Real Estate Lending and Appraisals

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. 96-06]

RIN 1557-AB48

Real Estate Lending and Appraisals

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

ACTION: Final rule.

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

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

revising its rules governing real estate lending as part of its

Regulation Review Program. Consistent with the goals of the Program,

the final rule modernizes and clarifies the rules, reduces unnecessary

regulatory burdens, and applies regulatory requirements only where

needed to address safety and soundness concerns or accomplish other

statutory responsibilities of the OCC.

EFFECTIVE DATE: April 19, 1996.

FOR FURTHER INFORMATION CONTACT: Laura Goldman, Attorney, Bank

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

Examiner, Credit & Management Policy (202) 874-5170; Frank R. Carbone,

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

Roland G. Ullrich, National Bank Examiner, Consumer and Fiduciary

Compliance (202) 874-4866; or Mark Tenhundfeld, Senior Attorney,

Legislative and Regulatory Activities (202) 874-5090, 250 E Street SW,

Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

The OCC has reviewed 12 CFR part 34 as another component of its

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

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

contribute significantly to maintaining the safety and soundness of

national banks or to accomplishing the OCC's other statutory

responsibilities. Another goal of the Program is to clarify regulations

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

apply. Consistent with these goals, the OCC intends for this final rule

to reduce regulatory costs and other burdens on national banks by

eliminating regulatory requirements that are neither essential to

maintaining the safety and soundness of national banks nor needed to

accomplish the OCC's statutory responsibilities.

The Proposal

On July 7, 1995, the OCC published a notice of proposed rulemaking

(NPRM or proposal) (60 FR 35353) to revise subparts A (General), B

(Adjustable-Rate Mortgages) (ARMs), and E (Other Real Estate Owned)

(OREO) of 12 CFR part 34.1 In the NPRM, the OCC proposed to

[[Page 11295]]

permit the suspension of the disposition period for leases that are

treated as OREO if a bank, acting in good faith, has entered into a

non-coterminous sublease (i.e., a sublease that has a term shorter than

the remainder of the master lease's term).2 Following termination

of a non-coterminous sublease, a bank would have the same amount of

time in which to dispose of the property that the bank had when it

entered into the sublease. The proposal also summarized the OCC's

general approach to questions of Federal preemption of State laws

governing real estate lending while emphasizing that this clarification

did not expand the scope of State law preemption beyond what appeared

in the former rule. Finally, the proposal removed redundant or

otherwise unnecessary provisions from the former rule and made several

other changes intended to improve the rule's clarity.

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

\1\ As explained in the preamble to the NPRM, the OCC did not

propose to amend subparts C (Appraisals) or D (Real Estate Lending

Standards) because the OCC recently adopted these subparts on an

interagency basis and the OCC wishes to gather additional

information on their effectiveness before deciding whether to

recommend an interagency effort to revise them.

\2\ Under both the former rule and the NPRM, a coterminous

sublease is deemed to be an effective disposition of a lease that

has been transferred to OREO.

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

The Final Rule and Comments Received

The OCC received 12 comments. Most commenters supported the

proposed changes. Comments were received from seven national banks, two

bank holding companies that control national banks, two trade groups,

and one law firm. Several commenters, while supporting the proposal,

suggested that the OCC make additional changes, as discussed later in

this preamble.

Three commenters raised issues concerning appraisals (subpart C of

part 34) while two offered suggestions concerning the real estate

lending standards (subpart D). The OCC will take these comments into

consideration when reviewing those subparts at a later date.

One commenter suggested that section 114 of the Riegle-Neal

Interstate Banking and Branching Efficiency Act (12 U.S.C. 43) (Riegle-

Neal Act) requires the OCC to resubmit for public comment proposed

Secs. 34.4, 34.5, 34.21, and 34.23, which contain statements of

preemption of various State laws. Section 114 requires, inter alia,

that the OCC publish notice of requests for the OCC to issue opinions

on whether Federal law preempts certain types of State laws, or when

the OCC, on its own initiative, proposes to issue such an opinion.

The OCC does not believe that section 114 applies to this

rulemaking. First, no prior notice under section 114 is required for

preemption issues that are essentially identical to those on which the

agency previously has opined. As was explained in the NPRM, each of the

sections at issue in the proposal is substantively identical to those

found in the existing rule.3 Second, the OCC has followed formal

rulemaking procedures in adopting and amending part 34, giving the

public ample opportunity to comment on each section. Third, the OCC is

adopting a rule, not issuing a preemption opinion or interpretation.

Thus, the section 114 procedures do not apply.

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

\3\ See 60 FR at 35354, 35355, and 35356.

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

The following discussion summarizes the amendments to part 34 and

the remaining comments.

Subpart A--General

Purpose and Scope (Sec. 34.1)

A national bank may make real estate loans pursuant to 12 U.S.C.

