Full text of Federal Deposit Insurance Corporation : Documents Relating to the Financial Crisis of 2007-2009 : Regulatory Capital Standards : Interim Final Rule for Mortgages Modified Under the Making Home Affordable Program, June 26, 2009

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Financial Institution Letter
FIL-36-2009
June 26, 2009

Federal Deposit Insurance Corporation
550 17th Street NW, Washington, D.C. 20429-9990

REGULATORY CAPITAL STANDARDS
Interim Final Rule for Mortgages Modified Under the Making
Home Affordable Program
Summary: On March 4, 2009, the U.S. Department of the Treasury announced guidelines
under the Making Home Affordable Program (MHAP) to promote sustainable loan modifications
for homeowners at risk of losing their homes due to foreclosure. The interim final rule clarifies
that a banking organization may retain the risk weight assigned to a mortgage loan before the
loan was modified under the MHAP following modification of the mortgage loan.
The federal banking and thrift agencies are issuing the attached interim final rule, which will take
effect when published in the Federal Register. Public comments must be submitted within 30
days after publication of the interim final rule in the Federal Register.
Distribution:
FDIC-Supervised Banks (Commercial and Savings)

Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Chief Accounting Officer

Related Topics:
Risk-Based Capital Rules
12 CFR Part 325

Attachment:
Interim Final Rule for Mortgages Modified Under
the Making Home Affordable Program

Contact:
Ryan D. Sheller, Senior Capital Markets Specialist,
at rsheller@fdic.gov or (202) 898-6614
Mark Handzlik, Senior Attorney, at
mhandzlik@fdic.gov or (202) 898-3990

Note:
FDIC financial institution letters (FILs) may be
accessed from the FDIC's Web site at
www.fdic.gov/news/news/financial/2009/index.html.
To receive FILs electronically, please visit
http://www.fdic.gov/about/subscriptions/fil.html.
Paper copies of FDIC financial institution letters
may be obtained through the FDIC’s Public
Information Center, 3501 Fairfax Drive, E-1002,
Arlington, VA 22226 (1-877-275-3342 or 703562-2200).

Highlights:
• Mortgage loans risk weighted at 50 percent before
modification would continue to be risk weighted at
50 percent after modification provided they
continue to meet other applicable prudential
criteria. Mortgage loans risk weighted at 100
percent would continue to be risk weighted at 100
percent after modification.
• Under the FDIC’s general risk-based capital rules,
a state nonmember bank may assign a 50 percent
risk weight to any modified mortgage loan,
provided the loan, as modified, is not 90 days or
more past due or in nonaccrual status and meets
other applicable criteria for a 50 percent risk
weight. Thus, the revisions provided under this
interim final rule relative to the FDIC’s risk-based
capital rules are clarifying in nature.
• Consistent with current practice, the agencies will
continue to allow past due and nonaccrual loans
that receive a 100 percent risk weight to return to
a 50 percent risk weight under certain
circumstances, including after demonstration of a
sustained period of repayment performance.

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
Docket ID: OCC-2009-0007
RIN 1557-AD25
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
Regulations H and Y; Docket No. R-1361
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AD42
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
No. OTS-2009-0007
RIN 1550-AC34
Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance;
Capital —Residential Mortgage Loans Modified Pursuant to the Making Home Affordable
Program
AGENCIES: Office of the Comptroller of the Currency, Department of the Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of
Thrift Supervision, Department of the Treasury.
ACTION: Interim final rule with request for public comment.
SUMMARY: To support and facilitate the timely implementation and acceptance of the
Making Home Affordable Program (Program) announced by the U.S. Department of the
Treasury (Treasury) and to promote the stability of banks, savings associations, bank holding
companies (collectively, banking organizations) and the financial system, the Office of the
Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board),
Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS)
(collectively, the agencies) have adopted this interim final rule (interim final rule or rule). The
rule provides that mortgage loans modified under the Program will retain the risk weight
assigned to the loan prior to the modification, so long as the loan continues to meet other
applicable prudential criteria.
DATES: The interim final rule is effective [INSERT DATE OF PUBLICATION]. Comments
must be received by [INSERT DATE 30 DAYS AFTER PUBLICATION].

ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the agencies is subject to delay,
commenters are encouraged to submit comments by the Federal eRulemaking Portal or e-mail, if
possible. Please use the title “Risk-Based Capital Guidelines—Residential Mortgage Loans
Modified Pursuant to the Making Home Affordable Program” to facilitate the organization and
distribution of the comments. You may submit comments by any of the following methods:
• Federal eRulemaking Portal – “Regulations.gov”: Go to http://www.regulations.gov.
Under the “More Search Options” tab click next to the “Advanced Docket Search” option
where indicated, select “Comptroller of the Currency” from the agency drop-down menu,
then click “Submit.” In the “Docket ID” column, select “OCC-2009-0007” to submit or
view public comments and to view supporting and related materials for this interim final
rule. The “How to Use This Site” link on the Regulations.gov home page provides
information on using Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and viewing the docket
after the close of the comment period.
• E-mail: regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of the Currency, 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
• Fax: (202) 874-5274.
• Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, Washington, DC 20219.
Instructions: You must include “OCC” as the agency name and “Docket Number OCC2009-0007” in your comment. In general, the OCC will enter all comments received into the
docket and publish them on the Regulations.gov Web site without change, including any
business or personal information that you provide such as name and address information, e-mail
addresses, or phone numbers. Comments received, including attachments and other supporting
materials, are part of the public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider confidential or
inappropriate for public disclosure.
You may review comments and other related materials that pertain to this interim final
rule by any of the following methods:
• Viewing Comments Electronically: Go to http://www.regulations.gov, under the “More
Search Options” tab click next to the “Advanced Document Search” option where
indicated, select “Comptroller of the Currency” from the agency drop-down menu, then
click “Submit.” In the “Docket ID” column, select “OCC-2009-0007” to view public
comments for this rulemaking action.
• Viewing Comments Personally: You may personally inspect and photocopy comments
at the OCC, 250 E Street, SW., Washington, DC. For security reasons, the OCC requires
that visitors make an appointment to inspect comments. You may do so by calling (202)
874-4700. Upon arrival, visitors will be required to present valid government-issued
photo identification and submit to security screening in order to inspect and photocopy
comments.
• Docket: You may also view or request available background documents and project
summaries using the methods described above.

Board: You may submit comments, identified by Docket No. R-1361, by any of the following
methods:
• Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting
comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for
submitting comments.
• E-mail: regs.comments@federalreserve.gov. Include docket number in the subject line of
the message.
• FAX: (202) 452-3819 or (202) 452-3102.
• Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System,
20th Street and Constitution Avenue, NW, Washington, DC 20551.
All public comments are available from the Board’s Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified
for technical reasons. Accordingly, your comments will not be edited to remove any identifying
or contact information. Public comments may also be viewed electronically or in paper form in
Room MP-500 of the Board’s Martin Building (20th and C Street, NW) between 9:00 a.m. and
5:00 p.m. on weekdays.
FDIC: You may submit by any of the following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for
submitting comments.
• Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html
• Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal
Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429.
• Hand Delivered/Courier: The guard station at the rear of the 550 17th Street Building
(located on F Street), on business days between 7:00 a.m. and 5:00 p.m.
• E-mail: comments@FDIC.gov.
Instructions: Comments submitted must include “FDIC” and “RIN 3064-AD42.” Comments
received will be posted without change to
http://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information
provided.
OTS: You may submit comments, identified by OTS-2009-0007, by any of the following
methods:
● Federal eRulemaking Portal: “Regulations.gov”: Go to http://www.regulations.gov. Under
the “more Search Options” tab click next to the ‘‘Advanced Docket Search’’ option where
indicated, select ‘‘Office of Thrift Supervision’’ from the agency dropdown menu, then click
“Submit.” In the ‘‘Docket ID’’ column, select ‘‘OTS-2009-0007” to submit or view public
comments and to view supporting and related materials for this proposed rulemaking. The
‘‘How to Use This Site’’ link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing public comments, viewing
other supporting and related materials, and viewing the docket after the close of the comment
period.
● Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552, Attention: OTS-2009-0007.
● Facsimile: (202) 906-6518.
3

