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TFR Questions and Answers
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Q&A No. 001 Other-Than-Temporary Impairment of Securities
Q&A No. 002 Traveler's Express and Outstanding Drafts
Q&A No. 003 Risk Weighting Industrial Bonds
Q&A No. 004 Federal Funds Sold
Q&A No. 005 Commitments to Originate Consumer Loans
Q&A No. 006 Consolidated Liquidity Requirement
Q&A No. 007 Deferred Taxes for Unrealized Gains and Losses
Q&A No. 008 Customer Sweep Accounts (Overnight Investments)
Q&A No. 009 Number of Full-time equivalent employees
Q&A No. 010 Second Mortgages
Q&A No. 011 Loan Classification
Q&A No. 012 Secured Personal Line of Credit
Q&A No. 013 ESOP Loan
Q&A No. 014 Consumer Loans
Q&A No. 015 Deposits: Medical Savings Plans
Q&A No. 016 Hierarchy of Risk-weighting
Q&A No. 017 Extensions of Credit to Officers
Q&A No. 018 Construction Participations
Q&A No. 019 Annual Listing of Service Corporations (Schedule CSS)
Q&A No. 020 Calculation of Past Due
Q&A No. 021 Risk-weighting Receivables from Brokers
Q&A No. 022 Partial Use of an Office Building
Q&A No. 023 FHLB Dividends
Q&A No. 024 Loans Secured by Stock
Q&A No. 025 Other Asset and Liability Codes
Q&A No. 026 Classification of Mobile Home Loans as Mortgages
Q&A No. 027 Direct Credit Substitute (Revised)
Q&A No. 028 Qualified Thrift Lender (QTL) Test
Q&A No. 029 (Revised) Reconciling Total Assets (SC60) to Assets to Riskweight (CCR64)
Q&A No. 030 Limited Partnership (Pass-through Investment)
Q&A No. 031 Commitment Fee on a Letter of Credit
Q&A No. 032 Credit Balances in Mortgage Loans
Q&A No. 033 Purchased Receivables
Q&A No. 034 Business Checking Account Overdraft Protection Lines
Q&A No. 035 Troubled Debt Restructuring
Q&A No. 036 Minority Interest
Q&A No. 037 Deductions for Assets of Consolidated Nonincludable Subsidiaries
Q&A No. 038 Multifamily and Nonresidential Mortgage Loans
Q&A No. 039 Over-extended Home Equity Loans
Q&A No. 040 Risk weighting high LTV loans (Revised)
Q&A No. 041 Escrows as Demand Deposits
Q&A No. 042 Open-ended Mortgage loans
Q&A No. 043 Cash Flow treatment of Mortgage loans converted to MBS
Q&A No. 044 Table Funding (Originating Mortgages Available-for-Sale)
Q&A No. 045 Check Processing and Computer Center Co-ops on CSS
Q&A No. 046 Definition of Real Estate Loans (TB72)
Q&A No. 047 Trust Preferred Securities
Q&A No. 048 Rabbi Trusts
Q&A No. 049 Conversion Factors For LIP
Q&A No. 050 Liquidity Ratio for De Novo Institutions
Q&A No. 051 Specific Reserves on Servicing Assets
Q&A No. 052 Hypothecated Deposits - Down Payments on Construction Loans
Q&A No. 053 Unsolicited Brokered Deposits
Q&A No. 054 CMR Filing Exemption
Q&A No. 055 Grandfathered Qualifying Multifamily Mortgage Loans
Q&A No. 056 Valuation of Foreclosed Assets
Q&A No. 057 QTL - Reorganized Entity
Q&A No. 058 Delinquent FHA/VA Loans Purchased from GNMA Pools
Q&A No. 059 Securities Reclassified from Available-for-Sale
Q&A No. 060 Mutual Funds (SFAS No. 115)
Q&A No. 061 Risk-Weighting of Unrealized Gains on Equity Securities
Q&A No. 062 Small Business Loans Secured By Residential Real Estate
Q&A No. 063 Risk-Weighting FHA-Insured Second Mortgages
Q&A No. 064 Automobile Financing Through Dealers
Q&A No. 065 Inclusion Of Collateralized FHLB Advances In The Liquidity Base
Q&A No. 066 Pledged Securities in QTL
Q&A No. 067 Undisbursed Balance (LIP) Of Land Development Loans
Q&A No. 068 Regulatory Liquidity - Short-Term Accounts Receivable
Q&A No. 069 Assisted Living Facilities
Q&A No. 070 Preferred Deposits
Q&A No. 071 Set-Off of Negative Cash Account
Q&A No. 072 Loans Secured by Duplexes
Q&A No. 073 LTV Calculation when the First Lien is FHA-Insured and the Second Lien is Conventional
Q&A No. 074 Risk Weighting Residual of a Loan Participation
Q&A No. 075 Deposit Premium Assessment Base (Revised)
Q&A No. 076 Reserve for Uncollectable Interest
Q&A No. 077 Loans Collateralized by Account Receivables
Q&A No. 078 Floating Rate CMO Valuation
Q&A No. 079 Complex Securities (Revised)
Q&A No. 080 Servicing Escrows
Q&A No. 081 Bank-Owned Life Insurance (BOLI)
Q&A No. 082 Loans to Executive Officers
Q&A No. 083 Aggregate Amount of all Extensions of Credit
Q&A No. 084 Participated Lines of Credit
Q&A No. 085 Complex Securities
Q&A No. 086 Loan-To-Value
Q&A No. 087 Accrued Interest Payable on Deposits Included in Liquidity
Q&A No. 088 Commitments on CMR
Q&A No. 089 Calculation of LTV Ratios for Single-Family Residential Mortgages
Q&A No. 090 Floating Rate Balloon Note
Q&A No. 091 Available-For-Sale Loans
Q&A No. 092 Firm Commitments to Sell Mortgage Loans Included in Liquidity
Q&A No. 093 Farm Loans
Q&A No. 094 Callable CDS
Q&A No. 095 Dollar Roll Clearing Account
Q&A No. 096 LTV-Deferred Loan Fees
Q&A No. 097 Leasing Activities
Q&A No. 098 Auto Leases
Q&A No. 099 Closed-End Home Equity Loans
Q&A No. 100 Uninsured Deposits
Q&A No. 101 QTL For Trust-Only Charters
Q&A No. 102 Fee Income on Individual Security Sales
Q&A No. 103 Mutual Fund Referrals
Q&A No. 104 Qualifying Multifamily Mortgage Loans
Q&A No. 105 Callable Bond Past Call Date
Q&A No. 106 Face Value of Liabilities with Options, Edit R950
Q&A No. 107 Convertible FHLB Advances
Q&A No. 108 Balloon Loans
Q&A No. 109 Deferred Tax Credits
Q&A No. 110 FHLB Non-Interest-Earning Deposits
Q&A No. 111 Regulatory Liquidity
Q&A No. 112 Liquidity, Callable Agency Notes
Q&A No. 113 QTL - Loans Pools
Q&A No. 114 Overdrafts on Checking Accounts
Q&A No. 115 Exchange Rate Contracts
Q&A No. 116 Risk-Weighting Accrued Interest
Q&A No. 117 Overdrafts in Cash Accounts
Q&A No. 118 Money Market Mutual Funds
Q&A No. 119 Risk Weighting Interest-Rate Contracts
Q&A No. 120 Qualifying Multifamily Loans - Assumption
Q&A No. 121 Write-Down of Beneficial Interests Pursuant to EITF Issue No. 99-20
Q&A No. 122 SFAS No. 115 Adjustments in Cash Flow Amounts
Q&A No. 123 Interpretation of Q&A No. 72 - Single-Family Construction Loans
Q&A No. 124 Combining Junior and Senior Loans for LTV Delinquency Reporting
Q&A No. 125 Partial PMI
Q&A No. 126 Original vs. Current LTV Calculation
Q&A No. 127 High LTV Loan Participations
Q&A No. 128 LTV - Decrease in Property Value (Revised)
Q&A No. 129 LTV - Additional Collateral
Q&A No. 130 Disbursements of Lines of Credit