371 and 12 U.S.C. 24 (Seventh). Part 34 formerly identified (in

Sec. 34.3) loans that are not considered ``real estate loans'' for

purposes of 12 U.S.C. 371 but which national banks nevertheless may

make pursuant to 12 U.S.C. 24 (Seventh). The proposal removed the list

in Sec. 34.3, and eliminated cross-references in Sec. 34.1 to that

list. However, since former paragraphs (f) and (g) of Sec. 34.3

contained an exception to the regulation's scope, the proposal

incorporated the substance of those provisions into the proposed

``Scope'' section of the revised regulation. The proposal also

relocated the text authorizing national banks to engage in real estate-

related transactions from Sec. 34.1(a) to proposed Sec. 34.3. This

change was proposed to conform the order of subpart A of part 34 to

that of other OCC rules. Finally, the proposal set forth a statement of

the purpose of part 34.

The OCC received no comments on this section, which is adopted as

proposed with stylistic changes and one clarification. The final rule

adds a statement clarifying that part 34 applies to national banks and

their operating subsidiaries, except where otherwise noted (see, e.g.,

12 CFR 34.21(b)).

Definitions (Sec. 34.2)

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

The definition of ``due-on-sale clause'' was moved from former

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

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

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

every section that refers to preemption.

The OCC received no comments on this section, which is adopted as

proposed with minor stylistic edits.

General Rule (Sec. 34.3)

The proposal set forth the general rule authorizing national banks

to engage in real estate lending and related transactions, and

relocated this general rule to a new section to conform the order of

subpart A of part 34 to that followed in other OCC regulations.

The OCC received no comments on this section, which is adopted as

proposed with minor stylistic edits.

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

Former Sec. 34.3 listed several types of loans that are not

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

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

provision was confusing and unnecessary. Therefore, the proposal

removed Sec. 34.3 in its entirety.

The OCC received no comments on this proposed removal, and

accordingly adopts the proposed change.

Applicability of Law (Sec. 34.4)

The proposal retained a statement of specific areas where Federal

law preempts State law in order to provide continued guidance in this

area. The proposal removed the vague reminder, found at former

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

added, in Sec. 34.4(b), a general statement of the OCC's position with

respect to preemption in order to clarify that the list of areas where

State law is preempted, carried over from the former rule, is not

necessarily exhaustive. The proposed rule clarified that the OCC will

apply traditional principles of Federal preemption when determining

whether a State law affecting real estate lending is preempted. Under

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

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

stands as an obstacle to the accomplishment of the full purposes and

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

evidence a Congressional intent to occupy a given field.4

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

\4\ The Supreme Court's most recent discussion of the principles

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

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

stated:

As both the majority and dissent acknowledge, we have identified

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

First, Congress can adopt express language defining the existence

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

Congress creates a scheme of federal regulation so pervasive as to

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

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

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

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

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

* or where state law `stands as an obstacle to the accomplishment

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

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

omitted). The plurality and dissenting opinions in Gade contain

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

respectively.

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

[[Page 11296]]

Other than the comment summarized earlier concerning the

application of section 114 of the Riegle-Neal Act (see text following

``The Final Rule and Comments Received,'' above), the OCC received no

comments on this provision, which is adopted as proposed with minor

stylistic edits.

Due-On-Sale Clauses (Sec. 34.5)

The proposal modified this section to improve clarity and to remove

unnecessary restatements of statutory provisions. No change was

proposed to the substance of those descriptions.

Other than the comment summarized above concerning the application

of section 114 of the Riegle-Neal Act (see text following ``The Final

Rule and Comments Received,'' above), the OCC received no comments on

this provision. The final rule makes minor stylistic edits to the

provision as proposed and removes the definition of the term

``lender,'' given that this term is not used in the final rule.

Subpart B--ARMs

Definitions (Sec. 34.20)

The proposal amended the definition of ``ARM loan'' by deleting the

provisions, found in former Sec. 34.5(a)(2), that exempt fixed-rate

extensions of credit that are payable either on demand or without any

interim amortization. The proposal made stylistic changes to the

definition of ``ARM loan,'' and removed the definition of ``consumer

credit'' because other changes to the rule make that definition

unnecessary. In order to consolidate all definitions used in subpart B,

the proposal relocated to Sec. 34.20 the definitions of ``affiliate''

and ``subsidiary'' formerly found in Sec. 34.6(b). Finally, the

proposal used the term ``renewal'' instead of ``refinance'' as that

term was used in former Sec. 34.5(a)(2) in order to avoid creating the

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

narrowly defined in Regulation Z (Reg. Z, 12 CFR part 226) of the Board

of Governors of the Federal Reserve System (Federal Reserve).

