reduce the potential for misunderstanding, however, we have made

several changes to paragraph (c). First, we have modified the

regulatory language that precedes the list of state laws that are not

preempted. The introductory language now indicates that laws falling in

these areas are not preempted to the extent that they either: (i) Have

only an incidental impact on lending; or (ii) are otherwise not

contrary to the purposes expressed in paragraph (a) of the regulation.

We also have added a provision to paragraph (c) disclaiming an intent

to preempt other state laws that may affect lending, but that OTS, upon

review, finds further a vital state interest and meet the foregoing

two-part test.

Adding this two-part test to the regulation will provide an

interpretive standard for identifying state laws that may be designed

to look like traditional property, contract, tort, or commercial laws,

but in reality are aimed at other objectives, such as regulating the

relationship between lenders and borrowers, protecting the safety and

soundness of lenders, or pursuing other state policy objectives.

When confronted with interpretive questions under Sec. 560.2, we

anticipate that courts will, in accordance with well established

principles of regulatory construction, look to the regulatory history

of Sec. 560.2 for guidance. In this regard, OTS wishes to make clear

that the purpose of paragraph (c) is to preserve the traditional

infrastructure of basic state laws that undergird commercial

transactions, not to open the door to state regulation of lending by

federal savings associations. When analyzing the status of state laws

under Sec. 560.2, the first step will be to determine whether the type

of law in question is listed in paragraph (b). If so, the analysis will

end there; the law is preempted. If the law is not covered by paragraph

(b), the next question is whether the law affects lending. If it does,

then, in accordance with paragraph (a), the presumption arises that the

law is preempted. This presumption can be reversed only if the law can

clearly be shown to fit within the confines of paragraph (c). For these

purposes, paragraph (c) is intended to be interpreted narrowly. Any

doubt

[[Page 50967]]

should be resolved in favor of preemption.

As questions arise, OTS will issue interpretive guidance consistent

with the foregoing. While recognizing that no regulation can anticipate

and expressly resolve all questions, we believe that new Sec. 560.2

provides thrifts with substantially more guidance than was available

under Sec. 545.2, thereby enabling them to plan and operate their

lending operations more efficiently. From time to time, OTS will

review, update, and modify Sec. 560.2 to ensure that it reflects new

developments and promotes ``best practices'' and safety and soundness.

Paragraph (d) of proposed Sec. 560.2 was derived from former

Sec. 571.22. It is being adopted as Sec. 560.110, incorporating the

modifications described earlier under that section.

Section 560.3 Definitions

This new section has been added to set forth in Part 560 lending-

related definitions formerly located in Part 545.

Subpart A--Lending and Investment Powers for Federal Savings

Associations

This subpart contains lending and investment regulations directly

applicable only to federal savings associations. These regulations are

nonetheless relevant to state-chartered savings associations by virtue

of Sec. 28 (a) and (b) of the FDIA and the Federal Deposit Insurance

Corporation's regulations at 12 CFR 303.13, which look to the type and

amount of activities permissible for federal savings associations as a

baseline for activities permitted for state-chartered savings

associations.

Section 560.30 General Lending and Investment Powers

Proposed Sec. 560.30 took the form of a chart that listed many of

the lending and investment powers granted to federal thrifts by the

HOLA. It was derived from the regulations that currently appear in Part

545. An important component of this regulation are the endnotes to the

chart that elaborate upon statutory limitations, impose regulatory

limitations, or otherwise describe conditions on the exercise of these

powers.

Commenters generally found the chart to be a very workable

reference tool, particularly for percentage of assets limitations for

specific types of loans and investments. Commenters believed that the

chart form with its statutory cross references made it easier for the

CFR user to locate statutory authority for various types of loans and

investments. At least one commenter suggested that the chart would be

more useful if it were more inclusive and listed additional statutory

and regulatory lending and investment powers. Accordingly, OTS is

adopting the lending and investment powers chart in the final rule in a

more inclusive form with additional references to thrifts' statutory

powers with regard to bankers' bank stock, business development credit

corporations, unsecured construction loans, deposits, securities issued

by the Federal government and government-sponsored enterprises, HUD-

insured or guaranteed investments, insured loans, liquidity

investments, mortgage-backed securities, nonconforming loans, the

National Housing Partnership Corporation and related partnerships and

joint ventures, and small business-related securities.57 Other

references in the chart on community development and letters of credit

have been modified or removed so that the chart more clearly reflects

lending and investment powers specifically authorized by the statute.