Q&A No. 131 High LTV Past Due Loans
Q&A No. 132 High LTV Charge-offs and Sales
Q&A No. 133 Installment Overdrafts
Q&A No. 134 Loans on Mixed Use Property or on Two Properties
Q&A No. 135 Nonconstruction Bridge Loans
Q&A No. 136 "Best Effort" Commitments to Sell Loans
Q&A No. 137 Combined Loan to Value with New Appraisal
Q&A No. 138 Pass-Through Securities Backed by Home Equity Loans
Q&A No. 139 Overdrafts of Commercial NOW and Demand Accounts
Q&A No. 140 SFAS No. 142 - Amortization of Goodwill (Revised)
Q&A No. 141 Definition of Nonaccrual Status
Q&A No. 142 High LTV Loans Originated for Sale (Revised)
Q&A No. 143 High LTV Purchases
Q&A No. 144 High LTV Sales
Q&A No. 145 Small Business Loans Secured by Personal Residence
Q&A No. 146 Liquidity in QTL
Q&A No. 147 CCR - Reporting GNMA Mutual Funds
Q&A No. 148 Combined Loan to Value with New Appraisal
Q&A No. 149 Matured CDs in CMR
Q&A No. 150 Recalculation of LTV (Revised)
Q&A No. 151 Construction Loans
Q&A No. 152 Construction Loans - Insured or Government Guarantee
Q&A No. 153 FHA/VA Insurance Pending
Q&A No. 154 Private Mortgage Guarantee
Q&A No. 155 Commercial Loans Secured by Deposits
Q&A No. 156 Small Business Loan Limit for QTL
Q&A No. 157 Purchased Subordinated Securities
Q&A No. 158 Residual Interests
Q&A No. 159 Loans Held For Sale
Q&A No. 160 Servicing Escrows
Q&A No. 161 Qualifying Multifamily Residential Mortgage Loans - Maturity Requirement
Q&A No. 162 Qualifying Multifamily Residential Mortage Loans - Payment History
Q&A No. 163 Investments in Nonoperating Entities
Q&A No. 164 Qualifying Single Family Residential Mortgage Loans
Q&A No. 165 Recourse Rule-120-Day Exception
Q&A No. 166 Commercial Loans Secured By GNMA Securities
Q&A No. 167 Loan Classification
Q&A No. 168 Adjustments To Loan Documentation Subsequent To Origination
Q&A No. 169 QTL Test - Mortgages Originated And Sold
Q&A No. 170 Credit Life Insurance On Consumer Loans
Q&A No. 171 Definition Of Outstanding Balance
Q&A No. 172 Construction Mezzanine (Bridge) Loans
Q&A No. 173 New Accounts-Name Change
Q&A No. 174 New Accounts-Acquisitions
Q&A No. 175 New Accounts-Maturity
Q&A No. 176 Definition Of Withdrawals
Q&A No. 177 Checking Account Sweeps
Q&A No. 178 Suspected Terrorists Deposits
Q&A No. 179 Loans Past Maturity
Q&A No. 180 LTV Calculation - Credit Life Insurance
Q&A No. 181 Loan Commitments
Q&A No. 182 Retirement Accounts
Q&A No. 183 Loans to Executive Officers
Q&A No. 184 Trust Preferred Securities
Q&A No. 185 Intangibles
Q&A No. 186 Minimum Pension Liability
Q&A No. 187 Offsetting Commitments to Sell and Purchase Securities
Q&A No. 188 CMO Risk Weighting
Q&A No. 189 Derivative Instruments and Hedges
Q&A No. 190 Overdrawn NOW Accounts
Q&A No. 191 Loans Sold with Recourse - 120 Day Limited Recourse
Q&A No. 192 Loans to Executive Officers
Q&A No. 193 Rescinded
Q&A No. 194 LTV - Other Credit Enhancement
Q&A No. 195 Best Effort Commitments
Q&A No. 196 Commercial Line of Credit Secured by Real Estate
Q&A No. 197 Renovation Loans
Q&A No. 198 Charge-off on Credit-Card Receivables
Q&A No. 199 Acquired Troubled Debt Restructured
Q&A No. 200 QTL - Life Insurance
Q&A No. 201 Insider Loans - Loans To Spouses
Q&A No. 202 CMR - Rounding Remaining Maturities
Q&A No. 203 CMR - Definition of Early Withdrawal
Q&A No. 204 CMR - Mortgage Pipeline
Q&A No. 205 Mortgages with Additional Collateral
Q&A No. 206 Foreclosed Property During Redemption Period
Q&A No. 207 Retail Repurchase Agreements
Q&A No. 208 Mortgage Loan Commitments
Q&A No. 209 Brokered Deposits (Revised)
Q&A No. 210 QTL - Lot Loans
Q&A No. 211 QTL - Marketable Equity Securities
Q&A No. 212 Rescinded
Q&A No. 213 Federal Farm Credit Bank Bonds (FFCB)
Q&A No. 214 Callable Multifamily and Nonresidential Mortgage Loans
Q&A No. 215 Overdraft Protection and Fees
Q&A No. 216 Intangible Pension Asset
Q&A No. 217 90% LTV
Q&A No. 218 Lines of Credit on Nonresidential Property
Q&A No. 219 Sub S Corp Dividends
Q&A No. 220 Reducing Low Level Recourse By Contingent Liability
Q&A No. 221 CD Maturity on a Nonbusiness Day
Q&A No. 222 Construction/Permanent Loans
Q&A No. 223 Zero Coupon State/Municipal Bonds
Q&A No. 224 INTERCOMPANY RECEIVABLES/PAYABLES
Q&A No. 225 COMPUTER SOFTWARE
Q&A No. 226 Foreclosure On Loans Purchased From Ginnie Mae Pools
Q&A No. 227 Including Subsidiary in Schedule FS
Q&A No. 228 Farm Services Agency (FSA) Guaranteed Loan
Q&A No. 229 Arms At Their Floor
Q&A No. 230 TFR Posting Schedule on FDIC Web Site
Q&A No. 231 Sallie Mae Pass-Through Securities
Q&A No. 232 Flexible Spending Accounts
Q&A No. 233 FHLB Advance Prepayment Penalities
Q&A No. 234 Internet Deposit Listings-Brokered Deposits
Q&A No. 235 Liabilities for Credit Losses for Off-Balance-Sheet Exposures
Q&A No. 236 Excess Alll
Q&A No. 237 Boli Investment Limitation, Definition of Total Capital
Q&A No. 238 Risk-Weighting Available-for-Sale Equity Securities With Unrealized Losses
Q&A No. 239 GNMA Buy-Back Program
Q&A No. 240 Revolving Lines Of Credit – As Refinancings
Q&A No. 241 Lines Of Credit To A Service Corporation
Q&A No. 242 Transactions With An Affiliated Bank
Q&A No. 243 Holding Company’s Dividends From Thrift Subsidiary
Q&A No. 244 Trust Preferred Securities
Q&A No. 245 Net Deferred Tax Assets
Q&A No. 246 Interest-Only Mortgages
Q&A No. 247 FHLB Overdrafts
[TOP]
SUBJECT: Other-Than-Temporary Impairment of Securities
LINE(S): SO321
DATE: Revised March 14, 2003
Question: How is an other-than-temporary impairment of a security reported on the TFR?
Answer: An other-than-temporary impairment of a security directly reduces the recorded investment of the security on Schedule SC and should be expensed on SO321 (Net Provision for Losses on Interest-Bearing Assets). Additionally, it should be reported as a charge-off on VA30 and VA155.
[TOP]
SUBJECT: Traveler's Express and Outstanding Drafts
LINE(S): SC110/710
SI239
DATE: May 23, 1997
Question: An institution uses Traveler's Express for their check clearing. Every time they need to have a check cut, the institution wires the money to Traveler's Express, which then cuts the check for the institution. Until the check clears, Traveler's has use of the money; however, the institution also is paid a nominal rate on the float.