● Hand Delivery/Courier: Guard’s Desk, East Lobby Entrance, 1700 G Street, NW., from 9
a.m. to 4 p.m. on business days, Attention: Regulation Comments, Chief Counsel’s Office,
Attention: OTS-2009-0007.
● Instructions: All submissions received must include the agency name and docket number for
this rulemaking. All comments received will be posted without change, including any personal
information provided. Comments, including attachments and other supporting materials received
are part of the public record and subject to public disclosure. Do not enclose any information in
your comment or supporting materials that you consider confidential or inappropriate for public
disclosure.
● Viewing Comments Electronically: Go to http://www.regulations.gov, under the “More
Search Options” tab click next to the “Advanced Document Search” option where indicated,
select ‘‘Office of Thrift Supervision’’ from the agency drop-down menu, then click ‘‘Submit.’’
In the “Docket ID” column, select ‘‘OTS-2009-0007” to view public comments for this notice of
proposed rulemaking action.
● Viewing Comments On-Site: You may inspect comments at the Public Reading Room, 1700
G Street, NW., by appointment. To make an appointment for access, call (202) 906–5922, send
an e-mail to public.info@ots.treas.gov, or send a facsimile transmission to (202) 906–6518.
(Prior notice identifying the materials you will be requesting will assist us in serving you.) We
schedule appointments on business days between 10 a.m. and 4 p.m. In most cases,
appointments will be available the next business day following the date we receive a request.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk Expert, Capital Policy Division, (202) 874-6022, or Carl
Kaminski, Senior Attorney, or Ron Shimabukuro, Senior Counsel, Legislative and Regulatory
Activities Division, (202) 874-5090, Office of the Comptroller of the Currency, 250 E Street,
SW, Washington, DC 20219.
Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or William Tiernay, Senior
Supervisory Financial Analyst, (202) 872-7579, Division of Banking Supervision and
Regulation; or April Snyder, Counsel, (202) 452-3099, or Benjamin W. McDonough, Senior
Attorney, (202) 452-2036, Legal Division. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263-4869.
FDIC: Ryan Sheller, Senior Capital Markets Specialist, (202) 898-6614, Capital Markets
Branch, Division of Supervision and Consumer Protection; or Mark Handzlik, Senior Attorney,
(202) 898-3990, or Michael Phillips, Counsel, (202) 898-3581, Supervision Branch, Legal
Division.
OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478, Capital Risk, or Marvin Shaw,
Senior Attorney, (202) 906-6639, Legislation and Regulation Division, Office of Thrift
Supervision, 1700 G Street, NW, Washington, DC 20552.
SUPPLEMENTARY INFORMATION: On March 4, 2009, Treasury announced guidelines
under the Program to promote sustainable loan modifications for homeowners at risk of losing
their homes due to foreclosure. 1 The Program provides a detailed framework for servicers to
modify mortgages on owner-occupied residential properties and offers financial incentives to
1

Further details about the Program, including Program terms and borrower eligibility criteria,
are available at http://www.makinghomeaffordable.gov.
4

lenders and servicers that participate in the Program. 2 The Program also provides financial
incentives for homeowners whose mortgages are modified pursuant to Program guidelines to
remain current on their mortgages after modification.3 Taken together, these incentives should
help responsible homeowners remain in their homes and avoid foreclosure, which in turn should
help ease the current downward pressures on house prices and the costs that families,
communities, and the economy incur from unnecessary foreclosures.
Under the Program, Treasury will partner with lenders and loan servicers to offer at-risk
homeowners loan modifications under which the homeowners may obtain more affordable
monthly mortgage payments. The Program applies to a spectrum of outstanding loans, some of
which meet all of the prudential criteria under the agencies’ general risk-based capital rules and
receive a 50 percent risk weight and some of which otherwise receive a 100 percent risk weight
under the agencies’ general risk-based capital rules. 4 Servicers who elect to participate in the
Program are required to modify all eligible loans 5 in accordance with the Program guidelines
unless explicitly prohibited by the governing pooling and servicing agreement and/or other
lender servicing agreements. The Program guidelines require the lender to first reduce payments
on eligible first-lien loans to an amount representing no greater than a 38 percent initial front-end
debt-to-income ratio. 6 Treasury then will match further reductions in monthly payments with the
lender dollar-for-dollar to achieve a 31 percent front-end debt-to-income ratio. 7 Borrowers
whose back-end debt-to-income ratio exceeds 55 percent must agree to work with a foreclosure
prevention counselor approved by the Department of Housing and Urban Development. 8
2

For ease of reference, the term servicer refers both to servicers that service loans held by other
entities and to lenders who service loans that they hold themselves. The term lender refers to the
beneficial owner or owners of the mortgage.

The Program also provides incentives for refinancing certain mortgage loans owned or
guaranteed by Fannie Mae or Freddie Mac. This interim rule does not cover such loans.
4

See 12 CFR Part 3, Appendix A, sections 3(a)(3)(iii) and 3(a)(4) (OCC); 12 CFR parts 208 and
225, Appendix A, sections III.C.3. and III.C.4. (Board); 12 CFR part 325, Appendix A, section
II.C. (FDIC); and 12 CFR 567.1 and 567.6 (OTS).

For a mortgage to be eligible for the Program, the property securing the mortgage loan must be
a one-to-four family owner occupied property that is the primary residence of the mortgagee,
not vacant, and not condemned. The mortgage also must have an unpaid principal balance (prior
to capitalization of arrearages) at or below the Federal National Mortgage Association
conforming loan limit for the type of property.
6

A front-end debt-to-income ratio measures how much of the borrower’s gross (pretax) monthly
income is represented by the borrower’s required payment on the first-lien mortgage, including
real estate taxes and insurance.
7

To qualify for the Treasury match, servicers must follow an established sequence of actions
(capitalize arrearages, reduce interest rate, extend term or amortization period, and then defer
principal) to reduce the front-end ratio on the loan from 38 percent to 31 percent, but may reduce
principal on the loan at any stage during the modification sequence to meet affordability targets.
8