In addition, the proposal sought comment on whether it remains

necessary or appropriate to continue to exempt from the definition of

``ARM loan'' fixed-rate loans that are payable at the end of a term

that, when added to all terms for which the bank has promised to

refinance the loan, is shorter than the term of the amortization

schedule. This exemption is similar, but not identical, to the

treatment of variable-rate transactions in Reg. Z. Specifically, the

OCC sought comment on (1) whether the difference between part 34 and

Reg. Z poses an unnecessary burden, and (2) whether commenters favor

amending part 34 to eliminate the difference, notwithstanding that such

approach would result in more loans being subject to the requirement

that a bank use an index beyond its control.

The OCC received three comments in response to the proposed changes

and the request for comments. Those commenters responding to the issues

raised by the exemption from the definition of ``ARM loan'' requested

that the OCC retain the exemption in the final rule. One commenter

noted that the highlighted difference between Reg. Z and part 34 does

not pose an unnecessary burden and that the bank already has systems in

place to deal with the difference. Another commenter noted that

removing the exemption would add a new layer of confusion to the

affected loans and would have the result of requiring banks to tie the

loans to an independent index. For the reasons advanced by the

commenters, and in light of the absence of any expression of problems

experienced by national banks, the OCC is retaining the exemption.

Another commenter suggested that the OCC should expand the

definition of ``ARM loan'' to be consistent with the definition of

``alternative mortgage transaction'' found in the Alternative Mortgage

Transaction Parity Act (Parity Act) (12 U.S.C. 3801 et seq.).5 The

suggested change would apply the general rule stated in Sec. 34.21

(which permits national banks to make, sell, purchase, participate in,

or otherwise deal in ARM loans without regard to State law limitations

on those activities) to a broader variety of loans, including home

equity loans. The commenter advocating this change suggested that the

former rule created a competitive disadvantage for national banks by

authorizing fewer types of ARM loans than may be made by other types of

lenders. No other commenter suggested that the definition of ``ARM

loan'' presents a problem.

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

\5\ The Parity Act defines ``alternative mortgage transaction''

as:

[A] loan or credit sale secured by an interest in residential

real property, a dwelling, all stock allocated to a dwelling unit in

a residential cooperative housing corporation, or a residential

manufactured home * * * (A) in which the interest rate or finance

charge may be adjusted or renegotiated; (B) involving a fixed-rate,

but which implicitly permits rate adjustments by having the debt

mature at the end of an interval shorter than the term of the

amortization schedule; or (C) involving any similar type of rate,

method of determining return, term, repayment, or other variation

not common to traditional fixed-rate, fixed-term transactions,

including without limitation, transactions that involve the sharing

of equity or appreciation; described and defined by applicable

regulation.

12 U.S.C. 3802(1).

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

The OCC has determined not to make the suggested change to the

definition of ``ARM loan.'' Historically, the OCC has confined the

scope of its ARM lending rule to home-purchase loans.6 While the

OCC's ARM lending rule does not authorize home equity lending, such

lending clearly is permissible under 12 U.S.C. 371, which permits any

national banking association to ``make, arrange, purchase or sell loans

or extensions of credit secured by liens on interests in real estate. *

* *'' Id. at 371(a). Thus, national banks may make the types of loans

that would be covered by the proposed expanded definition of ARM loan.

If a national bank encounters a provision of State law that it believes

is inappropriately restrictive, the bank may seek the OCC's opinion

concerning whether Federal law preempts the provision of State law in

question according to recognized principles of Federal preemption.

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

\6\ See, e.g., 46 FR 18932, 18935 (March 27, 1981) (``The intent

of the regulation is to improve the availability of mortgage funds

for purchasing residential property and to provide protection to

home purchases. The intent is not to regulate adjustable rate loans

made for other purposes.'').

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

The final rule adopts the changes to Sec. 34.20 as proposed in the

NPRM, except that it relocates the definitions of ``affiliate'' and

``subsidiary'' from Sec. 34.20 to Sec. 34.21(b). This change from the

proposal clarifies that only the provision concerning the purchase of

loans not in compliance with part 34 (Sec. 34.21(b)) applies to a

bank's affiliates and subsidiaries as these terms are defined in

section 23A of the Federal Reserve Act (12 U.S.C. 371c). Generally

speaking, part 34 applies to national banks and their operating

subsidiaries, unless the OCC determines otherwise.

General Rule (Sec. 34.21)

The proposal made only minor changes to simplify the general rule,

which provides that national banks and their subsidiaries may make,

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

notwithstanding any State law to the contrary that applies to these

activities. The proposal intended no change in the former rule

governing preemption of State law limitations on ARM lending. A

national bank may

[[Page 11297]]

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

with the OCC's regulations, except that, as already noted, loans

purchased from an affiliate or subsidiary must comply with part 34.

As noted earlier, the final rule relocates the definitions of

``affiliate'' and ``subsidiary'' to Sec. 34.21(b) to clarify that these

broadly encompassing definitions apply only in the limited

circumstances specified in that section. The final rule otherwise

adopts the proposal as published.