The institution argues that since they have wired money to Traveler's, they have paid for the check and it does not fit the definition of a zero-balance account. Use the example of paying your mortgage with a personal check versus a cashier's check. A personal check creates a liability until the check clears. A cashier's check does not, since you have "bought" the check with money from your account.
Do the outstanding checks at Traveler's have to be included in the deposit insurance assessment base and reported as deposits on SC710 or SI239?
Answer: No. The only amount that should be reported as a deposit in SC710 would be any funds not yet remitted to Traveler’s. For example, if the association wired the funds the following business day, the amount of the liability at the close of business would be reported as a deposit. However, in this case, the institution wires the funds the same day the checks are cut and therefore, has no liability on their books. Some institutions have this same arrangement with other money-order servicers such as American Express.
It is not reported on SI239 because the money-order servicer uses a commercial bank to clear the checks and, thus, the deposit is in the commercial bank’s deposit insurance assessment base.
[TOP]
SUBJECT: Risk Weighting Industrial Bonds
LINE(S): CCR505
DATE: May 23, 1997
Question: How are industrial revenue bonds risk-weighted on Schedule CCR?
Answer: Industrial revenue bonds are risk-weighted in the 100% risk-weight category because it is the obligation of the private company issuing them to pay the amounts due on the bonds, and the investors need to look to the private company's ability to honor the obligation. This is illustrated by the fact that the municipality will not take over the obligation to pay off the bonds if the private company goes bankrupt.
[TOP]
SUBJECT: Federal Funds Sold
LINE(S): SC162
SI385
DATE: May 23, 1997
Question: An institution considers their Fed Funds (SC162) as available-for-sale. They classify these funds as available-for-sale and account for them accordingly. Is this correct?
Answer: No. Federal Funds Sold are funds that are immediately available and invested for only one business day. Typically they are treated as cash equivalents and as such are not classified as available-for-sale or trading.
[TOP]
SUBJECT: Commitments to Originate Consumer Loans
LINE(S): CC310
DATE: May 23, 1997
Question: If an institution has approved a consumer loan, but a commitment letter has not been issued, is this a commitment? An institution has an electronic application tracking process through which loans are approved or denied. No commitment letter is sent to the applicants upon approval, although some branch managers may call to notify the applicants that the loan was approved. The borrowers can receive their funds within a few days; however, in some cases, it may be weeks before the customer comes into the office to pick up his check.
Answer: Yes, an approved loan is a commitment. The borrower does not have to be notified. If the association intends to make the loan, they must report it as a commitment for cash flow purposes, regardless of when the loan will be closed or the funds disbursed.
[TOP]
SUBJECT: Consolidated Liquidity Requirement
LINE(S): SI500
DATE: May 23, 1997
Question: The instructions for SI500 state: "Regulatory liquidity is computed for the reporting association consolidated with its operating subsidiaries." The General Instructions state that the TFR should be prepared on a fully consolidated basis. Are the instructions for SI500 in error?
Answer: No, the instructions are correct. Liquidity should be computed for an institution consolidated only with its operating subsidiaries.
[TOP]
SUBJECT: Deferred Taxes for Unrealized Gains and Losses
LINE(S): CCR137
DATE: May 22, 1997
Question: Should the amount on CCR137 (for unrealized gains and losses on certain available-for-sale securities) be reported gross or net of income taxes?
Answer: Generally, the amount on CCR137 should be reported before any income tax effect. The amount reported on CCR137 is directly related to the amount reported on CCR102.
The amount reported on CCR102 is an adjustment to equity capital to compute regulatory capital. It is an amount that is included in equity capital on SC860 and is net of any associated current or deferred income taxes.
The amount reported on CCR137 is an adjustment to total assets to compute adjusted total assets for regulatory capital purposes. Generally, this amount should be reported before any income tax effect. However, as explained below, if the income tax effect results in a change to assets (either current or deferred tax assets), the amount on CCR137 should be reported after the effect of income taxes. The current or deferred taxes from SFAS 115 adjustments are netted with all other current or deferred taxes of the institution to determine whether the result is a liability or asset. The CCR137 calculation can change from quarter to quarter depending on whether deferred taxes result in an asset or in a liability.
Example 1
Unrealized gains on CCR137 are reported after the effect of income taxes, only where the associated current or deferred tax liability is a component of a net tax asset.
Assume:
Mortgage pool securities on SC210 increased by unrealized gains on available-for-sale securities of $100.
An associated deferred tax liability of $40, included as a component of a net deferred tax liability on SC790.
Unrealized gains, net of income taxes, on available-for-sale securities of $60, reported as a positive amount on SC860.
Report:
-$60 on CCR102 (the net amount included in SC860)
-$100 on CCR137 (the only amount included in assets)
Example 2
Unrealized losses on CCR137 are reported after the effect of income taxes, only where the associated current or deferred tax asset is a component of a net tax asset.
[TOP] Assume:
U.S. Government securities on SC130 reduced by unrealized losses on available-for-sale securities of $100.
An associated deferred tax asset of $40, is included as a component of a net deferred tax asset, reported in other assets on SC690.
Unrealized losses, net of income taxes, on available-for-sale securities of $60 are reported as a negative amount on SC860.
Report:
$60 on CCR102 (the net amount included in SC860)
$60 on CCR137 (the deferred tax asset of $40 included in SC690 netted against the loss of $100 in SC130)
SUBJECT: Customer Sweep Accounts (Overnight Investments)
LINE(S): SC710, SC783
DATE: May 23, 1997
Question: An institution is going to be offering a new service to its checking account customers. They will "sweep" designated accounts of excess funds and then transfer these funds to a third party for investment. The customer accounts will be swept in the evening into a clearing account for transfer the next morning. The deposit accounts have been debited; how is the clearing account reported on the TFR?
This clearing account will also be used when the customer accounts are overdrawn and need to have some of the invested cash returned. In this reverse situation, the customer accounts will be credited in the evening, and the funds transferred back to the institution from the third party in the morning. The clearing account will have been debited, and it's possible that it may carry a debit balance if customer overdrafts exceed the amounts swept from other accounts. What happens in this instance?
Answer: Because the funds have not yet been transferred to the third party, the clearing account must be included in deposits on SC710.
If the customer account is overdrawn and there is no legal right of setoff against a funded account, the amount of the overdraft should be reported as a nonmortgage loan (SC345 if consumer, and SC303 if commercial). If there is a legal right of setoff against an account with sufficient funds, the overdraft should be deducted from deposits.
[TOP]
SUBJECT: Number of Full-time equivalent employees
LINE(S): SI370
DATE: July 1, 1997
Question: An institution either leases its employees or uses employees who work for its holding company. The S&L itself has no employees. The president works for the holding company. What should they put on SI370 (Number of Full-time Equivalent Employees)?
Answer: SI370 should include all employees leased from affiliates and all long-term contractual employees, who work primarily for the association. That is, an association should not include short-term contract employees such as those from a temporary employment agency, but should include employees leased from affiliates and contractual employees such as loan officers employed on a commission or fee basis. Additionally, contractual agreements with brokers or agents who provide the same service to others should not be included. A zero in SI370 is normally not acceptable.
[TOP]
SUBJECT: Second Mortgages
LINE(S): SC250
DATE: May 23, 1997
Question: An institution made second mortgage loans that are collateralized by real estate, and the combined loan-to-value (LTV) ratio of the first and second is less than 80%. Should these be classified as consumer loans instead of mortgage loans, because the institution does not have a formal, written legal title opinion for the second mortgage?
According to the institution, they are able to do their own title searches if necessary, since they are in the county seat. This saves them the attorney fees for each loan. Can loans be classified as mortgages under these circumstances?
