12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R0756]

Capital; Capital Adequacy Guidelines

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board of Governors of the Federal Reserve System is amending its
risk-based capital guidelines for state member banks and bank holding
companies. This final rule implements section 618(b) of the Resolution Trust
Corporation Refinancing, Restructuring, and Improvement Act of 1991 and
section 305(b)(1)(B) of the Federal Deposit Insurance Corporation Improvement
Act of 1991. The effect of the final rule will be to permit state member banks
and bank holding companies to lower from 100 percent to 50 percent the risk
weight assigned to certain multifamily housing loans.

EFFECTIVE DATE: This final rule is effective as of December 31, 1993.

FOR FURTHER INFORMATION CONTACT:

Rhoger H. Pugh, Assistant Director (202/7285883), Norah M. Barger, Manager
(202/4522402), Robert E. Motyka, Supervisory Financial Analyst
(202/4523621), or Barbara J. Bouchard, Senior Financial Analyst
(202/4523072), Division of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System, 20th Street and Constitution Avenue
NW., Washington, DC 20551. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), Dorothea Thompson (202/4523544), Board of
Governors of the Federal Reserve, 20th & C Street NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background

On April 10, 1992, the Federal Reserve Board (Board) issued for public comment
a proposal to amend its risk-based capital guidelines that would lower the
risk weight from 100 percent to 50 percent for certain multifamily housing
loans meeting specified criteria. This proposal was made to satisfy the
requirements of section 618(b) of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 (RTCRRIA). In
addition, this proposal would implement section 305(b)(1)(B) of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which requires
the Federal banking agencies1  to revise their risk-based capital guidelines
to reflect the actual performance and expected risk of loss of multifamily
housing loans.

1 The three other Federal banking agencies have also issued for public
comment similar proposals to lower the risk weight for multifamily housing
loans meeting the specified criteria. The Office of Thrift Supervision (OTS)
currently permits certain multifamily loans to be included in the 50 percent
risk weight category. The proposal issued by the OTS would modify its existing
criteria for such loans to qualify for a 50 percent risk weight.

Section 618(b) of RTCRRIA mandates that a 50 percent risk weight be accorded
to loans for multifamily housing meeting certain criteria. These statutory
criteria were incorporated into the Board's proposal and include the
following:

(1) The loan is secured by a first lien;

(2) The ratio of the principal obligation to the appraised value of the
property, that is, the loan-to-value (LTV) ratio does not exceed 80 percent
(75 percent if the loan is based on a floating interest rate);

(3) The annual net operating income generated by the property (before debt
service) is not less than 120 percent of the annual debt service on the loan
(115 percent if the loan is based on a floating interest rate);

(4) Amortization of principal and interest is over a period of not more than
30 years and the minimum maturity for repayment of principal is not less than
7 years; and

(5) All principal and interest payments have been made on the loan on time for
a period of not less than one year prior to placement in the 50 percent risk
category.

Section 618(b) also provides that the appropriate Federal banking agencies may
establish additional criteria that a multifamily housing loan must meet before
being accorded a 50 percent risk weight. In this regard, and in agreement with
the other Federal banking agencies, the Board's proposed amendment set forth
the following four additional criteria to ensure that only those multifamily
housing loans that expose an institution to minimal levels of credit risk
would receive a 50 percent risk weight:

(1) The loan-to-value ratio used for the purpose of the statutory criterion
cited above is based upon the most current appraised value of the property
(which normally would be the appraised value at the time the loan was
originated, unless a more recent evaluation or appraisal has been performed);

(2) The loan is performing in accordance with its original terms and is not
more than 90 days past due or carried in nonaccrual status;

(3) The average annual occupancy for the property securing the loan has been
at least 80 percent for the preceding year; and

(4) The loan has been made in accordance with prudent underwriting standards.

The existing risk-based capital guidelines provide that loans secured by
mortgages on 1- to 4-family residential properties must meet the first,
second, and fourth additional criteria in order to be assigned a 50 percent
risk weight. The third proposed criterion is a requirement under the OTS
guidelines for loans for multifamily housing accorded a 50 percent risk
weight.