Index (Sec. 34.22)

Former Sec. 34.7 required ARM loans that are subject to 12 CFR

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

shall be linked. Under that section, the index is to be readily

available to, and verifiable by, the borrower and beyond the control of

the lending bank. Proposed Sec. 34.22 made no changes to the substance

of the former rule.

One commenter requested that the OCC drop the requirement of an

independent index altogether, and suggested that the secondary market

and competitive pressures will protect the consumer. The OCC has

decided to keep the independent index, because the agency believes that

the requirement provides a significant protection to the consumer and

that it creates only limited burden on national banks.

Another commenter expressed concern that the former and proposed

rules could be construed to prohibit rate changes based on such

criteria as termination of employment, discontinuance of payment by a

particular method, default, or termination of certain banking

relationships by the customer. The commenter suggested that the OCC

clarify that a national bank may decrease the interest rate at any time

and increase the rate pursuant to a formula or schedule set forth in

the relevant loan documents specifying the amount of the increase and

the times at which, or circumstances under which, the increase may be

made. The OCC agrees with the commenter that this clarification is

appropriate, and has made the suggested change along with minor

stylistic edits in the final rule.

Rate Changes (Former Sec. 34.8--Removed)

Former Sec. 34.8 set forth the limitation found in section 1204 of

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

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

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

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

because it is an unnecessary and potentially confusing restatement of

the statute. Moreover, CEBA vests rulemaking authority with the Federal

Reserve, which has implemented section 1204 of CEBA at 12 CFR 226.30.

The OCC received no comments on the proposed change, and the

section is removed as proposed.

Prepayment Fees (Sec. 34.23)

The proposal made no substantive change to this section (former

Sec. 34.9), which provides that national banks may impose fees for

prepayments of ARM loans, notwithstanding any State law to the

contrary.

The OCC received no comments on this section, which is adopted as

proposed with minor stylistic edits.

Disclosure (Former Sec. 34.10--Removed)

This section requires a national bank that offers consumer ARM

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

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

Reg. Z (12 CFR part 226). The OCC believes that the reminder to comply

with Reg. Z disclosures when making a consumer ARM loan was appropriate

when the OCC-imposed disclosure requirements were removed, but now is

unnecessary. Accordingly, the proposal removed this section in its

entirety. The proposal also removed the term ``consumer credit'' from

the definition section (former Sec. 34.5(b)) since it was used only in

former Sec. 34.10.

One person commented on this proposed change, requesting that the

final rule retain the reference to Reg. Z in order to remind national

banks that the Federal Reserve has promulgated rules governing

disclosure requirements related to ARM lending. The OCC remains of the

view that a general reminder that Reg. Z applies is unnecessary, and

that the presence of a reminder about the applicability of a separate

regulation in one portion of an OCC rule, but not in others, is

potentially confusing. Therefore, this section is removed from the

final rule.

Nonfederally Chartered Commercial Banks (Sec. 34.24)

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

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

provisions of its ARM regulation that are inappropriate for

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

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

and so stated in former Sec. 34.11. Proposed Sec. 34.25 retained this

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

unnecessary citations to statutory authority.

The OCC received no comments on this section, which is adopted as

proposed with stylistic edits.

Transition Rule (Sec. 34.25)

The former rule (Sec. 34.12) provided that national banks were

authorized to make or administer loans during a ``window period''

beginning on the date the former rule was adopted (March 11, 1988) and

ending October 1, 1988, if the loans complied with the OCC rules in

effect before the March 11, 1988 amendment. Following October 1, 1988,

all ARM loans have been required to comply with part 34, as revised.

The proposal retained most of the former rule but removed what are now

unnecessary references to the window period.

The OCC received no comments on this section, which is adopted as

proposed with stylistic edits.

Subpart C--Appraisals

The OCC did not propose any changes to the rules governing the use

of appraisals. Accordingly, subpart C is not amended.

Subpart D--Real Estate Lending Standards

The OCC did not propose any changes to the real estate lending

standards. Accordingly, subpart D is not amended.

Subpart E--OREO

Definitions (Sec. 34.81)

Former Sec. 34.81 contained the definitions used in subpart E. The

proposal made several changes to these definitions in addition to

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

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

banking premises, and removed the term ``covered transactions real

estate'' from the definition of OREO (thereby rendering the definition

of covered transactions real estate unnecessary). The proposal also

removed the term ``transaction value'' and corresponding definition.

The OCC received no comments on these proposed changes, which are

adopted as proposed with stylistic edits. However, one commenter

suggested that the OCC make an additional change that was not proposed

in the NPRM, namely, to exempt leases from the definition of OREO. This

commenter noted that the proposal, which required a bank to dispose of

OREO leases after the expiration of a non-coterminous sublease, would

require the bank to track properties for an extended period

[[Page 11298]]

of time in order to insure that the bank ultimately complied with the

disposition requirements. The commenter also raised a number of

questions prompted by the NPRM, such as whether the existence of a

sublease is sufficient despite the fact that a subtenant is delinquent

and whether the sublease must be at market rates.