Answer: If the institution can show that it has a perfected lien, it can report the loan as a mortgage loan. This typically has been evidenced either through a title policy or an attorney's opinion; however, a statement by an officer of the institution should suffice. The statement should document when and where the lien was recorded and any prior liens and encumbrances. Other information may also be useful such as in which book of the county's court of records the lien is recorded.
[TOP]
SUBJECT: Loan Classification
LINE(S): SC23/30
DATE: May 23, 1997
Question 1: If an institution has commercial loans where the underwriting focuses primarily on the creditworthiness rather than the collateral, but the loan is fully secured by real estate, can they classify these loans as nonmortgage since OTS Regulation 560 focuses on the underwriting rather than the collateral?
Answer 1: If the loans are fully secured by real estate, they may elect to classify them as either mortgage or nonmortgage loans.
Question 2: Can the institution take a nonmortgage commercial loan, and break it out into a second loan for the real estate collateralized portion?
Answer 2: Yes, provided there are two separate loans and the real estate loan is fully secured by the real estate collateral.
Question 3: What constitutes "fully secured," if a loan-to-facilitate may exceed an 80% loan-to-value, but still qualify as mortgage?
Answer 3: A loan is fully secured when the fair value of the collateral minus costs to sell is no less than the carrying amount of the loan. However, it would be desirable to have collateral in excess of fair value minus costs to sell.
Question 4: Must SC300, Secured Commercial loans, reflect only fully secured loans?
Answer 4: Yes, fully secured at origination. It should not include loans secured by collateral taken as an "abundance of caution" where the amount of the collateral is minimal in relation to the size of the loan.
[TOP]
SUBJECT: Secured Personal Line of Credit
LINE(S): SC330/345
DATE: May 23, 1997
Question: An institution has approved an open-ended personal line of credit of approximately $2.8 million. It's secured by collateral consisting of approximately 25% in automobiles, 15% in loans on deposits, 15% in various real estate, with the balance in various other collateral. Approximately 5% is unsecured. Where should this be reported on the TFR?
Answer: The disbursed amount should be reported on SC345, which was redefined in the March 1997 TFR instructions as "Credit Cards and Related Plans." The instructions say to report the disbursed portion of open-end consumer credit, including both secured and unsecured credit. The undisbursed portion should be reported as a commitment on CC410 (Unused Lines of Credit: Open-end Consumer Lines).
[TOP]
SUBJECT: ESOP Loan
LINE(S): SC760
DATE: May 23, 1997
Question: A thrift holding company established an ESOP for the employees of a thrift and borrowed funds from a third party to fund the plan. The financial institution, not the holding company, pays the interest expense of $21,000 quarterly on this debt. Is the thrift required to reflect the debt obligation associated with the ESOP on the TFR, line SC760, Other Borrowings, or SC890, Other Components of Capital?
Answer: In some cases, yes. However, because not enough information is provided and because of the complexity of this issue, it should be referred to the Regional Accountant for resolution.
[TOP]
SUBJECT: Consumer Loans
LINE(S): SC310-345
DATE: December 1, 1997
Question: In reporting consumer loans in Schedule SC, is the collateral or the stated use of the loan proceeds the key to proper reporting?
Answer: The loan should be categorized based on the collateral as long as the collateral fully secures the loan. However, if the collateral is only taken as an abundance of caution, then the purpose would be the key.
For example: A lender made a revolving line of credit to finance college expenses for the borrower's child with a second lien on the borrower's home as collateral. If the loan would otherwise qualify under the lenders' home improvement loan program, it could be considered a 1-4 open-end mortgage loan. However, if the institution wanted to report it as an education loan, OTS would not object. On the other hand, if there was insufficient equity in the home to cover the loan (the lender took a security interest in the loan as an abundance of caution), then the loan should be reported as an education loan.
[TOP]
SUBJECT: Deposits: Medical Savings Plans
LINE(S): SC710
SI210/215
CMR
DATE: December 1, 1997
An institution has started to offer a medical savings plan account. The account offers a pre-tax savings plan to provide for qualified medical expenses. The individual customer deposits money for the medical savings plan up to their maximum allowable amount.
Question 1: Should these medical savings plan accounts be reported as passbook accounts?
Answer 1: In Schedule CMR these accounts should be reported as fixed-maturity deposits, because they do not have the characteristics of a passbook account. The original maturity would typically be 12 to 36 months because they are 12-month accounts with an additional 3-month grace period for filing claims. The remaining maturity would be based on the number of months until the end of the year plus three months for the grace period.
In Schedule SI, these generally could be reported as demand deposits if they are noninterest bearing and meet the other requirements of demand deposits.
They should not be reported with IRA/Keogh Accounts on SI210.
Question 2: If a customer has an unrelated $98,000 CD and a $9,000 MSA, would the full $9,000 Medical Savings Account be insured?
Answer 2: No, only the aggregated amount up to $100,000 would be insured. Medical Savings Accounts must be aggregated with other savings accounts in determining deposit insurance.
[TOP]
SUBJECT: Hierarchy of Risk-weighting
LINE(S): CCR450/480/505
DATE: December 1, 1997
Question 1: Can 1-4 FHA/VA conditionally guaranteed, insured mortgage loans, that are nonperforming be reported with performing loans in the 20% risk-weight category, since they will eventually recover?
Answer 1: Yes, include the FHA/VA conditionally guaranteed part in 20% risk-weight despite being nonperforming. Only the guaranteed portion should be risk-weighted at 20% with the remainder in 100% risk-weight.
Question 2: Would the nonaccrual status of loans take precedence for 100% risk-weight classification, even if the loans were more than fully secured by cash, where no risk would actually exist?
Answer 2: These loans would be risk-weighted at 20% if collateralized by cash held in a segregated deposit account by the reporting savings association.
Question 3: Would a construction loan that is FHA/VA secured, but that does not meet the test for a "qualifying residential construction loan" qualify for less than 100% risk-weighting?
Answer 3: Yes, the portion of assets conditionally guaranteed by U.S. government agencies (e.g., VA/FHA) is risk-weighted at 20%. Reminder: only the guaranteed portion should be risk-weighted at 20%, with the remainder risk-weighted at 100%.
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SUBJECT: Extensions of Credit to Officers
LINE(S): SI590/595
DATE: December 1, 1997
Question: Should the credit provided for employees before they become officers be included as extensions of credit on lines SI590/595, in the quarter that they actually become officers?
Answer: Yes, extensions of credit should be included in SI590/595 even though they were made before the employee became an officer. Even if the loan is beyond what is permitted by Regulation O, it may remain on the books. However, if the extension of credit is modified or renewed in any way it must conform to the regulation, since the individual is now an insider. In essence, the extension of credit is reported, but grandfathered, under current terms. The one exception would be a situation where the extension of credit was made immediately before the appointment to circumvent the regulations.
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SUBJECT: Construction Participations
LINE(S): SC240, CC105
DATE: December 1, 1997
An institution has made a construction loan for a hotel and they are participating out a portion of it. The institution has disbursed $700,000 to date, of which $300,000 was contributed by the other participants. This leaves a total of $300,000 as LIP.
Question 1: How is this accounted for? Does the institution show only their share of the disbursed amount in Schedule SC? If so, how is CF completed?
Answer 1: All participants should report their proportionate share of the construction loan on SC240. The increase in SC240 should be reported on CF210.
Question 2: How is the LIP reported in Schedule CC? All, or only the reporting institution's part? Will the participated amount be shown as loans serviced for others by the lead lender?
Answer 2: If the participants are all liable on the construction loan, they should all report their commitment on CC105. If only the lead lender is liable on the construction loan, only the lead lender would report LIP on CC105.
In either case the lead lender, as the servicer, should report the portion of the outstanding balance of the loan that is owned by the other participants on SI390.
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SUBJECT: Annual Listing of Service Corporations (Schedule CSS)
LINE(S): CSS110:150
DATE: December 1, 1997
Question 1: What is required on CSS120 through 160 to reflect the "total assets of the entity?"