Under the proposed revision to the risk-based capital guidelines,
privately-issued securities backed by multifamily housing loans that meet the
above cited criteria at the time the securities are originated would also
qualify for inclusion in the 50 percent risk category provided that the
structure of the security meets certain technical criteria set forth in the
guidelines. This treatment would parallel the treatment for privately-issued
securities backed by loans for 1- to 4-family residential properties under the
risk-based capital guidelines. Application of this treatment to a security
backed by multifamily housing loans means that the security would not qualify
for inclusion in the 50 percent risk category unless all the underlying
mortgages have been outstanding and performing for at least one year prior to
origination of the security.

Section 618(b)(2) of RTCRRIA requires the agencies to amend their capital
regulations and guidelines to provide that any loan fully secured by a first
lien on a multifamily housing property that is sold subject to a pro rata loss
sharing arrangement should be treated as sold to the extent that loss is
incurred by the purchaser of the loan. Section 618(b)(3) of RTCRRIA directs
the agencies to take into account other loss sharing arrangements, in
connection with the sale of any loan that is fully secured by a first lien on
multifamily housing property, to determine the extent to which such loans
should be treated as sold.

The Board's existing guidelines set forth guidance on the treatment of assets
sold with recourse, including those sold subject to loss sharing arrangements.

The risk-based capital guidelines for state member banks state that the
risk-based capital definition of the sale of assets with recourse, including
assets sold subject to loss sharing arrangements, is the same as the
definition contained in the instructions to the commercial bank Consolidated
Reports of Condition and Income (Call Report) glossary entry for "sales of
assets.'' Those instructions set out conditions that must be met in order for
a bank to treat a sale of assets as a true sale and, thus, to remove from its
balance sheet assets it has sold. Assets that have been sold and removed from
a bank's balance sheet in accordance with the Call Report instructions are
excluded from the calculation of risk-weighted assets.

Specifically with regard to the sale of assets, the Call Report instructions
provide:

if the risk retained by the seller is limited to some fixed percentage of any
losses that might be incurred and there are no other provisions resulting in
retention of risk, either directly or indirectly, by the seller, the maximum
amount of possible loss for which the selling bank is at risk (the stated
percentage times the sale proceeds) shall be reported as a borrowing and the
remaining amount of the assets transferred reported as a sale.

This treatment, which applies to sales of multifamily housing loans subject to
pro rata loss sharing arrangements, is consistent with the language of section
618(b)(2) of RTCRRIA.

The Call Report instructions also provide that other transfers of assets,
including the sale of assets subject to other loss sharing arrangements,
generally are reported as sales only if the selling institution:

(1) Retains no risk of loss from assets transferred resulting from any cause,
and

(2) Has no obligation to any party for the payment of principal or interest on
the assets transferred resulting from any cause. This treatment, which applies
to sales of multifamily housing loans subject to other loss sharing
arrangements, is consistent with the language of section 618(b)(3) of RTCRRIA.

Bank holding companies generally file their regulatory reports in accordance
with generally accepted accounting principles (GAAP). Under GAAP, bank holding
companies are permitted to treat some asset sales with recourse, including
those sold subject to loss sharing arrangements, as "true'' sales and, thus,
may remove the assets from the balance sheet. The risk-based capital
guidelines for bank holding companies state that where such transactions have
been removed from the balance sheet but meet the definition of assets sold
with recourse contained in the instructions to the Call Report, the assets
sold must be included in the calculation of risk-weighted assets. For this
purpose the assets that are sold are treated as an off-balance sheet exposure
and are converted at 100 percent to a credit equivalent amount and assigned to
the appropriate risk weight. This existing treatment, which applies to sales
of multifamily housing loans subject to pro rata and other loss sharing
arrangements, is consistent with the requirements of RTCRRIA sections 618(b)
(2) and (3).

Comments Received

Public comments were received from twenty-three respondents: ten banking
organizations, three savings institutions, nine trade associations, and one
law firm. Of the twenty-three commenters, eighteen favored lowering the risk
weight for qualifying multifamily mortgages from 100 percent to 50 percent;
one opposed the lower risk weight; and four gave no overall opinion on the
proposal. Commenters responding favorably to the proposal generally agreed
that, although loans for multifamily residential properties could be riskier
than loans for 1- to 4-family properties, the combination of the criteria
required by section 618(b) of RTCRRIA and the additional criteria proposed by
the Board should assure that only high quality multifamily housing loans would
be included in the 50 percent risk weight category. The one commenter that did
not support the proposal expressed the view that certain multifamily loans
should stay in the 100 percent risk category because of the historically
higher charge-off rates associated with these assets.

