# Lending and Investment > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A96-23726 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** September 30, 1996 - **Citation:** 61 FR 50951 ## Text 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. ----------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \1\ 12 U.S.C. 4803(a)(1). \2\ 61 FR 1162 (January 17, 1996). --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \4\ 12 U.S.C. 1464(c)(1)(B), (c)(2)(B). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \5\ 12 U.S.C. 1464(c)(1)(B), (c)(2)(B). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \7\ See 61 FR 11294, 11297 (March 20, 1996). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\ 12 U.S.C. 1701j-3; 12 CFR Part 591. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \10\ 12 U.S.C. 1464(c)(4)(C). \11\ 22 U.S.C. 2181, 2184. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \12\ 12 U.S.C. 1464(c)(3)(B). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \18\ See 12 CFR 567.1(kk), 567.6(a)(2)(i)(C). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \23\ See Notice of Proposed Rulemaking: Interpretive Rulings, 60 FR 11924, 11926 (March 3, 1995). \24\ 61 FR at 4852. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \25\ See footnote to the new Sec. 560.120(a). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \26\ 12 U.S.C. 1464(c)(1)(L). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \27\ 12 U.S.C. 1464(c)(2)(D). \28\ Id. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \29\ 12 U.S.C. 1464(b)(4). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \30\ See 15 U.S.C. 1693 et seq. and 12 CFR Part 205 respectively. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \31\ 12 U.S.C. 1464(c)(1)(A). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \33\ The OCC has recently proposed amendments to its leasing regulation at 60 FR 46246 (September 6, 1995). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \34\ 12 U.S.C. 1464(c)(1)(H). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \35\ 12 U.S.C. 1464(c)(4)(C). --------------------------------------------------------------------------- [[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. --------------------------------------------------------------------------- \36\ See Notice of Proposed Rulemaking, Subsidiaries and Equity Investments, 61 FR 29976 (June 13, 1996). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \39\ 12 U.S.C. 1831e(d). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \40\ 12 U.S.C. 1464(c)(2)(C). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \43\ 12 CFR 226.1(c)(1)(iv). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \46\ Appendix A to the real estate lending standards at current Secs. 563.100-101. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \50\ 60 FR at 35679. --------------------------------------------------------------------------- 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: --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \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 sub [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-23726. Public record. Not legal advice.