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

\57\ As part of its subsidiaries and equity investment proposal,

OTS has requested comment on other additions to this chart,

affecting service corporations, certain open-end management

investment companies, and small business investment companies. 61 FR

at 29981.

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

Section 560.31 Election Regarding Categorization of Loans or

Investments and Related Calculations

This section is derived from current Sec. 545.31, incorporating the

modifications described earlier under that section.

Section 560.33 Late Charges

This section is derived from current Sec. 545.34(b). It has been

modified as discussed under that section.

Section 560.34 Prepayments

This section is derived from current Sec. 545.34(c). The first

sentence of that section has been rewritten to make it easier to

understand, but no substantive change is intended. Advanced payments of

regular installments are not considered prepayments for purposes of

this regulation, as compared to payments to reduce the principal

balance due on a loan.

Section 560.35 Adjustments to Home Loans

This section is derived from current Sec. 545.33(c) and has been

modified as discussed under that section.

Section 560.40 Commercial Paper and Corporate Debt Securities

This section is derived from paragraphs (b) and (c) of current

Sec. 545.75. It has been modified as discussed under that section.

Section 560.41 Leasing

This section consolidates and reorganizes current Sec. 545.53

(finance leasing) and Sec. 545.78 (general leasing authority),

incorporating the modifications described under those sections. It has

been reorganized to clarify the separate sources of authority and

requirements that apply to these two types of leasing.

Section 560.42 State and Local Government Obligations

This section is derived from Sec. 5(c)(1)(H) of the HOLA and

paragraphs (a) and (b) of current Sec. 545.72. It is being adopted as

proposed.

Section 560.43 Foreign Assistance Investments

This section is a consolidation and reorganization of current

Secs. 545.39 and 545.73.

Subpart B--Lending and Investment Provisions Applicable to All Savings

Associations

This subpart contains safety and soundness based lending standards

and provisions applicable to all savings associations, including state

savings associations, to the extent that they have the authority to

make the investments it discusses.

Section 560.93 Lending Limitations

This section, including its appendices, has been moved, with only

technical conforming changes, from Sec. 563.93.

Section 560.100 Real Estate Lending Standards; Purpose and Scope

This section has been transferred without change from Sec. 563.100.

Section 560.101 Real Estate Lending Standards

This section and the accompanying appendix have been transferred

with only technical and conforming changes, from Sec. 563.101 and Part

563, Subpart D, Appendix A.

Section 560.110 Most Favored Lender Usury Preemption

This section implements section 4(g) of the HOLA. Section 4(g)

provides that, notwithstanding any contrary state law, savings

associations may charge interest on any extension of credit at a rate

equal to the greater of: (a) One percentage

[[Page 50968]]

point above the discount rate on 90-day commercial paper in effect at

the Federal Reserve Bank in the Federal Reserve district in which the

savings association is located; or (b) the rate allowed by the laws of

the state in which the savings association is located for the state's

most favored lender, i.e., the class of state lending institution

authorized to charge the highest interest rate. Section 560.110

replaces Sec. 571.22, which is being removed today.

In its January proposal, OTS restated the text of Sec. 571.22, with

several changes intended to eliminate unnecessary verbiage. However,

OTS also solicited comment regarding whether paragraph (b) of the

regulation should be modified to conform more closely to the OCC's most

favored lender regulation.

Paragraph (b) of Sec. 571.22 indicated that any savings association

electing to make loans at the interest rate authorized for a state most

favored lender must also comply with the same ``substantive state law

requirements'' that are applicable to that state lender when making

loans of the same type. The OCC interpretive regulation, which

implements a parallel statutory provision for national banks, uses a

slightly different phrase to describe what types of state laws must be

complied with pursuant to the most favored lender doctrine. The OCC

requires national banks to comply with all state laws that apply to the

state most favored lender and are ``material to the determination of

the interest rate'' authorized under state law.58 OTS has

previously opined that this standard is similar, though not identical,

to OTS's ``substantive law'' standard.59 OTS specifically

requested comment regarding whether paragraph (b) of Sec. 571.22 should

be replaced in its entirety with a reference to state laws that are

``material to the determination of the interest rate.''