Answer 1: Data should be reported for a subsidiary on a stand-alone basis, i.e., unconsolidated. It is not intended that extraordinary efforts be made to obtain the financial data requested in CSS. An institution's best efforts, within reason, should be made to present accurate data; however, reasonable assumptions and estimates will be accepted.
Question 2: If all of the subsidiaries of the thrift parent are sequentially listed, column-by-column, using the various business codes, then, should each individual subsidiary be applying the equity method as they report balances on CSS120:160?
Answer 2: In reporting assets they should include the investment in lower tier subsidiary on the equity method; however, net income should be stated for the subsidiary being reported on only. All subsidiaries of all tiers should be listed.
Question 3: If a subsidiary has a fiscal year-end of June 30th, what should be reported on line CSS150: Net Income for the calendar year?
Answer 3: Net income should be reported for the calendar year. Exceptions can be made where data for the period from the fiscal year end to the end of the calendar year are not available. However, this should be rare.
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SUBJECT: Calculation of Past Due
LINE: Schedule PD
DATE: December 1, 1997
Question 1: Are escrows included in the calculation of cycles past due?
Answer 1: Escrows are included in the calculation of cycles past due if they are contractually required and legal.
Question 2: How are partial payments treated? For example: If a borrower is paying $25 per month on a loan with payments due of $100 per month, at the end of two months would the loan be two cycles past due and, therefore, reported on Schedule PD, or would it be one cycle past due and not reported on Schedule PD?
Answer 2: After the second payment, the loan is 15 days past due, and is, therefore, less than one cycle (30 days) past due. After the third payment, the loan is 37.5 days past due and is, therefore, more than one cycle (30 days) past due. Note the computations below:
After Payment No. 2 No. 3
Full payment amount (b) 100 100 Partial payment made (25) (25) Partial payment not made 75 75 Number of months x 2 x 3 Total balance due 150 225 Amount not "past due" (100) (100) * Balance "past due" (a) 50 125 Past due factor (a ÷ b)
0.50 1.25 Days in cycle x 30 x 30 Days past due 15.0 37.5 "Past due" Category < 30 30-90 * It is assumed that partial payments are applied first to the oldest components of the balance. Accordingly, the unpaid portion of the current month is not yet "past due."
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SUBJECT: Risk-weighting Receivables from Brokers
LINE: CCR
DATE: December 1, 1997
Question: When an association sells a security, it books a receivable in Other Assets during the period between the trade date and the settlement date. Are such receivables risk weighted at 100%? For instance, if the receivable is created through the sale of a government security, that receivable would be risk-weighted higher than the original security, even though settlement has not taken place. Is this correct?
Answer: Receivables are risk-weighted according to the debtor. For example, if it is a claim on a domestic depository institution, it is risk-weighted at 20%; if it is conditionally guaranteed by the United States, it is also risk-weighted at 20%. If it is due from a broker/purchaser and unsecured, it is risk-weighted at 100%, but may be risk-weighted at a lower risk-weight if the claim is collateralized by lower risk-weighted assets as explained below.
This receivable is risk-weighted differently than the original security because the institution has a different asset than it did previously. The association no longer has the U.S. Government's unconditional guarantee. Therefore, the receivable must be risk-weighted at a higher level. However, if the reporting association can legally enforce its claim, including taking legal possession of the collateral free and clear of enforceable claims of others and the securities under sale qualify for 0% or 20% risk-weighting, the amount due from the broker/purchaser is risk-weighted at 20% and reported on CCR430 if the collateral is a mortgage security, or CCR450 if the collateral is another U.S. Government security.
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SUBJECT: Partial Use of an Office Building
LINE(S): SC45/55
CCR370/505
DATE: December 1, 1997
Question: An institution owns property that it intends to develop into an office building. The plans for the building are for a twelve-story building, two floors of which will be occupied by retail businesses and ten will contain offices. The institution intends to occupy five floors of the building. Because the institution will only partially occupy the building, can they still include it as "office premises" on SC55 and risk-weight it at 100%, or must it be considered real estate held for investment reported on SC45, which they must deduct from capital on CCR370? Should it be prorated?
Answer: The entire building may be included as "office premises," risk-weighted at 100%, as long as 25% or more of the building is used by the institution or is intended for future use.
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SUBJECT: FHLB Dividends
LINE(S): SO493/494
DATE: December 1, 1997
Question: Must institutions report FHLB dividends in Other Noninterest Income every quarter?
Answer: Yes, dividends should always be reported unless the dividend rounds to less than $1 thousand.
FHLB dividends are declared every quarter, either in cash or stock. When FHLB cash dividends are declared, they should be accrued. FHLB stock dividends must also be reported in income in accordance with the AICPA "Bank and Savings Institutions Audit and Accounting Guide," paragraphs 5.88 through 5.92; however, in the case of stock dividends, the FHLB stock asset account is debited, rather than cash.
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SUBJECT: Loans Secured by Stock
LINE(S): SC330
DATE: December 1, 1997
Question: A loan is secured by stock (traded on the New York Stock Exchange) and is made to an individual for the purpose of buying more stock. Where should this be reported on Schedule SC?
Answer: This loan should be reported on SC330 (Other Closed-end Consumer Loans, Including Leases).
If the thrift has $200,000 or more in credit secured directly, or indirectly, by margin stock extended in the last quarter, it must register with the Federal Reserve Bank in its district and follow the requirements of Regulation G. Regulation G requires the use of certain FRB forms for reporting such transactions and also limits covered loans to 50% of the value of the stock at the time of purchase. See OTS Thrift Activities Handbook Section 562, Margin Securities (Regulation G).
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SUBJECT: Other Asset and Liability Codes
LINE(S): SC690/SC796
DATE: May 23, 1997
Question: How should the detail lines under Other Assets and Other Liabilities be reported? Should the institutions code all items in the other category, sum them by code and report the three largest, or report the three largest without summation. This could, of course, result in the same code being used for two or even all three of the detail lines.
Answer: The accounts should be aggregated by code, so that a code only appears once. Once they have been aggregated, the three largest items should be reported. Code 99 is the only code that may appear more than once.
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SUBJECT: Classification of Mobile Home Loans as Mortgages
LINE(S): SC326
DATE: December 1, 1997
Question: An institution is building up a portfolio of mobile home loans. Some are straightforward consumer loans. Others, however are loans on the land as well as on the mobile home. The mobile homes are put on concrete pads. Should these loans be reported as mortgage loans?
Answer: Mortgage loans secured by both a developed lot and a mobile home on a fixed site (where the wheels are detached and the home is permanently anchored to a foundation or pad) should be classified and risk-weighted as 1-4 family mortgage loans.
If, however, the mobile home is not fixed to the site, the loan could be classified as either a nonmortgage, mobile home loan, or a mortgage on a developed building lot, based on the relative values of each piece of collateral relative to the loan. For example, if the mobile home was valued at $20,000 and the land at $10,000, the loan generally would be classified as a nonmortgage, mobile home loan. If the numbers were reversed, the loan would generally be classified as a lot loan (mortgage). If the ratio was 50/50, then the institution could classify the loan either way. The percentages are not that critical, so we should let the institution classify the loans as they want, as long as their classifications are reasonable. Of course, the institution could make two separate loans, one on the mobile home, and one on the developed lot.
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SUBJECT: Direct Credit Substitute
LINE(S): CC465
DATE: March 10, 1998 (Revised January 21, 2000)
Question: What is the definition of "Direct Credit Substitute" to be reported on CC465?