The OCC believes that long-term leases of real property can present

many of the same risks that are presented by ownership of a fee simple

interest and, therefore, that safety and soundness reasons dictate that

leases be covered by the rules governing disposition of OREO. The

commenter is correct in concluding that a bank that has entered into a

non-coterminous sublease must dispose of the lease within the time

remaining under the OREO disposition rules once the sublease expires.

However, the OCC believes that the tracking burden associated with this

disposition requirement is minimal and reasonable in light of the

safety and soundness benefits derived by continuing to treat leases as

OREO. Questions regarding the adequacy of a particular sublease will be

addressed on a case-by-case basis. However, national banks are to

exercise good faith in entering into non-coterminous subleases.

Holding Period (Sec. 34.82)

The proposal clarified, in Sec. 34.82(b)(2), that the holding

period begins on the date that a national bank ceases to use former

banking premises without relocating the business formerly conducted

there to another site. The proposed rule also made changes to improve

clarity and to remove provisions that are redundant in light of 12

U.S.C. 29. The proposal relocated the requirement that a national bank

dispose of OREO when prudent judgment dictates from Sec. 34.83 (which

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

timing of disposition). Finally, proposed Sec. 34.82 retained a

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

statement clarified that OREO, as defined in the regulation, is subject

to the divestiture provisions.

The OCC received no comments on this section, which is adopted as

proposed with minor stylistic edits.

Disposition of Real Estate (Sec. 34.83)

Formerly, Sec. 34.83(a)(5) permitted disposition of leases only

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

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

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

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

to do so. As industry consolidation and technological advances further

reduce the utilization of branches and back- office space, this problem

likely will become more severe.

To address this problem, proposed Sec. 34.83(a)(3) permitted the

divestiture period to be suspended for the duration of a non-

coterminous sublease. The proposal also made numerous stylistic changes

to Sec. 34.83 that simplify the former regulation and eliminate

unnecessary repetition. The proposal modified Sec. 34.83(b) to clarify

that disposition efforts must be ongoing throughout the disposition

period. Finally, as previously noted, the proposal relocated the

provision in former Sec. 34.83 (requiring disposition when prudent

judgment dictates) to proposed Sec. 34.82.

The OCC received six comments on the proposed change affecting non-

coterminous subleases, and all six favored the change. In light of

these comments and for the reasons stated in the preamble to the NPRM,

the OCC adopts the proposed changes to this section, with the

additional changes noted as follows.

Two commenters requested that the OCC permit a national bank to

exercise options to extend a lease if the extension is necessary to

attract prospective sublessees. These commenters noted that a third

party will not enter into a sublease if the duration of the sublease is

insufficient to justify making whatever expenditures are required to

conform the property to the third party's business. The OCC agrees that

a national bank should have the flexibility to extend a lease if the

extension enables the bank to sublease the property and certain

safeguards are satisfied, and has modified Sec. 34.83(a)(3)

accordingly.

Historically, the OCC has required national banks to divest of OREO

as soon as possible. See, e.g., OCC Interpretive Letter No. 491 (1989-

1990 Transfer Binder) Fed. Banking L. Rep. (CCH) ] 83,074 at p. 71,184

(Sept. 6, 1989) (``It should be recognized that the Bank's paramount

obligation is to dispose of its interest in the lease [that has become

OREO] at the earliest possible date, consistent with 12 U.S.C. Sec. 29

* * *''). The OCC continues to require divestiture of OREO as soon as

possible but in any event within the divestiture period prescribed by

statute. The change proposed by the commenters is consistent with this

requirement. Under the changes proposed in the NPRM and by the

commenters, national banks remain obligated to take appropriate steps

before the disposition period expires either to dispose of a lease

outright (by assigning the lease or entering into a coterminous

sublease) or to enter into a non-coterminous sublease that will suspend

the running of the disposition period. The change proposed by the

commenters will facilitate a bank's compliance with this obligation.

While the OCC agrees that the change proposed by the commenters is

appropriate and consistent with applicable law, a national bank may not

enter into an extension of a master lease for the purpose of

speculating in real estate. For this reason, the final rule clarifies

that the OCC reserves the right to require a national bank to take

immediate steps to dispose of an extended lease if the OCC finds that

the bank entered into the extension for the purpose of real estate

speculation.7 The final rule also prohibits a national bank from

entering into an extension unless (1) the bank, prior to entering into

an extension of the master lease, has a firm commitment from a third

party to sublease the property and (2) the duration of the extension is

reasonable and does not materially exceed the duration of the sublease.

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

7 The NPRM stated that the OCC reserves this right in

connection with leases in general but was silent on the question of

extensions of lease.