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

\58\ 12 CFR 7.7310 (revised and recodified at 12 CFR 7.4001, 61

FR at 4869).

\59\ OTS Op. Chief Counsel, Oct. 14, 1992.

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

Two commenters responding to this inquiry supported adoption of the

OCC's regulatory language. The commenters believed that the OCC

language is more precise and its adoption would promote parity and

uniformity in the agencies' interpretations of most favored lender

questions consistent with section 303 of the CDRIA.

A third commenter raised a concern that the OCC's provision

(``material to the determination of the interest rate'') was narrower

in scope than OTS's substantive law standard. This commenter noted that

OTS currently interprets substantive state law requirements to include

disclosure laws. The commenter reasoned that by complying with federal

disclosure laws and disclosure laws in the state where it is located, a

thrift need not comply with disclosure laws in states where it is not

located but where borrowers reside. The commenter argued that this

approach helps thrifts to make interstate loans more efficiently under

a single set of disclosures that comply with federal law and the law of

state where it is located without having to comply with a multiplicity

of state specific disclosure requirements.

Contrary to the commenter's concern, adopting the ``materiality''

standard will not subject federal thrifts to the disclosure laws of

``non-location'' states. New Sec. 560.2(b)(9), discussed above,

specifically indicates that state disclosure requirements do not apply

to federal thrifts, except when required by Sec. 560.110. Nothing in

Sec. 560.110 applies the disclosure laws of non-location states to

federal savings associations. Under Sec. 560.110, only the disclosure

laws of the location state will ever apply. If the ``substantive law''

standard were carried forward, the disclosure laws of the location

state would apply every time a thrift made a loan under the most

favored lender doctrine. By contrast, if the ``materiality'' standard

is adopted, the disclosure laws of the location state will apply only

in those rare instances where those laws are material to the

determination of the interest rate. Thus, in the interest of reducing

regulatory burden and establishing greater uniformity, OTS has decided

to adopt the ``materiality'' standard.

The debate about the ``materiality'' standard, however, raises a

more general question about whether OTS should conform the entire text

of its most favored lender regulation to the OCC regulation. In this

regard, we note that the courts have recognized that, when enacting

section 4(g) of the HOLA, Congress intended to give savings

associations the same most favored lender status conferred upon

national banks.60 Thus, OTS and its predecessor, the FHLBB, have

long looked to the OCC regulation and other precedent interpreting the

national bank most favored lender provision for guidance in

interpreting section 4(g) and OTS's implementing regulation.61 But

for the distinction discussed above regarding the ``materiality''

standard, differences between OTS and OCC regulations have been purely

a matter of syntax, not substance.

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

\60\ Gavey Properties/762 v. First Financial Savings & Loan, 845

F.2d 519, 521 (5th Cir. 1988); and 12 CFR 571.22 (1996).

\61\ See, e.g., OTS Op. Chief Counsel, Dec. 24, 1992, pp. 3-4.

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

In February of this year, after OTS had issued its proposal, the

OCC amended and updated its most favored lender regulation.62 The

primary change was to add an express definition of the term

``interest'' that was consistent with past precedent. The Supreme Court

recently upheld this definition as a reasonable construction of the

statutory most favored lender provision for national banks.63

Under the OCC's amended regulation, the term ``interest'' is defined to

include, without limitation, numerical periodic rates, late fees, not

sufficient funds fees, overlimit fees, annual fees, cash advance fees,

and membership fees.

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

\62\ 61 FR at 4869.

\63\ Smiley v. Citibank (South Dakota), N.A., 116 S. Ct. 1730

(1996).

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

Given the similarities between section 4(g) of the HOLA and the

national bank most favored lender provision, OTS believes that the term

``interest'' as it appears in section 4(g) and OTS's implementing

regulation should be interpreted in a manner consistent with the OCC

regulation and the Supreme Court's decision, even if the new OTS

regulation did not expressly define the term.64

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

\64\ This means, among other things, that when federal thrifts

elect to make loans in reliance on the most favored lender rate of

their location state, they must comply with any limits the location

state imposes on the lending fees encompassed within the term

``interest,'' notwithstanding Sec. 560.2(b)(5). In all other

circumstances, state restrictions on loan-related fees are

preempted, as provided in Sec. 560.2(b)(5).