Answer: A definition of direct credit substitute may be found in the OTS Regulations at 12 CFR 567.1 (f). That definition is subsumed by a more comprehensive definition contained in an interagency proposal on Recourse and Direct Credit Substitutes as follows:
[TOP]""Direct credit substitute means an arrangement in which a savings association assumes, in form or in substance, any risk of credit loss directly or indirectly associated with a third-party asset or other financial claim, that exceeds the association's pro rata share of the asset or claim. If a savings association has no claim on an asset, then the assumption of any risk of credit loss is a direct credit substitute. Direct credit substitutes include, but are not limited to:
- Financial guarantee-type standby letters of credit that support financial claims on the account party;
- Guarantees, surety arrangements, and irrevocable guarantee-type instruments backing financial claims;
- Loans or lines of credit that provide credit enhancement for the financial obligations of an account party;
- Purchased loan servicing assets if the servicer is responsible for credit losses associated with the loans being serviced, or if the servicer makes or assumes certain representations and warranties on the loans other than standard representation and warranties as defined in this section; and
- Purchased subordinated interests or purchased residual interests in financial assets sold (including both security and nonsecurity forms) that absorb more than their pro rata share of losses from the underlying assets.
SUBJECT: Qualified Thrift Lender (QTL) Test
LINE(S): SI581-583
DATE: March 10, 1998
Question: Now that the liquidity regulation has been amended to permit the inclusion of most mortgage-backed securities, should securities that are eligible as liquidity be deducted from total assets to determine "portfolio assets" on the QTL worksheet?
Answer: Any liquid mortgage-backed securities that are reported on line 12 of the QTL worksheet may not also be included on line 4, "regulatory liquidity." Double counting is not permitted.
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SUBJECT: Reconciling Total Assets (SC60) to Assets to Riskweight (CCR64)
LINE(S): CCR64
DATE: March 1, 2004
Question: How can we reconcile total assets reported on Schedule SC to assets to risk-weight on Schedule CCR?
Answer: As follows:
Reconciliation of Total Assets to Assets to Risk-Weight Schedule CCR Reference Total assets (SC60) CCR205 Deduct:
Assets of "nonincludable" subsidiariesCCR260 Goodwill and certain other intangible assets CCR265 Disallowed servicing assets, disallowed deferred tax assets, disallowed residual interests, and other disallowed assets CCR270 Other CCR275 Add:
Accumulated losses (gains) on certain available-for-sale securities and cash flow hedgesCCR280 Qualifying intangible assets CCR285 Other CCR290 Equals: Adjusted total assets CCR25 Deduct:
Equity investments and other assets required to be deductedCCR370 Deduction for low-level recourse and residual interests CCR375 Add:
Unrealized gains on available-for-sale equity securities[A] Allowance for loan and lease losses (ALLL) [B] Assets risk-weighted at 200% under ratings-based approach [C] Off-balance-sheet assets required to be risk-weighted [D] Equals: Assets to risk-weight CCR64
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- [A] Include here any pretax unrealized gains net of losses included in assets on SC60, where
any portion, up to 45 percent, of those gains are reported on CCR302.- [B] Include here the ALLL reported on SC283 and SC357, combined, and, therefore, reflected
in SC60. However, this amount is not necessarily the same amount reported on CCR350.- [C] Include here the amount of assets included in SC60 that are also reported on CCR501
after being multiplied by a factor of 2.- [D] Include here off-balance-sheet assets to risk-weight not included in SC60.
SUBJECT: Limited Partnership (Pass-through Investment)
LINE(S): SC50/SO491
DATE: March 10, 1998
Question: An association has an investment in a limited partnership that had been reported on SC140 prior to the change in definition of this line. The limited partnership is designated as pass-through per OTS regulations. The institution is assuming that they should now be reported on SC50, is this correct, and should the income generated be reported on SO491? If the income is reported on SO491 what code should be used?
Answer: The instructions for SC140 state that equity investments that are not subject to SFAS No. 115, including pass-through investments, should be reported on SC50. The instructions for SC50 state that investments in pass-through investments accounted for by either the equity or cost method (i.e., not marked to fair value pursuant to SFAS 115) should be reported on SC50. The key here is whether or not the equity investment is included in the scope of SFAS 115. If it is, it is reported on SC140; if it is not, it is reported on SC50. It appears from the above description that this partnership is accounted for using the equity method and is not included in the scope of SFAS 115 and, therefore, should be reported on SC50.
We prefer that income from all investments reported on SC50 accounted for using the equity method be reported on SO491 using an 06 code in SO495 or 497.
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SUBJECT: Commitment Fee on a Letter of Credit
LINE(S): SC330
DATE: March 10, 1998
Question: An institution has a deferred commitment fee on a letter of credit. Once the loan is funded (or the letter of credit is drawn on) the unamortized yield adjustment will be netted against the loan, and reported on line SC330. Where should this be reported on the TFR prior to the loan disbursement?
Answer: It should be reported on line SC796, Other Liabilities and Deferred Income, because it is a liability. To be reported as a contra-asset, it must be identified with a specific asset. In this case there is no asset until the letter of credit is drawn down.
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SUBJECT: Credit Balances in Mortgage Loans
LINE(S): SC23
DATE: March 10, 1998
Question: An institution has a few mortgage loans for which the borrowers have overpaid; these loans now carry credit balances. Overpaid credit cards are reclassified as deposits; is this also the case with overpaid mortgages?
Answer: Yes. Payments in excess of principal, accrued interest, and all other fees should be reclassified as deposits.
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SUBJECT: Purchased Receivables
LINE(S): SC & CMR
DATE: March 10, 1998
Question: Where should account receivables purchased at a discount be reported on Schedules SC and CMR?
Answer: Account receivables purchased at a discount (factored receivables), should generally be reported as unsecured commercial loans and in most cases may qualify as small business loans for QTL purposes. If the debtors are consumers and the association has fully underwritten each of the receivables and they meet the institution's underwriting requirements, they may be reported as consumer loans.
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SUBJECT: Business Checking Account Overdraft Protection Lines
LINE(S): Schedule SB
DATE: June 19, 1998
Question 1: An institution has small business checking accounts with overdraft protection. If the checking accounts are overdrawn, are they reported on SB as a loan?
Answer 1: Yes. Schedule SB follows the same definitions of a loan as Schedule SC. If there is no right of off-set against another deposit of the customer, the overdraft is reported as a loan on SC303 (Unsecured Commercial Loans). Any loans outstanding at 6/30 in SC303 that meet the definition of a small business loan for purposes of Schedule SB, should be reported on Schedule SB.
Question 2: If the overdrafts are reported on Schedule SB, what is the amount to be reported, the actual overdrawn amount or the amount of overdraft protection?
Answer 2: The amount of the overdraft protection is the "original amount" of the loan. The size of the "original amount" determines where it is reported in Schedule SB. Overdraft loans should follow the reporting instructions for lines of credit.
"the ‘original amount’ of the loan is the amount when the line of credit or loan commitment was most recently approved, extended, or renewed prior to the report date. However, if the amount currently outstanding as of the report date exceeds this size, the ‘original amount’ is the amount currently outstanding."
The amount reported is the amount outstanding at the report date.
Question 3: Should the checking account itself be reported on Schedule SB, since it is a small business checking account?
Answer 3: No, only loans with an outstanding balance are reported on Schedule SB.
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SUBJECT: Troubled Debt Restructuring
LINE(S): VA940, VA941
DATE: June 19, 1998
Question: An old internal Q&A for Troubled Debt Restructured (TDR) stated that "If there is a full settlement there would not be a TDR, but if there is a loss it would be a TDR."
Does this rule still hold true for line VA941, TDR included in the statement of condition, if the restructure is as REO?
Items # 3 & 4 in the new instructions for TDR say to include:
3. Foreclosed assets as TDR.
4. TDR even if no losses were recorded this quarter.
Answer: If there has been no loss on the original loan (i.e., the loan and all interest payments have been or will be recovered), the transaction normally would not be considered TDR. This applies to both loan restructuring and REO. With REO, the fair value of the property less the costs to sell must equal or exceed the full payments that would have been received under the loan.
The statement about including TDR even if no losses were recorded this quarter means that if a transaction is TDR but the loss was taken as a charge off or SVA in a prior period, it should still be reported as TDR. The circumstance that no loss is taken during the accounting period in which restructuring takes place does not avoid TDR reporting when full recovery of the original terms of the loan is not effected.