A back-end debt-to-income ratio measures how much of a borrower’s gross (pretax) monthly
income would go toward monthly mortgage and nonmortgage debt service obligations.
5

In addition to the incentives for lenders, servicers are eligible for other incentive
payments to encourage participation in the Program; borrowers can likewise receive incentive
payments for remaining current on their monthly payments. Servicers will receive an up-front
servicer incentive payment of $1,000 for each eligible first-lien modification. Lenders and
servicers are eligible for one-time incentive payments of $1,500 and $500, respectively, for early
modifications of first-lien mortgages – that is, modifications made while a borrower is still
current on mortgage payments but at risk of imminent default. To encourage ongoing
performance of modified loans, servicers also will receive “Pay for Success” incentive payments
of up to $1,000 per year for up to three years for first-lien mortgages as long as borrowers remain
in the program. Borrowers can likewise receive “Pay for Performance Success” incentive
payments that reduce the principal balance on their first-lien mortgage up to $1,000 per year for
up to five years in exchange for remaining current on monthly payments on their modified firstlien mortgages. Lenders also may receive a home price depreciation reserve payment to offset
any losses if a modified loan subsequently defaults.
For second-lien mortgages, lenders are eligible to receive incentive payments based on
the difference between the interest rate on the modified first-lien mortgage and the reduced
interest rate (either 1 percent or 2 percent) on the second-lien mortgage following modification. 9
Servicers may receive a one-time $500 incentive payment for successful second-lien
modifications, as well as additional incentive payments of up to $250 per year for up to three
years for second-lien mortgages as long as both the modified first-lien and second-lien
mortgages remain current. A borrower also may receive incentive payments of up to $250
dollars per year for a modified second-lien mortgage loan for up to five years for remaining
current on the loan, which amounts will be paid to reduce the unpaid principal of the first-lien
mortgage. However, second-lien modification incentives only will be paid with respect to a
given property if the first-lien mortgage on the property also is modified under the Program. 10
Treatment Under Risk-Based Capital Rules
Under the agencies’ general risk-based capital rules, loans that are fully secured by first
liens on one-to-four family residential properties, either owner-occupied or rented, and that meet
certain prudential criteria (qualifying mortgage loans) are risk-weighted at 50 percent. If a
banking organization holds both a first-lien and a junior-lien mortgage on the same property, and
no other party holds an intervening lien, the loans are treated as a single loan secured by a firstlien mortgage and risk-weighted at 50 percent if the two loans, when aggregated, meet the

Participating servicers will be required to follow certain steps in modifying amortizing secondlien mortgages, including reducing the interest rate to 1 percent. Lenders may receive an
incentive payment from Treasury equal to half of the difference between (i) the interest rate on
the first lien as modified and (ii) 1 percent, subject to a floor.
10
In some cases when appropriately tailored to the borrower, servicers also may choose to
accept a lump-sum payment from Treasury to extinguish some or all of a second-lien mortgage
under a pre-set formula.

conditions to be a qualifying mortgage loan. 11 Other junior-lien mortgage loans are riskweighted at 100 percent. 12
In general, to qualify for a 50 percent risk weight, a mortgage loan must have been made
in accordance with prudent underwriting standards and may not be 90 days or more past due or
carried in nonaccrual status. Mortgage loans that do not qualify for a 50 percent risk weight are
assigned a 100 percent risk weight. Under the OCC’s general risk-based capital rules for
national banks, “not restructured” is listed among the criteria that mortgage loans must meet in
order to receive a 50 percent risk weight. 13 Under the Board’s general risk-based capital rules
for bank holding companies and state member banks, mortgage loans must be “performing in
accordance with their original terms” in order to receive a 50 percent risk weight. 14 Generally,
mortgage loans that have been modified are considered to have been restructured (OCC), or are
not considered to be performing in accordance with their original terms (Board). Therefore,
under the OCC’s and Board's current general risk-based capital rules, such loans must be risk
weighted at 100 percent.
Under the FDIC’s general risk-based capital rules, a state nonmember bank may assign a
50 percent risk weight to any modified mortgage loan, so long as the loan, as modified, is not 90
days or more past due or in nonaccrual status and meets other applicable criteria for a 50 percent
risk weight. 15 Under the OTS’s general risk-based capital rules, a savings bank may assign a 50
percent risk weight to any modified residential mortgage loan, so long as the loan, as modified, is
not 90 days or more past due and meets other applicable criteria for a 50 percent risk weight. 16
Thus, the revisions provided under this interim final rule relative to the FDIC’s and OTS’s riskbased capital rules are clarifying in nature.
After carefully considering the specific features of the Program, the agencies have
adopted this interim final rule to provide that mortgage loans modified under the Program will
retain the risk weight appropriate to the mortgage loan prior to the modification, as long as other
applicable prudential criteria remain satisfied. Accordingly, under the interim final rule, a
qualifying mortgage loan appropriately risk weighted at 50 percent before modification under the
Program would continue to be risk weighted at 50 percent after modification, and a mortgage
loan risk weighted at 100 percent prior to modification under the Program would continue to be
risk weighted at 100 percent after modification. Consistent with the agencies’ current treatment,
if a mortgage loan were to become 90 days or more past due or carried in non-accrual status or
otherwise restructured after being modified under the Program, the loan would be assigned a risk
weight of 100 percent. Also consistent with current practice, the agencies intend to continue to
allow past due and nonaccrual loans that receive a 100 percent risk weight to return to a
11