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

Therefore, rather than perpetuate nonsubstantive differences in

syntax that could create confusion, OTS has decided to conform new

Sec. 560.110 to the OCC regulation. We do not believe this results in

any substantive change from former Sec. 571.22, except for adoption of

the ``materiality'' standard, discussed above. Conforming to the OCC

regulation is consistent with the commenters' view that the OCC's

syntax is clearer and more precise, and with the congressional command

to move toward greater banking agency uniformity.

Section 560.120 Letters of Credit and Other Independent Undertakings

To Pay Against Documents

This section is derived from current Sec. 545.48 and establishes

standards for letters of credit for all savings associations,

incorporating the modifications discussed under that section.

[[Page 50969]]

Section 560.121 Investments in State Housing Corporations

This section is derived from current Sec. 563.95, incorporating the

modifications described earlier under that section.

Section 560.160 Asset Classification

This section requires each savings association to have an internal

system to classify its assets and to establish appropriate valuations

or charge-offs, as appropriate. It replaces the more detailed

regulation found at current Sec. 563.160.

Section 560.170 Records for Lending Transactions

This section contains general loan documentation requirements based

on the interagency safety and soundness standards and guidelines found

at 12 CFR Part 570. It replaces the specific loan documentation

requirements previously found at Sec. 563.170(c) (1)-(10), and

incorporates the modifications described earlier under that section.

Section 560.172 Reevaluation of Real Estate Owned

This section has been transferred, without change, from

Sec. 563.172.

Subpart C--Alternative Mortgage Transactions

This subpart contains rules applicable to alternative mortgages

originated by federal and state savings associations and certain other

state lenders.

Section 560.210 Disclosures for Adjustable-Rate Mortgage Loans,

Adjustment Notices, and Interest-Rate Caps

This section has been transferred from Sec. 563.99. It has been

amended as discussed under that section and to remove a definition,

``fixed rate mortgage loan,'' that is no longer used in the regulation.

Section 560.220 Alternative Mortgage Parity Act

This section (originally proposed as Sec. 560.210) is derived from

current Sec. 545.33(f), ``Notice of housing creditors regarding

alternative mortgage transactions'' and applies to state savings

associations and certain other state-chartered lenders. OTS has

observed that state housing creditors interested in engaging in

alternative mortgage transactions could not easily locate

Sec. 545.33(f). Placing these provisions into a subpart specifically

dealing with alternative mortgages will make them more accessible. The

section has been streamlined and modified to remove cross-references to

repealed provisions and to clarify the scope of federal lending

regulations applicable to state housing creditors electing to originate

loans under the Parity Act. While the proposal indicated that all of

new Part 560 would be considered appropriate and applicable to the

exercise of the authority under the Parity Act, the final rule has been

revised to identify the appropriate sections with greater specificity.

One commenter suggested adding language to clarify that this section

does not limit the preemption of the imposition of state licensing

requirements on federal associations. Because of modifications made to

the final preemption regulation at Sec. 560.2, OTS believes that the

addition of this language is not necessary. States may not impose

lending license requirements on federal thrifts.

III. Disposition of Existing Lending and Investment Regulations

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

Original provision New provision Comment

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

Sec. 545.31 (a),(b).................. Secs. 560.31(a), 560.3........ Modified. Substance has been moved into

Sec. 560.31(a); definitions have been

moved into Sec. 560.3.

Sec. 545.31 (c),(d).................. Sec. 560.31 (b),(c)........... Modified.

Sec. 545.32(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.32(b) (1),(2)............... ............................... Removed.

Sec. 545.32(b) (3)-(6)............... ............................... Removed, included as areas in which

state law is preempted under Sec.

560.2.

Sec. 545.32(c)....................... Sec. 560.3.................... Substantially unchanged.

Sec. 545.32(d)....................... ............................... Removed.

Sec. 545.33 Introductory paragraph... Sec. 560.3.................... Substantially unchanged.

Sec. 545.33(a)....................... ............................... Removed, included as area in which

state law is preempted under Sec.

560.2.

Sec. 545.33(b)....................... ............................... Removed.

Sec. 545.33(c) (1)-(3)............... Sec. 560.35................... Modified.

Sec. 545.33(c) (4),(5)............... ............................... Removed.

Sec. 545.33 (d),(e).................. ............................... Removed.

Sec. 545.33(f)....................... Sec. 560.220.................. Modified.