Several commenters requested clarification as to whether the qualifying
criteria would be applied only once at the time of loan origination or on a
continuous basis. Three respondents addressed the application of the annual
net operating income-to-debt service ratio as applied to loans to finance
multifamily buildings owned by cooperative housing corporations. They noted
that since this type of property is generally operated as a not-for-profit
enterprise, it would not meet the proposed annual net operating income-to-debt
service coverage standard and thus, loans to finance acquisition of such
properties could not qualify for the 50 percent risk weight category. Two
commenters discussed the treatment of securities backed by multifamily housing
loans. One of these commenters expressed the view that the requirement that a
multifamily housing loan must perform in accordance with its terms for at
least one year before it could qualify for a 50 percent risk weight would
prevent securitization of multifamily loans at origination. This commenter
also noted that it would be difficult to monitor each underlying loan in a
security for continuous compliance with the qualifying criteria.

Final Rule

After review of the public comments, and in agreement with the other Federal
banking agencies, the Board is adopting a final rule amending the risk-based
capital guidelines to lower the risk weight from 100 percent to 50 percent for
loans secured by mortgages on multifamily residential properties meeting
certain conditions as well as for securities backed by such qualifying
mortgages. This final rule implements section 618(b) of RTCRRIA and section
305(b)(1)(B) of FDICIA. The criteria a multifamily housing loan must meet to
be included in the 50 percent risk category are the same as those proposed,
except that the 80 percent average annual occupancy requirement has been
eliminated and clarification has been made with regard to other criteria.

Following consultations with the other agencies, the Board has decided to
eliminate the requirement that the property financed must have maintained an
average annual occupancy rate of at least 80 percent for the previous year.
Comments received by the other agencies indicated that the additional
safeguards this occupancy criterion might provide would be minimal in
comparison to the increased record-keeping burden it would create. The Board
believes that the remaining criteria should be sufficient to satisfy concerns
related to safety and soundness of loans secured by multifamily residential
property that are assigned a 50 percent risk weight.

Several commenters noted that certain cooperative properties and other
not-for-profit multifamily residential properties may not be able to generate
sufficient cash flow to satisfy the annual net operating income-to-debt
service ratio required in the qualifying criteria. In light of these comments,
the final rule specifies that cooperative and other not-for-profit multifamily
residential properties may be deemed to satisfy the annual net operating
income-to-debt service ratio requirement if they generate sufficient cash flow
to provide comparable protection to the institution. Sufficient cash flow to
provide comparable protection may be generated in a variety of ways, for
example, through additions to special operating reserve accounts or special
subsidies provided by Federal, state, local, or private sources. This
comparable protection accommodation could allow low- and moderate-income
not-for-profit multifamily housing projects to qualify for the 50 percent risk
category, provided that they meet the other criteria.

The Board notes that the annual debt service ratio requirements must be
satisfied on an on-going basis for a multifamily housing loan to continue to
receive a 50 percent risk weight.

In addition, the final rule states that for purposes of satisfying the one
year's timely performance criterion in the case where the existing owner of a
multifamily residential property is refinancing a loan on that property, all
principal and interest payments on the loan being refinanced must have been
made on a timely basis in accordance with the terms of the loan for at least
the preceding year.

The existing risk-based capital guidelines specify that prudent underwriting
standards include a conservative loan-to-value ratio, and the proposed rule
stated that, in the case of a loan secured by multifamily residential
property, the loan-to-value ratio would not be deemed conservative if it
exceeded 80 percent (75 percent if the loan is based on a floating interest
rate). The final rule notes that prudent underwriting standards dictate that a
loan-to-value ratio used in the case of a loan to acquire a property would not
be deemed conservative unless the value is based on the lower of the purchase
price of the property or the value as determined by the most current appraisal
or, if appropriate, the most current evaluation. Otherwise, the loan-to-value
ratio generally would be based upon the value of the property as determined by
the most current appraisal or, if appropriate, the most current evaluation.
Subsequent appraisals (or evaluations) of a multifamily property will not be
required for the purpose of continuing to include the loan secured by such
property in the 50 percent risk category. However, if a subsequent appraisal
(or evaluation) is obtained and it indicates that the loan-to-value ratio
exceeds the statutory requirements, the loan would have to be reassigned to
the 100 percent risk category.