See 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC); 12 CFR parts 208 and 225,
Appendix A, section III.C.3. (Board); 12 CFR part 325, Appendix A, section II.C. (FDIC); and
12 CFR 567.1 (OTS).

See 12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC); 12 CFR parts 208 and 225,
Appendix A, section III.C.4. (Board); 12 CFR part 325, Appendix A, section II.C. (FDIC); and
12 CFR 567.6(1)(iv) (OTS).

12 CFR Part 3, Appendix A, section 3(a)(3)(iii) (OCC).

12 CFR parts 208 and 225, Appendix A, section III.C.3. (Board).
12 CFR Part 325, Appendix A, section II.C. (FDIC)
16
12 CFR 567.1 (OTS).
15

50 percent risk weight under certain circumstances, including after demonstration of a sustained
period of repayment performance.
If a banking organization holds both a qualifying first-lien mortgage loan and a secondlien mortgage loan on the same property, with no intervening lien, and both loans are modified
under the Program, the banking organization may continue to apply the risk weights appropriate
to the loans prior to the modification, as long as other prudential criteria remain satisfied.
Additionally, in certain circumstances under the general risk-based capital rules (as with, for
example, a direct credit substitute or recourse obligation), a banking organization is permitted to
look through an exposure to the risk weight of a residential mortgage loan underlying that
exposure. In these cases, the banking organization would follow the capital treatment provided
in this interim final rule in the event that the underlying residential mortgage loan has been
modified pursuant to the Program.
The agencies believe that treating mortgage loans modified under the Program in the
manner described above is appropriate in light of the special and unique incentive features of the
Program and the fact that the Program is offered by the U.S. government in order to achieve the
public policy objective of promoting sustainable loan modifications for homeowners at risk of
foreclosure in a way that balances the interests of borrowers, servicers, and lenders. As
previously described, the Program requires that a borrower’s front-end debt-to-income ratio on a
first-lien mortgage modified under the Program be reduced to no greater than 31 percent -- which
should improve the borrower’s ability to repay the modified loan -- and, importantly, provides
for Treasury to match reductions in monthly payments dollar-for-dollar to reduce the borrower’s
front-end debt-to-income ratio from 38 percent to 31 percent. In addition, as described above,
the Program provides material financial incentives for servicers and lenders to take actions to
reduce the likelihood of defaults, as well as to servicers and borrowers designed to help
borrowers remain current on modified loans. The structure and amount of these cash payments
meaningfully align the financial incentives of servicers, lenders, and borrowers to encourage and
increase the likelihood of participating borrowers remaining current on their mortgages. Each of
these incentives is important to the agencies’ determination with respect to the appropriate
regulatory capital treatment of mortgage loans modified under the Program.
For the reasons discussed above, the agencies have adopted this interim final rule.
The agencies seek comment on all aspects of this interim final rule.
Regulatory Analysis
Administrative Procedure Act
Pursuant to sections 553(b) and (d) of the Administrative Procedure Act,17 the agencies
find that there is good cause for issuing this interim final rule and making the rule effective
immediately upon publication, and that it is impracticable, unnecessary, or contrary to the public
interest to issue a notice of proposed rulemaking and provide an opportunity to comment before
the effective date. The agencies have adopted the rule in light of, and to help address, the
continuing stressed conditions in the housing and financial markets and the continuing unusual
and urgent needs of homeowners. The rule will allow banking organizations to continue to risk
weight loans modified under the Program at their pre-modification risk weights, thereby
promoting stability in the banking and financial markets and promoting sustainable
modifications of mortgages on owner-occupied residential properties. The agencies believe it is
17