Sec. 545.34(a)....................... Sec. 560.2.................... Modified and reorganized.

Sec. 545.34(b)....................... Sec. 560.33................... Modified.

Sec. 545.34(c)....................... Sec. 560.34................... Modified.

Sec. 545.35.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.36.......................... ............................... Removed. Paragraphs (c) and (d) to be

incorporated into guidance.

Sec. 545.37.......................... ............................... Removed.

Sec. 545.38 (a),(b).................. ............................... Removed.

Sec. 545.38(c)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.39(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.39(b)....................... Sec. 560.43................... Modified.

Sec. 545.40.......................... ............................... Removed.

Sec. 545.41.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.42.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.43.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.44.......................... ............................... Removed.

Sec. 545.45(a)....................... ............................... Removed.

Sec. 545.45(b)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.45 (c),(d).................. ............................... To be incorporated into guidance.

Sec. 545.45(e)....................... ............................... Removed.

Sec. 545.46(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.46(b) introductory paragraph Sec. 560.30................... Incorporated into lending and

and (b)(1). investment powers chart.

[[Page 50970]]

Sec. 545.46(b)(2).................... ............................... Removed.

Sec. 545.47.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.48(a)....................... Sec. 560.120.................. Significantly changed.

Sec. 545.48(b)....................... ............................... Removed.

Sec. 545.49.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.50(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.50(b)....................... Sec. 560.3.................... Substantially unchanged.

Sec. 545.50(c)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.51(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.51(b)....................... ............................... Removed.

Sec. 545.52.......................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.53(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.53 (b)-(d).................. Sec. 560.41................... Significantly changed.

Sec. 545.72 Introductory paragraph... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.72 (a),(b).................. Sec. 560.42................... Significantly changed.

Sec. 545.72(c)....................... ............................... Removed.

Sec. 545.73 Introductory paragraph... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.73 (a),(b).................. Sec. 560.43................... Modified.

Sec. 545.74 (c)(1)(vi)............... ............................... Modified.

Sec. 545.75(a)....................... Sec. 560.30................... Incorporated into lending and

investment powers chart.

Sec. 545.75 (b),(c).................. Sec. 560.40................... Modified.

Sec. 545.75(d)....................... ............................... Removed.

Sec. 545.78.......................... Sec. 560.30. See also Sec. Significantly changed and incorporated

560.41.. into lending and investment powers

chart.

Sec. 556.2........................... ............................... Removed.

Sec. 556.3........................... ............................... To be incorporated into guidance.

Sec. 556.10.......................... ............................... To be incorporated into guidance.

Sec. 563.93.......................... Sec. 560.93................... Redesignated with no changes.

Sec. 563.95.......................... Sec. 560.121.................. Significantly changed.

Sec. 563.97.......................... ............................... Removed.

Sec. 563.99.......................... Sec. 560.210.................. Redesignated and modified by removing

paragraph (a)(2) and adding new

paragraph (g).

Sec. 563.100......................... Sec. 560.100.................. Redesignated without change.

Sec. 563.101......................... Sec. 560.101.................. Redesignated without change.

Sec. 563.160......................... Sec. 560.160.................. Significantly changed.

Sec. 563.170 (a),(b)................. ............................... Unchanged.

Sec. 563.170(c) introductory text.... ............................... Modified.

Sec. 563.170 (c)(1)-(10)............. Sec. 560.170.................. Significantly changed.

Sec. 563.170 (d),(e)................. ............................... Unchanged.

Sec. 563.172......................... Sec. 560.172.................. Unchanged.

Sec. 571.8........................... ............................... Removed.

Sec. 571.13.......................... ............................... To be incorporated into guidance.

Sec. 571.20.......................... ............................... To be incorporated into guidance.

Sec. 571.22.......................... Sec. 560.110.................. Significantly changed.

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

IV. Administrative Procedure Act

This final rule results from the notice of proposed rulemaking OTS

published on January 17, 1996. In addition to the regulatory language

proposed in that notice, OTS is today redesignating, without

substantive change, other lending-related regulations previously

located in Part 563 into new Part 560. Pursuant to section 553(b) of

the Administrative Procedure Act, OTS hereby finds that good cause

exists not to publish those provisions for public notice and comment.

They are merely being renumbered and grouped with other lending-related

regulations for the convenience of users, thus public notice and

opportunity to comment are unnecessary.