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

The OCC also has amended Sec. 34.83(a)(3) to clarify that the

agency retains the authority to require a national bank to take

appropriate steps to dispose of a lease (or extension thereof) if the

OCC finds that the bank has not acted in good faith in entering into a

sublease. Thus, for instance, if a bank subleases property to a related

third party for a nominal amount so that the bank may retain possession

of the lease and speculate on the property's future value, the bank

will not have acted in good faith and the OCC will require the bank to

take immediate steps to dispose of the master lease.

Future Bank Expansion (Sec. 34.84)

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

future bank expansion that formerly appeared in Sec. 34.83(c) in order

to make the future bank expansion rule easier to locate.

The OCC received no comments on this section, which is adopted as

proposed.

Appraisal Requirements (Sec. 34.85)

The proposal made no substantive change to the existing rule set

forth in former Sec. 34.84. This rule provides that a national bank

should obtain either an appraisal or evaluation, as appropriate

[[Page 11299]]

under 12 CFR part 34, subpart C, when real estate is transferred to

OREO or when OREO is sold. The former rule provided an exception to

this requirement if a national bank already has a valid appraisal or

evaluation for the property in question. Banks are to monitor the value

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

practices.

One commenter suggested that the OCC not require appraisals every

time property formerly used (or intended to be used) as bank premises

is transferred to OREO. The OCC will consider this comment when the

agency reviews subpart C of part 34, which sets forth the rules

governing when and what type of an appraisal is required. The OCC

received no other comments on this section. The final rule makes

stylistic edits to the proposal and removes an unnecessary reminder in

Sec. 34.85(b) that a bank is to follow its real estate collateral

evaluation policy.

Additional Expenditures and Notification (Sec. 34.86)

The proposal rearranged Sec. 34.86 (former Sec. 34.85) to improve

clarity, and modified other parts of this section to simplify the

procedures for informing banks of the OCC's decision regarding proposed

additional expenditures. The OCC specifically sought comment on whether

the standard regarding completion of OREO development or improvement

projects provides sufficient guidance.

The OCC received one comment on this section. The commenter stated

that the existing guidance on the development of OREO is sufficient. In

light of this comment and the absence of comments requesting further

guidance, the OCC adopts this section as proposed with minor stylistic

edits.

Accounting Treatment (Sec. 34.87)

The proposal retained the former rule, which specified that OREO

reporting should conform to instructions in the Consolidated Report of

Condition and Income.

The OCC received one comment on the accounting treatment that

should be applied to OREO. The commenter suggested that, since the

leased property during the term of a non-coterminous sublease will not

be an asset to be disposed of, the OCC should require national banks to

account for the lease as ``premises'' and not ``held for sale.''

However, since a bank no longer uses OREO property as premises, the OCC

believes that OREO property that has been subleased by a bank is

appropriately accounted for as ``held for sale.'' The OCC received no

other comments on this section, which is adopted as proposed with minor

stylistic edits.

Application (Former Sec. 34.87)

Former Sec. 34.87 provided that subpart E is applicable to all OREO

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

17, 1993. The proposal removed this provision since it is unnecessary

and potentially confusing.

The OCC received no comment on this proposed removal. Accordingly,

the OCC has removed former Sec. 34.87.

Effective Date

Section 302 of the Riegle Community Development and Regulatory

Improvement Act of 1994 delays the effective date of regulations

promulgated by the Federal banking agencies that impose additional

reporting, disclosure, or new requirements to the first day of the

first calendar quarter following publication of the final rule. The OCC

believes that section 302 is not applicable to this final rule, because

the effect of the regulation is to reduce burdens on national banks.

The final regulation does not impose any additional reporting or other

requirements not already contained in the current version of the OCC's

real estate lending regulations. The effective date of this final rule

is April 19, 1996.

Derivation Table

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

of the former regulation, if any, upon which the final provision is

based, and identifies generally the action taken.

Derivation Table

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

Revised section Original section Comments

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

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

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

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

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

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

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

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

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

34.2(b) Removed.

34.3 Removed.

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

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

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

34.5(b) Removed.

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

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

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

34.8 Removed.

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

34.10 Removed.

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

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

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

34.81(b) Removed.

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

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

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

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

[[Page 11300]]

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

34.81(g) Removed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

34.87 Removed.

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

Regulatory Flexibility Act

It is hereby certified that this regulation will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

regulation will reduce the regulatory burden on national banks,

regardless of size, by simplifying and clarifying former regulatory

requirements.

Executive Order 12866

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

regulatory action under Executive Order 12866.