See 5 U.S.C. 553(b) and (d).
8

important to address immediately the risk-based capital treatment of mortgage loans modified
under the Program in order to facilitate timely implementation and acceptance of the Program.
The agencies note again that the Program has already been adopted and is in effect. The
agencies are soliciting comment on all aspects of the rule and will make such changes that they
consider appropriate or necessary after review of any comments received.
Riegle Community Development and Regulatory Improvement Act
Section 302 of Riegle Community Development and Regulatory Improvement Act
generally requires that regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions take effect on the first day of a calendar quarter
unless the relevant agency finds good cause that the regulations should become effective sooner
and publishes its finding with the rule. 18 For the reasons discussed above, the agencies find good
cause for making this interim final rule effective immediately. In addition, making the rule
effective immediately will allow affected insured depository institutions and bank holding
companies to take advantage of the rule in calculating their risk-based capital ratios at the end of
the second quarter 2009. If banking organizations are required to hold residential mortgage
loans modified pursuant to the Program at a 100 percent risk weight, the resulting risk-based
capital requirements could be excessive in light of the risks associated with those assets. This
interim final rule will ensure that banking organizations maintain appropriate risk-based capital
levels with respect to modified residential mortgage loans in calculating their risk-based capital
ratios for the second quarter 2009.
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and make available for
public comment an initial regulatory flexibility analysis that describes the impact of a proposed
rule on small entities. 19 Under regulations issued by the Small Business Administration, 20 a
small entity includes a commercial bank, bank holding company, or savings association with
assets of $175 million or less (a small banking organization). As of December 31, 2008, there
were approximately 2,586 small bank holding companies, 394 small savings associations, 850
small national banks, 432 small state member banks, and 3,116 small state nonmember banks.
As a general matter, the Board’s general risk-based capital rules apply only to a bank holding
company that has consolidated assets of $500 million or more. Therefore, the changes to the
Board’s capital adequacy guidelines for bank holding companies will not affect small bank
holding companies.
This rulemaking does not involve the issuance of a notice of proposed rulemaking and,
therefore, the requirements of the RFA do not apply. However, the agencies note that the rule
does not impose any additional obligations, restrictions, burdens, or reporting, recordkeeping or
compliance requirements on banks or savings associations, including small banking
organizations, nor does it duplicate, overlap or conflict with other Federal rules. The rule also
will benefit small banking organizations that are subject to the agencies’ general risk-based
capital rules by allowing mortgage loans modified under the Program to retain the risk weight
18

See 12 U.S.C. 4802(b)(1). Other exceptions to this calendar-quarter requirement also exist
that are not relevant here.
19

See 5 U.S.C. 603(a).

See 13 CFR 121.201.
9

assigned to the loan prior to the modification. Further, the agencies are requesting public
comment on this rule and will modify the rule as appropriate after reviewing the comments.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C.
3506), the agencies have reviewed the interim final rule to assess any information collections.
There are no collections of information as defined by the Paperwork Reduction Act in the final
rule.
OCC/OTS Executive Order 12866
Executive Order 12866 requires federal agencies to prepare a regulatory impact analysis
for agency actions that are found to be “significant regulatory actions.” Significant regulatory
actions include, among other things, rulemakings that “have an annual effect on the economy of
$100 million or more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public health or safety, or state,
local, or tribal governments or communities.” The OCC and the OTS each determined that its
portion of the interim final rule is not a significant regulatory action under Executive Order
12866.
OCC/OTS Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act of 1995 21 (UMRA) requires that an agency prepare
a budgetary impact statement before promulgating a rule that includes a federal mandate that
may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the
private sector of $100 million or more (adjusted annually for inflation) in any one year. If a
budgetary impact statement is required, section 205 of the UMRA also requires an agency to
identify and consider a reasonable number of regulatory alternatives before promulgating a rule.
The OCC and the OTS each have determined that its interim final rule will not result in
expenditures by State, local, and tribal governments, in the aggregate, or by the private sector, of
$100 million or more in any one year. Accordingly, neither the OCC nor the OTS has prepared a
budgetary impact statement or specifically addressed the regulatory alternatives considered.
Solicitation of Comments on Use of Plain Language
Section 722 of the GLBA required the agencies to use plain language in all proposed and final
rules published after January 1, 2000. The agencies invite comment on how to make this
proposed rule easier to understand. For example:
• Have the agencies organized the material to suit your needs? If not, how could they
present the rule more clearly?
• Are the requirements in the rule clearly stated? If not, how could the rule be more clearly
stated?
• Do the regulations contain technical language or jargon that is not clear? If so, which
language requires clarification?
• Would a different format (grouping and order of sections, use of headings, paragraphing)
make the regulation easier to understand? If so, what changes would achieve that?
• Is this section format adequate? If not, which of the sections should be changed and
how?
• What other changes can the agencies incorporate to make the regulation easier to
understand?
21