V. Paperwork Reduction Act of 1995

Respondents/recordkeepers are not required to respond to this

collection of information unless it displays a currently valid OMB

control number.

The recordkeeping requirements contained in 12 CFR 560.170 and

563.170 of this final rule have been submitted to and approved by the

Office of Management and Budget under OMB Control No. 1550-0078 in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3507(d)).

In response to comments received, OTS has decided to adopt 12 CFR

560.35, which was not part of the proposal. The reporting requirements

contained in this section have been submitted to the Office of

Management and Budget for review.

Comments on all aspects of these information collections should be

sent to the Office of Management and Budget, Paperwork Reduction

Project (1550), Washington, DC 20503 with copies to OTS, 1700 G Street,

NW., Washington, DC 20552.

The recordkeeping requirements in this final rule are found in 12

CFR 560.35, 560.170, and 563.170. The reporting and recordkeeping

requirements set forth in this final rule are needed by OTS in order to

supervise savings associations and develop regulatory policy. The

likely recordkeepers are OTS-regulated savings associations. Start-up

costs to respondents: None.

Records are to be maintained for the period of time respondent/

recordkeeper owns the loan plus three years.

The burden estimates for new Sec. 560.35 are as follows:

Estimated number of respondents: 120.

Estimated average annual burden hours per respondent: 1.

Estimated number of hours per response: 20 hours.

[[Page 50971]]

Estimated number of total annual burden hours: 2,400 hours.

Start-up costs to respondents: None.

VI. Executive Order 12866

The Director of OTS has determined that this final rule does not

constitute a ``significant regulatory action'' for the purposes of

Executive Order 12866.

VII. Regulatory Flexibility Act Analysis

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

certifies that this final rule will not have a significant economic

impact on a substantial number of small entities. The final rule does

not impose any additional burdens or requirements upon small entities

and reduces burdens on all savings associations. The regulations have

been reorganized to group all lending regulations together in a single

part, which will make the regulations easier to locate and use. A chart

setting forth the lending and investment powers of savings

associations, with accompanying statutory citations, will make it

easier for small savings associations to determine the scope of their

lending authority. Loan documentation requirements have been

streamlined and should result in less paperwork for small associations

holding low-dollar amount, non-complex, loans in their portfolios.

VIII. Unfunded Mandates Act of 1995

OTS has determined that the requirements of this final rule will

not result in expenditures by State, local, and tribal governments, or

by the private sector, of more than $100 million in any one year.

Accordingly, a budgetary impact statement is not required under section

202 of the Unfunded Mandates Act of 1995.

IX. Effective Date

Section 302 of CDRIA delays the effective date of regulations

promulgated by the Federal banking agencies that impose additional

reporting, disclosure, or new requirements to the first day of the

first calendar quarter following publication of the final rule. OTS

believes that CDRIA does not apply to this final rule because it

imposes no new burden. It reduces regulatory burden in the lending and

investment areas and provides added flexibility.

List of Subjects

12 CFR Part 545

Accounting, Consumer protection, Credit, Electronic funds

transfers, Investments, Reporting and recordkeeping requirements,

Savings associations.

12 CFR Part 556

Savings associations.

12 CFR Part 560

Consumer protection, Investments, Manufactured homes, Mortgages,

Reporting and recordkeeping requirements, Savings associations,

Securities.

12 CFR Part 563

Accounting, Advertising, Crime, Currency, Investments, Reporting

and recordkeeping requirements, Savings associations, Securities,

Surety bonds.

12 CFR Part 566

Liquidity, Reporting and recordkeeping requirements, Savings

associations.

12 CFR Part 571

Accounting, Conflicts of interest, Investments, Reporting and

recordkeeping requirements, Savings associations.

12 CFR Part 590

Banks, banking, Loan programs--housing and community development,

Manufactured homes, Mortgages, Savings associations.

Accordingly, and under the authority of 12 U.S.C. 1462a, the Office

of Thrift Supervision amends chapter V, title 12, Code of Federal

Regulations, as set forth below.

PART 545--OPERATIONS

1. The authority citation for part 545 continues to read as

follows:

Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.

Secs. 545.31-545.43, 545.45-545.53 [Removed]

2. Sections 545.31 through 545.43 and 545.45 through 545.53 are

removed.