In connection with the loan-to-value ratio criterion, the Board also notes
that under the agencies' 1992 real estate lending standards regulations and
guidelines, as a general matter, institutions may extend loans to improved
property, which includes existing multifamily residential property, with
loan-to-value ratios of up to 85 percent. These guidelines, which implement
section 304 of FDICIA, became effective on March 19, 1993. While these
guidelines permit institutions to make loans secured by existing multifamily
property with loan-to-value ratios that exceed 80 percent, such loans would
not qualify for the 50 percent risk category. Rather, they should be assigned
to the 100 percent risk category.

The final rule provides that securities backed by mortgages on multifamily
residential properties may be accorded a 50 percent risk weight if each
underlying mortgage satisfies all the criteria for eligibility for the 50
percent risk weight at the time the pool is originated and the structure of
the security meets certain technical criteria set forth in the guidelines.
This treatment parallels that accorded to securities backed by mortgages on 1-
to 4-family residential properties that qualify for a 50 percent risk weight.
In light of issues raised by commenters, the Board is clarifying that the
final rule does not require monitoring of each loan that has been pooled into
a security for continuous compliance with all the qualifying criteria. As a
safeguard against deterioration in the underlying assets, however, the final
rule stipulates that a security backed by multifamily mortgage loans may be
accorded a 50 percent risk weight only as long as principal and interest
payments on the security are not more than 30 days past due.

Finally, in order to conform the Board's regulatory language to that of the
other agencies, the final rule amends the risk-based capital guidelines for
state member banks by clarifying in a footnote that a multifamily housing loan
that is sold subject to a pro rata loss sharing arrangement is to be treated
by the selling bank as sold (and excluded from the balance sheet assets), to
the extent that the sales agreement provides for the purchaser of the loan to
share in any loss incurred on the loan on a pro rata basis with the selling
bank. This means that, in such a transaction, the portion of the loan that is
treated as sold by the selling bank is excluded from the calculation of the
risk-based capital ratio.

With regard to bank holding companies, a footnote in the final rule clarifies
that multifamily housing loans sold subject to such pro rata loss sharing
arrangements, may be treated as sold, for risk-based capital purposes, to the
same extent as for banks. The portion that is sold would not be subject to the
100 percent conversion factor normally applied to assets sold with recourse
but rather would be excluded from the calculation of the risk-based capital
ratio.

The clarifying footnotes also provide guidance on the risk-based capital
treatment of sales of multifamily housing loans in which the purchaser of a
loan shares in any loss incurred on the loan with the selling institution on
other than a pro rata basis. These other loss sharing arrangements are taken
into account, for purposes of determining the extent to which such loans are
treated by the selling banking organization as sold for risk-based capital
purposes, and excluded from a bank's balance sheet assets or the credit
equivalent amount of a bank holding company's off-balance sheet items, in the
same manner as prescribed in the instructions to the Call Report. As noted
earlier, these footnotes reflect the existing Call Report and risk-based
capital treatment with respect to such assets sold subject to loss sharing
arrangements.

In addition, the Board notes that the Board and the other banking agencies,
under the auspices of the Federal Financial Institutions Examination Counsel
(FFIEC), have been working together to develop revisions to the agencies'
risk-based capital standards that will better distinguish between the degrees
of risk in loss sharing arrangements involving asset sales in general. In this
regard, on December 16, 1993, the Board approved a recommendation from the
Federal Financial Institution Examination Council to seek public comment on a
Notice of Proposed Rulemaking and an Advanced Notice of Proposed Rulemaking
concerning the regulatory treatment of assets sold subject to loss sharing
arrangements. To the extent these proposals apply to multifamily housing
loans, they would, if adopted, also satisfy the requirements of section
618(b)(3) of RTCRRIA.

Finally, the Board finds, for good cause, that an immediate effective date is
necessary in order to serve the public interest, avoid confusion, and expedite
the reporting of a capital charge that is commensurate with the risks
associated with multifamily housing loans that meet the specified criteria. A
December 31, 1993 effective date will enable banking organizations to use the
reduced risk weight for multifamily housing loans in their end-of-year
regulatory reports. In addition, the Board believes this effective date is
appropriate because the revision would reduce, rather than expand, regulatory
burden.

