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To: Chief Executive Officers of National Banks, Department and Division Heads, Examining Personnel, and Other Interested Parties

Description: Final Rule

On March 2, 1999, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision published the attached joint final rule. The rule amends the agencies' risk-based capital and leverage ratio regulations to be consistent with the provisions of section 303 of the Riegle Community Development and Regulatory Improvement Act of 1994 (CDRIA). Section 303 requires the agencies to work jointly to make uniform regulations and guidelines implementing common statutory or supervisory policies. On October 27, 1997, the agencies published a proposed rulemaking in response to this statutory requirement. Under the proposal, the agencies would make uniform their treatment of construction loans on presold residential properties, investments in mutual funds, and real estate loans secured by junior liens on one- to four-family residential properties. The agencies also proposed to make the minimum Tier 1 leverage standards uniform and simple. The OCC received nine comment letters.

The final rule adopts three of the four proposed changes with little modification. First, the final rule amends the OCC's risk-based capital regulation to allow a 50 percent risk weight for construction loans on presold residential properties. Second, the final rule clarifies existing OCC policy that allows a bank to assign a mutual fund investment on a pro-rata basis to different risk weight categories according to the investment limits in the fund's prospectus. Third, the final rule amends the OCC's leverage capital requirements so that national banks with a composite rating other than 1 under the Uniform Financial Institution Rating System (CAMELS) are required to maintain a minimum 4.0 percent leverage ratio.

In response to the comments received, this final rule implements a treatment of first and junior liens on one- to four-family residential properties that differs from the 1997 proposal. The 1997 interagency proposal adopted the OCC's current treatment of the risk weighting of first and junior liens. Prudently underwritten first liens would have continued to be assigned to the 50 percent risk weight category, while all junior liens would have been assigned to the 100 percent risk weight category. However, the agencies accepted the commenters' assertion that the imposition of a single risk weight on all junior liens is unduly burdensome, because it fails to incorporate differences in the credit quality of those loans. Therefore, this final rule adopts a different approach, whereby first and junior liens on a property are treated as a single exposure. The combined exposure will be risk weighted at 50 percent if it is not more than 90 days past due (or in nonaccrual status) and is prudently underwritten. Otherwise the combined exposure will be risk weighted at 100 percent.

For further information, contact Roger Tufts, senior economic advisor, Capital Policy (202) 874-5070, or Ronald Shimabukuro, senior attorney, Legislative and Regulatory Activities Division, (202) 874-5090.

Kevin J. Bailey
Deputy Comptroller for Core Policy

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