Unfunded Mandates Act of 1995

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

Act) requires that an agency prepare a budgetary impact statement

before promulgating an NPRM likely to result in a rule that includes a

Federal mandate that may result in the annual expenditure of $100

million or more in any one year by State, local, and tribal

governments, in the aggregate, or by the private sector. If a budgetary

impact statement is required, section 205 of the Unfunded Mandates Act

requires an agency to identify and consider a reasonable number of

alternatives before promulgating an NPRM. The OCC has determined that

the final rule will not result in expenditures by State, local, and

tribal governments, or by the private sector, of more than $100 million

in any one year. Accordingly, the OCC has not prepared a budgetary

impact statement or specifically addressed the regulatory alternatives

considered. As discussed in the preamble, the final rule will reduce

unnecessary burdens on national banks seeking to engage in real estate

lending.

List of Subjects in 12 CFR Part 34

Mortgages, National banks, Reporting and recordkeeping

requirements.

Authority and Issuance

For the reasons set out in the preamble, part 34 of chapter I of

title 12 of the Code of Federal Regulations is amended as set forth

below:

PART 34--REAL ESTATE LENDING AND APPRAISALS

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

follows:

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

and 3331 et seq.

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

follows:

Subpart A--General

Sec.

34.1 Purpose and scope.

34.2 Definitions.

34.3 General rule.

34.4 Applicability of State law.

34.5 Due-on-sale clauses.

Subpart B--Adjustable-Rate Mortgages

34.20 Definitions.

34.21 General rule.

34.22 Index.

34.23 Prepayment fees.

34.24 Nonfederally chartered commercial banks.

34.25 Transition rule.

Subpart C--Appraisals

* * * * *

Subpart D--Real Estate Lending Standards

* * * * *

Subpart E--Other Real Estate Owned

34.81 Definitions.

34.82 Holding period.

34.83 Disposition of real estate.

34.84 Future bank expansion.

34.85 Appraisal requirements.

34.86 Additional expenditures and notification.

34.87 Accounting treatment.

Subpart A--General

Sec. 34.1 Purpose and scope.

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

real estate-related lending and associated activities by national

banks.

(b) Scope. This part applies to national banks and their operating

subsidiaries as provided in 12 CFR 5.34. For the purposes of 12 U.S.C.

371 and subparts A and B of this part, loans secured by liens on

interests in real estate include loans made upon the security of

condominiums, leaseholds, cooperatives, forest tracts, land sales

contracts, and construction project loans. Construction project loans

are not subject to subparts A and B of this part, however, if they have

a maturity not exceeding 60 months and are made to finance the

construction of either:

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

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

full amount of the

[[Page 11301]]

bank's loan upon completion of the building; or

(2) A residential or farm building.

Sec. 34.2 Definitions.

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

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

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

an equivalent contractual interest in the property securing the loan is

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

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

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

Mariana Islands, American Samoa, and Guam.

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

order of any State agency, or judicial decision interpreting State law.

Sec. 34.3 General rule.

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

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

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

limitations prescribed by the Comptroller of the Currency by regulation

or order.

Sec. 34.4 Applicability of State law.

(a) Specific preemption. A national bank may make real estate loans

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

limitations concerning:

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

real estate;

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

(3) The term to maturity of the loan;

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

security of real estate; and

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

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

loan.

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

Federal preemption in considering whether State laws apply to other

aspects of real estate lending by national banks.

Sec. 34.5 Due-on-sale clauses.

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

secured by a lien on real property, that includes a due-on-sale clause.

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

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

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

enforceable, notwithstanding any State law limitations to the contrary.

For the purposes of this section, the term real property includes

residential dwellings such as condominium units, cooperative housing

units, and residential manufactured homes.

Subpart B--Adjustable-Rate Mortgages

Sec. 34.20 Definitions.

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

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

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

cooperative housing unit, or residential manufactured home, where the

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

of interest from time to time. An ARM loan does not include fixed-rate

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

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

is shorter than the term of the amortization schedule.

Sec. 34.21 General rule.

(a) Authorization. A national bank and its subsidiaries may make,

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

interests therein without regard to any State law limitations on those

activities.

(b) Purchase of loans not in compliance. A national bank may

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

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

an affiliate or subsidiary must comply with this part. For purposes of

this paragraph, the terms affiliate and subsidiary have the same

meaning as in 12 U.S.C. 371c.

Sec. 34.22 Index.

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

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

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

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

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

must be readily available to, and verifiable by, the borrower and

beyond the control of the bank. A national bank may use as an index any

measure of rates of interest that meets these requirements. The index

may be either single values of the chosen measure or a moving average

of the chosen measure calculated over a specified period. A national

bank also may increase the interest rate in accordance with applicable

loan documents specifying the amount of the increase and the times at

which, or circumstances under which, it may be made. A national bank

may decrease the interest rate at any time.

Sec. 34.23 Prepayment fees.

A national bank offering or purchasing ARM loans may impose fees

for prepayments notwithstanding any State law limitations to the

contrary. For purposes of this section, prepayments do not include:

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

reduce negative amortization; or

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

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

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

determination of monthly payments contained in the loan documents.

Sec. 34.24 Nonfederally chartered commercial banks.

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

may make ARM loans in accordance with the provisions of this subpart.