See Pub. L. 104-4.
10

List of Subjects
12 CFR Part 3
Administrative practice and procedure, Banks, Banking, Capital, National banks, Reporting and
recordkeeping requirements, Risk.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 225
Administrative Practice and Procedure, Banks, banking, Federal Reserve System, Holding
companies, Reporting and recordkeeping requirements, Securities.
12 CFR Part 325
Administrative practice and procedure, Banks, banking, Capital Adequacy, Reporting and
recordkeeping requirements, Savings associations, State nonmember banks.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Risk, Savings associations.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the common preamble, the Office of the Comptroller of the
Currency amends Part 3 of chapter I of Title 12, Code of Federal Regulations as follows:
PART 3- MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, and
3909.
2. In appendix A to Part 3, in section 3, revise paragraph (a)(3)(iii) to read as follows:
Appendix A to Part 3 – Risk Based Capital Guidelines
* ****
Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off- Balance Sheet Items
*****
(a)***
(3)***
(iii) Loans secured by first mortgages on one-to-four family residential properties, either owner
occupied or rented, provided that such loans are not otherwise 90 days or more past due, or on
nonaccrual or restructured. It is presumed that such loans will meet the prudent underwriting
standards. For the purposes of the risk-based capital guidelines, a loan modified solely pursuant
to the U.S. Department of Treasury’s Making Home Affordable Program will not be considered
to have been restructured.
*****
11

Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons stated in the common preamble, the Board of Governors of Federal
Reserve System amends parts 208 and 225 of Chapter II of title 12 of the Code of Federal
Regulations as follows:
PART 208 – MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority for part 208 continues to read as follows:
Authority : 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461, 481-486,
601, 611, 1814, 1816, 1818, 1820(d)(9),1833(j), 1828(o)1831, 1831o, 1831p-1, 1831r-1, 1831w,
1831x 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 U.S.C. 78b, 78I(b),
78l(i),780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42
U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.
2. In appendix A to part 208, revise Section III. C.3. , to read as follows:
APPENDIX A to PART 208 – CAPITAL ADEQUACY GUIDELINES FOR STATE MEMBER
BANKS: RISK-BASED MEASURE
III. * * *
C. * * *
3. Category 3: 50 percent. This category includes loans fully secured by first liens 41 on 1- to 4family residential properties, either owner-occupied or rented, or on multifamily residential
properties,42 that meet certain criteria.43 Loans included in this category must have been made in
accordance with prudent underwriting standards;44 be performing in accordance with their
original terms; and not be 90 days or more past due or carried in nonaccrual status. For purposes
of this 50 percent risk weight category, a loan modified solely pursuant to the U. S. Department
of Treasury’s Making Home Affordable Program will be considered to be performing in
accordance with its original terms. 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
(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.
Also assigned to this category are revenue (non-general obligation) bonds or similar obligations,
including loans and leases, that are obligations of states or other political subdivisions of the U.S.
(for example, municipal revenue bonds) or other countries of the OECD-based group, but for
which the government entity is committed to repay the debt with revenues from the specific
projects financed, rather than from general tax funds.
Credit equivalent amounts of derivative contracts involving standard risk obligors (that is,
obligors whose loans or debt securities would be assigned to the 100 percent risk category) are
included in the 50 percent category, unless they are backed by collateral or guarantees that allow
them to be placed in a lower risk category.
*****

If a bank 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 purposes
of determining the loan-to-value ratio and assigning a risk weight.

Loans 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. Such loans to builders will be considered prudently underwritten only if the bank has
obtained sufficient documentation that the buyer of the home intends to purchase the home (i.e.,
has a legally binding written sales contract) and has the ability to obtain a mortgage loan
sufficient to purchase the home (i.e., has a firm written commitment for permanent financing of
the home upon completion).
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
13

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 as prescribed for
reporting purposes in the instructions to the Call Report.
43

Residential 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.

Prudent 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 loanto-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.

PART 225 – BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority for part 225 continues to read as follows:
Authority : 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c)(8),
1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801
and 6805.
2. In appendix A to part 225, revise section III.C.3., to read as follows:
APPENDIX A to PART 225 – CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING
COMPANIES: RISK-BASED MEASURE
III. * * *
C. * * *
3. Category 3: 50 percent. This category includes loans fully secured by first liens48 on 1- to 4family residential properties, either owner-occupied or rented, or on multifamily residential
properties,49 that meet certain criteria.50 Loans included in this category must have been made in
accordance with prudent underwriting standards;51 be performing in accordance with their
original terms; and not be 90 days or more past due or carried in nonaccrual status. For purposes
of this 50 percent risk weight category, a loan modified or restructured solely pursuant to the
U.S. Department of Treasury’s Making Home Affordable Program will be considered to be
performing in accordance with its original terms. The following additional criteria must also be
14

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:
(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.
Also assigned to this category are revenue (non-general obligation) bonds or similar obligations,
including loans and leases, that are obligations of states or other political subdivisions of the U.S.
(for example, municipal revenue bonds) or other countries of the OECD-based group, but for
which the government entity is committed to repay the debt with revenues from the specific
projects financed, rather than from general tax funds.
Credit equivalent amounts of derivative contracts involving standard risk obligors (that is,
obligors whose loans or debt securities would be assigned to the 100 percent risk category) are
included in the 50 percent category, unless they are backed by collateral or guarantees that allow
them to be placed in a lower risk category.
*****