The definition of TDR in the TFR is intended to be the same as the GAAP definition of TDR.
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SUBJECT: Minority Interest
LINE(S): SC-799
DATE: June 19, 1998
Question 1: How is minority interest reported if an institution owns 90% of a subsidiary and what is the offset of this transaction?
Answer 1: When an institution owns a controlling interest (typically defined as more than 50% ownership) in another company, they must consolidate 100% of the assets and liabilities of that company. However, they report in the equity section only their own equity. The amount of assets less liabilities owned by others is called "minority interest" and is reported on SC799 in order to balance. Likewise, 100% of the income and expense of the subsidiary is consolidated on a line-by-line basis, and the minority share of net income is deducted on SO491 or SO580, as applicable.
Question 2: An association is owned by a holding company that also owns 10% of a subsidiary of the association. In other words there are three tiers: the savings and loan holding company, the savings association, and the subsidiary. The holding company owns the savings association and 10% of the subsidiary. The savings association owns 90% of the subsidiary. In the TFR of the savings association, how much of the subsidiary is consolidated? If 100% of the subsidiary is consolidated, how is the 10% owned by the holding company reported?
Answer 2: One hundred percent of the subsidiary is consolidated. When looking at the savings association’s report, the 10% owned by the holding company is reported as minority interest in Schedule SC on SC799 and in Schedule SO on SO491 or SO580, as applicable. The principle of minority interest applies when the minority interest is held by an unconsolidated affiliate or by an unrelated third party.
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SUBJECT: Deductions for Assets of Consolidated Nonincludable Subsidiaries
LINE(S): CCR145
DATE: June 19, 1998
Question: Should line CCR145 (Total Assets of Non-includable Subs) be reduced by the amount of intercompany eliminations that are done during consolidation?
Line CCR145 is a deduction from Total Assets on CCR135. CCR135 has already been reduced by checking accounts that the sub has with the parent through the equity method of consolidation.
It seems that without the reduction of line CCR145 for the intercompany accounts that they would be reducing assets twice for the cash items. This overstated deduction would result in an understatement of assets and an understatement of capital reserves required.
Answer: The deduction for adjusted total assets related to consolidated nonincludable subsidiaries on line CCR145 should reduce total assets by the amount of assets of the subsidiary included in consolidated assets. This amount will equal the subsidiary’s total assets less those assets eliminated in consolidation. We have found the easiest way to understand this is to use T-accounts and work through examples. In every example that we used, the amount reported on CCR145 equaled the difference in total assets between the stand-alone parent thrift and the consolidated entity, plus the thrift’s investment account and loans and advances to the subsidiary.
Example 1:
Assume a 100%-owned, consolidated nonincludable subsidiary, with total assets of $100, total liabilities of $80, and capital of $20.
Also assume total assets of the subsidiary include insured deposits of $10 with the thrift parent. In consolidation, the insured deposits of $10 that are included in the subsidiary’s total assets, and also in the thrift parent’s total liabilities, are eliminated from consolidated total assets and from consolidated total liabilities. Consolidated total assets, net of the elimination entry, include $90 ($100 - $10) of the subsidiary’s total assets; therefore, the amount reported on CCR145 is $90. The deduction on CCR105 for "investments in and advances to" is $20.
Example 2:
Assume a 90%-owned, consolidated nonincludable subsidiary, with total assets of $100 and total liabilities of $80.
Also assume total assets of the parent thrift include a loan to the subsidiary of $10.
In consolidation, the loan of $10 that is included in the thrift’s total assets, and also in the subsidiary’s total liabilities, is eliminated from consolidated total assets and from consolidated total liabilities. Consolidated total assets, after the elimination entry, include $100 of the subsidiary’s assets.
The deduction on CCR145 is $100. The deduction on CCR105 is $28, which is calculated as follows: $18 ($20 equity of subsidiary times 90% ownership interest) plus $10 (loan to subsidiary).
Example 3:
Assume a 100%-owned subsidiary is nonincludable because its stated purpose is an impermissible activity. It has not yet begun operations, but has cash of $100 which has been deposited in the parent savings association; additionally, the subsidiary has no liabilities. In consolidation, the $100 of assets of the subsidiary has been eliminated against the deposit on the parent’s books. Therefore, the amount of deduction on CCR145 is zero. However, because the investment in the subsidiary is $100, the amount reported on CCR105 is $100.
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SUBJECT: Multifamily and Nonresidential Mortgage Loans
LINE(S): CMR261
DATE: June 19, 1998
Question: Are multifamily and nonresidential ARMs, with rate changes greater than 60 months reported as balloon loans? My understanding is that any adjustable mortgage with a next rate change greater than 60 months would be considered a balloon, until such time that the rate change period falls below 5 years. Is this correct, or does this rule only apply to single family dwellings?
Answer: The short answer to your question is that the 60 month rule used in classifying single family ARMs as balloons does not apply to multifamily and nonresidential mortgages. The latter are classified as balloons if the remaining maturity is a least ten years shorter than the remaining time to full amortization.
With multifamily and nonresidential loans, the first thing to determine is if the loan is fully amortizing or is a balloon. Balloon mortgages have a remaining time to full amortization that is a least 10 years longer than their remaining maturity; all others are considered to be fully amortizing. Once it is established whether the loan is fully amortizing or a balloon, the next step is to categorize it as fixed or adjustable rate. If the interest accrual rate on the loan is ever scheduled to be reset (based on an index whose future level is presently unknown), the loan is considered adjustable rate. That is true regardless of when the coupon is scheduled to reset.
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SUBJECT: Over-extended Home Equity Loans
LINE(S): SC253, 340
DATE: June 19, 1998
Question: An association has home equity loans where disbursements have been made on the loans over the contractual limit. These loans were made about ten years ago and, although at the time they were made, the limit of the loans was 80% of the value of the properties, the values of the properties have decreased. Because these loans have been drawn down in excess of the contractual limit, some of them are no longer fully secured. How must these loans be reported on the TFR? If they are in excess of the contractual limit, but still fully secured is the reporting different?
Answer: Home equity loans that are fully secured at origination (i.e., no greater than the value of the security property) should be reported as 1-4 family open-end or closed end residential loans provided the institution has perfected a mortgage. If the collateral value is not fully documented with either an appraisal or evaluation, the loan should be reported on SC 316 or SC340, depending on whether it is an open-or closed-end loan. The categorization is made when the loan is originated or acquired. We would be hesitant to make the institution re-categorize the loan because of declining property value, unless the contract states that the line is to be renewed on a regular basis and/or a reappraisal or evaluation is to be obtained.
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SUBJECT: Risk weighting high LTV loans
LINE(S): CCR460
CCR505
DATE: September 11, 1998 (Revised August 2, 1999)
Question: An institution has a new loan product whereby they make a conventional 80% loan to a borrower with excellent credit, and then issue a 2nd deed of trust to cover the 20% down payment. The 2nd deed of trust is recorded as a separate loan. If the loans are analyzed individually, the first mortgage loan would be reported in the 50% category, since the LTV is 80% or less, and the 2nd would be classified in the 100% category, since it is based on creditworthiness. However, if you look at the loans on a combined basis, they have exceeded the 80% LTV requirement, which would mean that both loans should be reported in the 100% category.
What is the proper risk-weighting for these loan types?
Revised Answer: The federal banking agencies revised the risk-based capital regulation in a rulemaking that took effect on April 1, 1999. The revised rule requires institutions to combine certain junior liens with the first lien. Because the institution holds the first and second liens and no other party holds an intervening lien, the loans will be viewed as a single extension of credit secured by a first lien on the underlying property for the purpose of determining the LTV ratio, as well as for risk weighting. The combined loan amount must be assigned to the 100% risk category, because the combined loans have exceeded the 80% LTV limit.
The combined loans would also be aggregated with other high LTV loans reported to the board of directors in accordance with the Interagency Guidelines attached to 12 CFR 560.100-101. The guidelines also state that the institution's aggregate investment in such loans should not exceed 100% of capital.