Regulatory Flexibility Act Analysis

The Federal Reserve Board does not believe adoption of this final rule would
have a significant economic impact on a substantial number of small business
entities (in this case, small banking organizations), in accord with the
spirit and purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).
In this regard, the final rule would reduce certain regulatory burdens on bank
holding companies as it would reduce the capital charge on certain
transactions. In addition, because the risk-based capital guidelines generally
do not apply to bank holding companies with consolidated assets of less than
$150 million, this proposal will not affect such companies.

List of Subjects

12 CFR Part 208

Accounting, Agriculture, Banks, banking, Confidential business information,
Currency, Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Holding companies,
Reporting and recordkeeping requirements, Securities.

For the reasons set forth in the preamble the Board is amending 12 CFR parts
208 and 225 to read as follows:

PART 208 MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE
SYSTEM (REGULATION H)

1. The authority citation for part 208 continues to read as follows:

Authority: 12 U.S.C. 36, 248(a) and (c), 321338, 461, 481486, 601, 611,
1814, 1823(j), 1831o, 1831p1, 39063909, 3310, 33313351; 15 U.S.C. 78b,
78o4(c)(5), 78q, 78q1, 78w, 781(b), 781(i), and 1781(g).

2. Appendix A to part 208 is amended by revising the first paragraph of
section III.C.3., and Category 3 Item 1. of Attachment III to read as follows:

Appendix A to Part 208 Capital Adequacy Guidelines for State Member Banks:
Risk-Based Measure

                                  * * * * *

III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet Items

                                  * * * * *

C. Risk Weights

                                  * * * * *

3. Category 3: 50 percent. This category includes loans fully secured by first
liens 34 on 1- to 4-family residential properties, either owner-occupied or
rented, or on multifamily residential properties, 35 that meet certain
criteria. 36 Loans included in this category must have been made in
accordance with prudent underwriting standards; 37 be performing in
accordance with their original terms; and not be 90 days or more past due or
carried in nonaccrual status. The following additional criteria must also be
applied to a loan secured by a multifamily residential property that is
included in this category: all principal and interest payments on the loan
must have been made on time for at least the year preceding placement in this
category, or in the case where the existing property owner is refinancing a
loan on that property, all principal and interest payments on the loan being
refinanced must have been made on time for at least the year preceding
placement in this category; amortization of the principal and interest must
occur over a period of not more than 30 years and the minimum original
maturity for repayment of principal must not be less than 7 years; and the
annual net operating income (before debt service) generated by the property
during its most recent fiscal year must not be less than 120 percent of the
loan's current annual debt service (115 percent if the loan is based on a
floating interest rate) or, in the case of a cooperative or other
not-for-profit housing project, the property must generate sufficient cash
flow to provide comparable protection to the institution. Also included in
this category are privately-issued mortgage-backed securities provided that

 34If a bank holds the first and junior liens(s) on a residential property
and no other party holds an intervening lien, the transaction is treated as a
single loan secured by a first lien for the purpose of determining the
loan-to-value ratio.

 35Loans that qualify as loans secured by 1- to 4-family residential
properties or multifamily residential properties are listed in the
instructions to the commercial bank Call Report. In addition, for risk-based
capital purposes, loans secured by 1- to 4-family residential properties
include loans to builders with substantial project equity for the construction
of 1- to 4-family residences that have been presold under firm contracts to
purchasers who have obtained firm commitments for permanent qualifying
mortgage loans and have made substantial earnest money deposits.

The instructions to the Call Report also discuss the treatment of loans,
including multifamily housing loans, that are sold subject to a pro rata loss
sharing arrangement. Such an arrangement should be treated by the selling bank
as sold (and excluded from balance sheet assets) to the extent that the sales
agreement provides for the purchaser of the loan to share in any loss incurred
on the loan on a pro rata basis with the selling bank. In such a transaction,
from the standpoint of the selling bank, the portion of the loan that is
treated as sold is not subject to the risk-based capital standards. In
connection with sales of multifamily housing loans in which the purchaser of a
loan shares in any loss incurred on the loan with the selling institution on
other than a pro rata basis, these other loss sharing arrangements are taken
into account for purposes of determining the extent to which such loans are
treated by the selling bank as sold (and excluded from balance sheet assets)
under the risk-based capital framework in the same manner as prescribed for
reporting purposes in the instructions to the Call Report.