If 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 purposes of determining the loan-to-value ratio and assigning a risk weight.
15

Loans that qualify as loans secured by 1- to 4-family residential properties or multifamily
residential properties are listed in the instructions to the FR Y–9C Report. In addition, for riskbased 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. Such
loans to builders will be considered prudently underwritten only if the bank holding company has
obtained sufficient documentation that the buyer of the home intends to purchase the home (i.e.,
has a legally binding written sales contract) and has the ability to obtain a mortgage loan sufficient
to purchase the home (i.e., has a firm written commitment for permanent financing of the home
upon completion).
50

Residential 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.

* * * * *
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority for Issuance
For the reasons stated in the common preamble, the Federal Deposit Insurance Corporation
amends Part 325 of Chapter III of Title 12, Code of the Federal Regulations as follows:
PART 325 – CAPITAL MAINTENANCE
1. The authority citation for part 325 continues to read as follows:
Authority: 12 U.S.C. 1814(a), 1815(b), 1816, 1818(a), 1818(b), 1815, 1818(a), 1818(b),
1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1835, 3907, 3909,
4808; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790, (12 U.S.C. 1831n, note); Pub. L. 102242, 105 Stat. 2236, 2355, 2386 (12 U.S.C. 1828 note).
2. Amend Appendix A to part 325 by revising footnote 39 to read as follows:
16

Appendix A to Part 325 – Statement of Policy on Risk Based Capital
* * * * *
II * * *
C.* * *
***** *
39
This category would also include a first-lien residential mortgage loan on a one-to-four family
property that was appropriately assigned a 50 percent risk weight pursuant to this section
immediately prior to modification under the Making Home Affordable Program established by
the U.S. Department of Treasury, so long as the loan, as modified, is not 90 days or more past
due or in nonaccrual status and meets other applicable criteria for a 50 percent risk weight. In
addition, real estate loans that do not meet all of the specified criteria or that are made for the
purpose of property development are placed in the 100 percent risk category.
* * * * *
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
For reasons set forth in the common preamble, the Office of Thrift Supervision amends
part 567 of Chapter V of title 12 of the Code of Federal Regulations as follows:
PART 567 – CAPITAL
1. The authority for citation for part 567 continues to read as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 (note)
§576.1 is amended as set forth below:
a. In the definition Qualifying mortgage loan add a new paragraph to read as
follows
§576.1 Definitions
* ****
Qualifying mortgage loan
* ** * *
(4) A loan that meets the requirements of this section prior to modification under the U.S.
Department of Treasury’s Making Home Affordable Program may be included as a qualifying
mortgage loan, so long as the loan is not 90 days or more past due.
*

* * * *

[THIS SIGNATURE PAGE PERTAINS TO THE JOINT INTERIM FINAL RULE WITH
REQUEST FOR PUBLIC COMMENT ENTITLED “RISK-BASED CAPITAL
GUIDELINES; CAPITAL ADEQUACY GUIDELINES; CAPITAL MAITENANCE;
CAPITAL – RESIDENTIAL MORTGAGE LOANS MODIFIED PURSUANT TO THE
MAKING HOME AFFORDABLE PROGRAM”]

By order of the Board of Governors of the Federal Reserve System, June 23, 2009.

Jennifer J. Johnson

(signed)

Jennifer J. Johnson,
Secretary of the Board.

Dated: June 19, 2009.

John C. Dugan

(signed)

John C. Dugan,
Comptroller of Currency

Dated: June 17, 2009

By the Office of the Thrift Supervision

John E. Bowman

(signed)

John E. Bowman,
Acting Director

THIS SIGNATURE PAGE PERTAINS TO THE JOINT INTERIM FINAL RULE WITH
REQUEST FOR PUBLIC COMMENT ENTITLED “RISK-BASED CAPITAL
GUIDELINES; CAPITAL ADEQUACY GUIDELINES; CAPITAL MAITENANCE;
CAPITAL – RESIDENTIAL MORTGAGE LOANS MODIFIED PURSUANT TO THE
MAKING HOME AFFORDABLE PROGRAM”

Dated at Washington D.C., this 23rd day of June 2009.

FEDERAL DEPOSIT INSURANCE CORPORATION

Valerie J. Best

(signed)

Valerie J. Best
Assistant Executive Secretary

(SEAL)

Full text of Federal Deposit Insurance Corporation : Documents Relating to the Financial Crisis of 2007-2009 : Regulatory Capital Standards : Interim Final Rule for Mortgages Modified Under the Making Home Affordable Program, June 26, 2009

FRASER