For purposes of this section, the term ``State'' shall have the same

meaning as set forth in Sec. 34.2(b).

Sec. 34.25 Transition rule.

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

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

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

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

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

continue to administer the loan or binding commitment to lend in

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

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

1988, must comply with all provisions of this subpart.

Subpart C--Appraisals

* * * * *

Subpart D--Real Estate Lending Standards

* * * * *

Subpart E--Other Real Estate Owned

Sec. 34.81 Definitions.

(a) Capital and surplus means:

(1) A bank's Tier 1 and Tier 2 capital as calculated under the

OCC's risk-based capital standards set out in appendix A to part 3 of

this chapter based upon the bank's Consolidated

[[Page 11302]]

Report of Condition and Income filed under 12 U.S.C. 161; plus

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

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

of risk-based capital under Appendix A to 12 CFR part 3, based upon the

bank's Consolidated Report of Condition and Income filed under 12

U.S.C. 161.

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

(including capitalized and operating leases) acquired by a national

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

previously contracted.

(c) Former banking premises means real estate (including

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

contemplated. This includes real estate originally acquired for future

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

purposes.

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

subpart C of this part.

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

(1) DPC real estate; and

(2) Former banking premises.

(f) Recorded investment amount means:

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

generally accepted accounting principles; and

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

Sec. 34.82 Holding period.

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

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

the end of the holding period (or an extension thereof) permitted by 12

U.S.C. 29.

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

the date that:

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

national bank;

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

banking premises or ceases to use the former banking premises without

relocating; or

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

expansion.

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

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

period begins at the expiration of that redemption period.

Sec. 34.83 Disposition of real estate.

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

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

(1) With respect to OREO in general:

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

accepted accounting principles;

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

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

United States government or a loan eligible for purchase by a

Federally-sponsored instrumentality that purchases loans; or

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

contract for deed;

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

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

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

(3) With respect to a capitalized or operating lease:

(i) By obtaining an assignment or a coterminous sublease. If a

national bank enters into a sublease that is not coterminous, the

period during which the master lease must be divested will be suspended

for the duration of the sublease, and will begin running again upon

termination of the sublease. A national bank holding a lease as OREO

may enter into an extension of the lease that would exceed the holding

period referred to in Sec. 34.82 if the extension meets the following

criteria:

(A) The extension is necessary in order to sublease the master

lease;

(B) The national bank, prior to entering into the extension, has a

firm commitment from a prospective subtenant to sublease the property;

and

(C) The term of the extension is reasonable and does not materially

exceed the term of the sublease;

(ii) Should the OCC determine that a bank has entered into a lease,

extension of a lease, or a sublease for the purpose of real estate

speculation in violation of 12 U.S.C. 29 and this part, the OCC will

take appropriate measures to address the violation, which may include

requiring the bank to take immediate steps to divest the lease or

sublease; and

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

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

receiving or accumulating from the purchaser an amount in a down

payment, principal and interest payments, and private mortgage

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

in accordance with generally accepted accounting principles.

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

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

and shall maintain documentation adequate to reflect those efforts.

Sec. 34.84 Future bank expansion.

A national bank normally should use real estate acquired for future

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

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

or an appropriately authorized bank official or subcommittee of the

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

action must be available for inspection by national bank examiners.

Sec. 34.85 Appraisal requirements.

(a) General. (1) Upon transfer to OREO, a national bank shall

substantiate the parcel's market value by obtaining either:

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

(ii) An appropriate evaluation when the recorded investment amount

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

part.

(2) A national bank shall develop a prudent real estate collateral

evaluation policy that allows the bank to monitor the value of each

parcel of OREO in a manner consistent with prudent banking practice.

(b) Exception. If a national bank has a valid appraisal or an

appropriate evaluation obtained in connection with a real estate loan

and in accordance with subpart C of this part, then the bank need not

obtain another appraisal or evaluation when it acquires ownership of

the property.

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

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

valid appraisal or an appropriate evaluation.

Sec. 34.86 Additional expenditures and notification.

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

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

the project if the advances:

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

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

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

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

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

appropriate supervisory office at least 30 days before implementing a

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

estimated cost and the bank's current

[[Page 11303]]

recorded investment amount (including any unpaid prior liens on the

property) exceeds 10 percent of the bank's capital and surplus. A

national bank need notify the OCC under this paragraph (b)(1) only

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

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

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

(2) The required notification must demonstrate that the additional

expenditure is consistent with the conditions and limitations in

paragraph (a) of this section.

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

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

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

conditions imposed by the OCC.

Sec. 34.87 Accounting treatment.

A national bank shall account for OREO, and sales of OREO, in

accordance with the Instructions for the preparation of the

Consolidated Reports of Condition and Income.

Dated: March 7, 1996.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 96-6481 Filed 3-19-96; 8:45 am]

BILLING CODE 4810-33-P