 36Residential property loans that do not meet all the specified criteria or
that are made for the purpose of speculative property development are placed
in the 100 percent risk category.

 37Prudent underwriting standards include a conservative ratio of the
current loan balance to the value of the property. In the case of a loan
secured by multifamily residential property, the loan-to-value ratio is not
conservative if it exceeds 80 percent (75 percent if the loan is based on a
floating interest rate). Prudent underwriting standards also dictate that a
loan-to-value ratio used in the case of originating a loan to acquire a
property would not be deemed conservative unless the value is based on the
lower of the acquisition cost of the property or appraised (or if appropriate,
evaluated) value. Otherwise, the loan-to-value ratio generally would be based
upon the value of the property as determined by the most current appraisal, or
if appropriate, the most current evaluation. All appraisals must be made in a
manner consistent with the Federal banking agencies' real estate appraisal
regulations and guidelines and with the bank's own appraisal guidelines.

(1) The structure of the security meets the criteria described in section
III(B)(3) above;

(2) If the security is backed by a pool of conventional mortgages, on 1- to
4-family residential or multifamily residential properties each underlying
mortgage meets the criteria described above in this section for eligibility
for the 50 percent risk category at the time the pool is originated;

(3) If the security is backed by privately-issued mortgage-backed securities,
each  underlying security qualifies for the 50 percent risk category; and

(4) If the security is backed by a pool of multifamily residential mortgages,
principal and interest payments on the security are not 30 days or more past
due.

Privately-issued mortgage-backed securities that do not meet these criteria or
that do not qualify for a lower risk weight are generally assigned to the 100
percent risk category.

                                  * * * * *

Attachment III Summary of Risk Weights and Risk Categories for State Member
Banks

                                  * * * * *

Category 3: 50 Percent

1. Loans fully secured by first liens on 1-to 4-family residential properties
or on multifamily residential properties that have been made in accordance
with prudent underwriting standards, that are performing in accordance with
their original terms, that are not past due or in nonaccrual status, and that
meet other qualifying criteria, and certain privately-issued mortgage-backed
securities representing indirect ownership of such loans. (Loans made for
speculative purposes are excluded.)

                                  * * * * *

PART 225 BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y)

1. The authority citation for part 225 continues to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p1, 1843(c)(8), 1844(b),
1972(l), 3106, 3108, 3907, 3909, 3310, and 33313351.

2. Appendix A to part 225 is amended by revising the first paragraph of
section III.C.3., footnote 48 in section III.D.1., and Category 3 Item 1. of
Attachment III to read as follows:

Appendix A to Part 225 Capital Adequacy Guidelines for Bank Holding Companies:
Risk-Based Measure

                                  * * * * *

III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet Items

                                  * * * * *

C. Risk Weights

                                  * * * * *

3. Category 3: 50 percent. This category includes loans fully secured by first
liens 37 on 1- to 4-family residential properties, either owner-occupied or
rented, or on multifamily residential properties, 38 that meet certain
criteria. 39 Loans included in this category must have been made in
accordance with prudent underwriting standards; 40 be performing in
accordance with their original terms; and not be 90 days or more past due or
carried in nonaccrual status. The following additional criteria must also be
applied to a loan secured by a multifamily residential property that is
included in this category: all principal and interest payments on the loan
must have been made on time for at least the year preceding placement in this
category, or in the case where the existing property owner is refinancing a
loan on that property, all principal and interest payments on the loan being
refinanced must have been made on time for at least the year preceding
placement in this category; amortization of the principal and interest must
occur over a period of not more than 30 years and the minimum original
maturity for repayment of principal must not be less than 7 years; and the
annual net operating income (before debt service) generated by the property
during its most recent fiscal year must not be less than 120 percent of the
loan's current annual debt service (115 percent if the loan is based on a
floating interest rate) or, in the case of a cooperative or other
not-for-profit housing project, the property must generate sufficient cash
flow to provide comparable protection to the institution. Also included in
this category are privately-issued mortgage-backed securities provided that:

 37If a banking organization holds the first and junior lien(s) on a
residential property and no other party holds an intervening lien, the
transaction is treated as a single loan secured by a first lien for the
purpose of determining the loan-to-value ratio.