Secs. 545.72-545.73 [Removed]

3. Sections 545.72 and 545.73 are removed.

Sec. 545.74 [Amended]

4. Section 545.74 is amended by revising paragraph (c)(1)(vi) to

read as follows:

Sec. 545.74 Service corporations.

* * * * *

(c) * * *

(1) * * *

(vi) Commercial loans and participations therein.

* * * * *

Sec. 545.75 [Removed]

5. Section 545.75 is removed.

Sec. 545.78 [Removed]

6. Section 545.78 is removed.

PART 556--STATEMENTS OF POLICY

7. The authority citation for part 556 continues to read as

follows:

Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1464, 1701j-3; 15 U.S.C.

1693-1693r.

Secs. 556.2, 556.3, 556.10 [Removed]

8. Sections 556.2, 556.3, and 556.10 are removed.

9. Part 560 is added to read as follows:

PART 560--LENDING AND INVESTMENT

Sec.

560.1 General.

560.2 Applicability of law.

560.3 Definitions.

Subpart A--Lending and Investment Powers for Federal Savings

Associations

560.30 General lending and investment powers.

560.31 Election regarding categorization of loans or investments

and related calculations.

560.33 Late charges.

560.34 Prepayments.

560.35 Adjustments to home loans.

560.40 Commercial paper and corporate debt securities.

560.41 Leasing.

560.42 State and local government obligations.

560.43 Foreign assistance investments.

Subpart B--Lending and Investment Provisions Applicable to all Savings

Associations

560.93 Lending limitations.

560.100 Real estate lending standards; purpose and scope.

560.101 Real estate lending standards.

560.110 Most favored lender usury preemption.

560.120 Letters of credit and other independent undertakings to pay

against documents.

560.121 Investment in state housing corporations.

560.160 Asset classification.

560.170 Records for lending transactions.

560.172 Re-evaluation of real estate owned.

Subpart C--Alternative Mortgage Transactions

560.210 Disclosures for adjustable-rate mortgage loans, adjustment

notices, and interest-rate caps.

560.220 Alternative Mortgage Parity Act.

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1701j-3, 1828,

3803, 3806; 42 U.S.C. 4106.

Sec. 560.1 General.

(a) Authority and scope. This part is being issued by OTS under its

general rulemaking and supervisory authority

[[Page 50972]]

under the Home Owners' Loan Act (HOLA), 12 U.S.C. 1462 et seq. Subpart

A of this part sets forth the lending and investment powers of Federal

savings associations. Subpart B of this part contains safety-and-

soundness based lending and investment provisions applicable to all

savings associations. Subpart C of this part addresses alternative

mortgages and applies to all savings associations.

(b) General lending standards. Each savings association is expected

to conduct its lending and investment activities prudently. Each

association should use lending and investment standards that are

consistent with safety and soundness, ensure adequate portfolio

diversification and are appropriate for the size and condition of the

institution, the nature and scope of its operations, and conditions in

its lending market. Each association should adequately monitor the

condition of its portfolio and the adequacy of any collateral securing

its loans.

Sec. 560.2 Applicability of law.

(a) Occupation of field. Pursuant to sections 4(a) and 5(a) of the

HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to promulgate

regulations that preempt state laws affecting the operations of federal

savings associations when deemed appropriate to facilitate the safe and

sound operation of federal savings associations, to enable federal

savings associations to conduct their operations in accordance with the

best practices of thrift institutions in the United States, or to

further other purposes of the HOLA. To enhance safety and soundness and

to enable federal savings associations to conduct their operations in

accordance with best practices (by efficiently delivering low-cost

credit to the public free from undue regulatory duplication and

burden), OTS hereby occupies the entire field of lending regulation for

federal savings associations. OTS intends to give federal savings

associations maximum flexibility to exercise their lending powers in

accordance with a uniform federal scheme of regulation. Accordingly,

federal savings associations may extend credit as authorized under

federal law, including this part, without regard to state laws

purporting to regulate or otherwise affect their credit activities,

except to the extent provided in paragraph (c) of this section or

Sec. 560.110 of this part. For purposes of this section, ``state law''

includes any state statute, regulation, ruling, order or judicial

decision.

(b) Illustrative examples. Except as provided in Sec. 560.110 of

this part, the types of state laws preempted by paragraph (a) of thi

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