 38Loans that qualify as loans secured by 1- to 4-family residential
properties or multifamily residential properties are listed in the
instructions to the FR Y9C Report. In addition, for risk-based capital
purposes, loans secured by 1- to 4-family residential properties include loans
to builders with substantial project equity for the construction of 1-to
4-family residences that have been presold under firm contracts to purchasers
who have obtained firm commitments for permanent qualifying mortgage loans and
have made substantial earnest money deposits.

 39Residential property loans that do not meet all the specified criteria or
that are made for the purpose of speculative property development are placed
in the 100 percent risk category.

 40Prudent underwriting standards include a conservative ratio of the
current loan balance to the value of the property. In the case of a loan
secured by multifamily residential property, the loan-to-value ratio is not
conservative if it exceeds 80 percent (75 percent if the loan is based on a
floating interest rate). Prudent underwriting standards also dictate that a
loan-to-value ratio used in the case of originating a loan to acquire a
property would not be deemed conservative unless the value is based on the
lower of the acquisition cost of the property or appraised (or if appropriate,
evaluated) value. Otherwise, the loan-to-value ratio generally would be based
upon the value of the property as determined by the most current appraisal, or
if appropriate, the most current evaluation. All appraisals must be made in a
manner consistent with the Federal banking agencies' real estate appraisal
regulations and guidelines and with the banking organization's own appraisal
guidelines.

(1) The structure of the security meets the criteria described in section
III(B)(3) above;

(2) if the security is backed by a pool of conventional mortgages, on 1- to
4-family residential or multifamily residential properties, each underlying
mortgage meets the criteria described above in this section for eligibility
for the 50 percent risk category at the time the pool is originated;

(3) If the security is backed by privately-issued mortgage-backed securities,
each underlying security qualifies for the 50 percent risk category; and

(4) If the security is backed by a pool of multifamily residential mortgages,
principal and interest payments on the security are not 30 days or more past
due. Privately-issued mortgage-backed securities that do not meet these
criteria or that do not qualify for a lower risk weight are generally assigned
to the 100 percent risk category.

                                  * * * * *

D. Off-Balance Sheet Items

                                  * * * * *

1. * * *  48

 48In regulatory reports and under GAAP, bank holding companies are
permitted to treat some asset sales with recourse as "true'' sales. For
risk-based capital purposes, however, such assets sold with recourse and
reported as "true'' sales by bank holding companies are converted at 100
percent and assigned to the risk category appropriate to the underlying
obligor or, if relevant the guarantor or nature of the collateral, provided
that the transactions meet the definition of assets sold with recourse
(including assets sold subject to pro rata and other loss sharing
arrangements), that is contained in the instructions to the commercial bank
Consolidated Reports of Condition and Income (Call Report). This treatment
applies to any assets, including the sale of 1- to 4-family and multifamily
residential mortgages, sold with recourse. Accordingly, the entire amount of
any assets transferred with recourse that are not already included on the
balance sheet, including pools of 1- to 4-family residential mortgages, are to
be converted at 100 percent and assigned to the risk category appropriate to
the obligor, or if relevant, the nature of any collateral or guarantees. The
only exception involves transfers of pools of residential mortgages that have
been made with insignificant recourse for which a liability or specific
non-capital reserve has been established and is maintained for the maximum
amount of possible loss under the recourse provision.

                                  * * * * *

Attachment III Summary of Risk Weights and Risk Categories for Bank Holding
Companies

                                  * * * * *

Category 3: 50 Percent

1. Loans fully secured by first liens on 1- to 4-family residential properties
or on multifamily residential properties that have been made in accordance
with prudent underwriting standards, that are performing in accordance with
their original terms, that are not past due or in nonaccrual status, and that
meet other qualifying criteria, and certain privately-issued mortgage-backed
securities representing indirect ownership of such loans. (Loans made for
speculative purposes are excluded.)

                                  * * * * *

Board of Governors of the Federal Reserve System, December 17, 1993.

William W. Wiles,

Secretary of the Board.

[FR Doc. 9331338 Filed 122893; 8:45 am]

BILLING CODE 621001M