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SUBJECT: Escrows as Demand Deposits
LINE(S): SI-215
DATE: September 11, 1998
Question: Examiners and management at an institution are having a definitional problem with escrows as demand deposits. These are P&I and T&I escrows established for their mortgage customers and placed in deposit accounts from which payments are made on the borrowers’ behalf.
Escrows are included on SI-215 if they meet the definition of a demand deposit. But there are three criteria in the instructions for SI-215 in order for the deposit to be considered demand deposits. The third criteria states, "From which the depositor is authorized to make…" In the case of loan escrows, who is the depositor, the borrower or the institution?
The borrower is not authorized to make withdrawals or transfers; if the depositor is the borrower, then these escrows are not demand deposits according to the instructions.
The institution is authorized to make withdrawals on behalf of the borrower. If the institution is the depositor, then are these accounts demand deposits?
Answer: In this example, the reporting institution maintains and services escrow accounts for its mortgage customers. In this case, the depositor of the escrow accounts is the borrower; the institution is merely holding the funds for remittance to a third party. Therefore, we look to the borrower to determine whether or not the escrow funds represent demand deposits or time and savings deposits.
Escrows that meet the definition of demand deposits are to be reported on SI-215. However, the funds in question do not meet the definition of a demand deposit because the depositor – the borrower – is not authorized to make any transfers from the account. Therefore, these amounts must be reported on SC-783 as Escrows but they should not be reported on SI-215 as demand deposits.
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SUBJECT: Open-ended Mortgage loans
LINE(S): CC410
DATE: September 11, 1998
Question: An institution has a commitment to make home equity lines of credit that will be reported on SC253. Where is the commitment reported, on CC280 or CC410?
Answer: If the commitment is to disburse a specific amount at closing, that amount should be reported on CC280. The remainder of the commitment should be reported on CC410. If the amount to be disbursed at closing is unknown, the full amount of the line of credit should be reported on CC410.
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SUBJECT: Cash Flow treatment of Mortgage loans converted to MBS
LINE(S): CF140:330
DATE: September 11, 1998
Question: An institution is originating mortgage loans, securitizing them, then selling the transformed MBS to another institution.
On schedule CF, they are reporting a mortgage origination on CF230 and a MBS sale on CF160.
Based on the instructions for Mortgage Pools, should the sale be reported on CF310 in the loan category, and the purchase reflected on CF140:150, in the MBS category in addition to CF160 and CF230, to reflect the full cycle of the transaction? Or is it OK for to reflect an origination as a loan, and a sale as a security?
Answer: In order to track and reconcile these transactions, they have to be reported on four lines, CF230 for the origination, CF310 and CF140:150 for the securitization, and CF160 for the sale of the security.
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SUBJECT: Table Funding (Originating Mortgages Available-for-Sale)
LINE(S): Schedules CF, CC, SI and SO
DATE: September 11 , 1998
An association originates mortgages loans and then immediately sells the loans, using a table-funding arrangement with its investors. While the association is the initial lender of record on the note and mortgage, it signs an assignment at the borrower's loan closing and the association’s funds are never invested in these loans. It is unclear whether the association would have an obligation to originate the loans, if for any reason its investors failed to honor their commitment.
Question 1: Should these loans appear on Schedule CF of the TFR as originations, and of course sales, or should this production not appear at all on CF?
Answer 1: All loans made in the name of the reporting savings association or its subsidiaries should be reported as commitments and as loans disbursed even if these loans are funded by and immediately transferred to a third party. Loans for which the underwriting is done by the reporting savings association but which are made in the name of a third party should not be reported.
However, prior to loan closing, if the association has a clean legal opinion that they would not be obligated if for any reason the investors failed to honor their commitment, the loan commitment does not have to be reported on Schedule CC.
Question 2: Should this production be includable in the thrift's QTL calculation? Our compliance examiners have already determined that this production does not count for the bank towards meeting its CRA responsibilities. Instead, it counts for the investor.
Answer 2: As long as the mortgage loans are "residential," they should be included on line 20 (loans originated and sold) of the association's QTL worksheet. HOLA Section 10(m)(4)(C)(iii)(I) provides that "50 percent of the dollar amount of the residential mortgage loans originated by...(a) savings association and sold within 90 days of origination" are includable in QTL calculations, subject to the 20% of assets cap.
Question 3: On which lines of Schedule SO should the revenues relating to these loans be reported? Say for example that a $100,000 loan is originated with a 1% origination fee, no discount points to the borrower, and is sold to the investor at par with a 150 b.p. servicing release premium (SRP). Further assume that the bank has 75 b.p. of identifiable direct expenses associated with the loan. I believe that the full 100 b.p. origination fee should be reported on SO420 Other Fees and Charges. In turn, I believe the 150 b.p. SRP should be reported on SO430 as a gain on sale of assets held for sale. Since the sale occurred immediately, I believe the 75 b.p. points of identifiable expenses gets reported on the appropriate categories within SO51 Noninterest Expense. Do you agree with this reporting, or do I have part or all of this wrong?
Answer 3: Yes, this reporting is acceptable. The identifiable expenses may also be deducted from the origination fee if the association has its records set up to accommodate it.
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SUBJECT: Check Processing and Computer Center Co-ops
LINE(S): Schedule CSS
DATE: December 10, 1998
Question: An institution owns small percentages (<5%) of both a check processing center and a computer center. Many other financial institutions are also stockholders. Should these two organizations be reported on Schedule CSS?
Answer: The answer to the question depends on what authority the thrift relies on to make the investment. If the thrift relies on its service corporation investment powers to make such investments, the entity must be included in Schedule CSS regardless of the ownership level. Alternatively, if a thrift relies on pass-through investment (§560.32) or its de minimis investment authority (§560.36) or some other thrift powers for such investments, then the entities are not considered subordinate organizations and, therefore, should not be listed on Schedule CSS.
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SUBJECT: Definition of Real Estate Loans (TB72)
LINE(S): SC250, SC253,SC316, SC340
DATE: December 10, 1998
Question: An institution is confused by the difference between the definition of real estate loans in OTS Thrift Bulletin No. 72 (TB-72) and the definition of mortgage loans in the TFR. The nonmortgage loan category in the TFR Instruction Manual includes loans based primarily on the credit worthiness of the borrower. However, the last paragraph on page 4 of TB-72, under the section titled "Abundance of Caution," states, a loan based on the creditworthiness of the borrower with an additional lien on the borrower’s real estate (as an extra measure of protection), would be subject to real estate lending standards. This would seem to also require loans covered by TB-72 to be reported as mortgage loans. Are these loans to be reported as mortgage loans in Schedule SC?
Answer: The TFR classification of loans does not follow the real estate lending standards rule or TB-72. Therefore, a 1-4 family secured loan that does not fully qualify as a mortgage loan because the lender decided not to get an appraisal or because it is not fully secured by the real estate (i.e., has a loan-to-value ratio in excess of 100%) is classified on the TFR on SC310 through SC345. But this loan would still be subject to the real estate lending standards rule if it is secured by real estate as defined in 560.100-101.
All loans secured by, or financing the construction or improvement of, real estate are subject to the real estate lending standards rule (12 CFR 560.100-101). That means, the institution must establish prudent written lending standards that consider the interagency guidelines (attached to 560.101) and the supervisory loan-to-value (LTV) limits. If the institution makes loans with LTVs in excess of the supervisory limits, it should report them to their board of directors at least quarterly and limit such loans to 100% of capital for owner occupied 1-4 family mortgages and, within that limit, 30% of capital for all other high LTV loans.
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SUBJECT: Trust Preferred Securities
LINE(S): SC 185
DATE: December 10, 1998
Question: Where are Trust Preferred Securities reported on Schedule SC? OTS’s TB-73 discusses these investment securities, and from reading it and the TFR instructions, I think they would be reported in SC185. The institution is currently reporting them on SC140. They have approximately $30 million of TPSs. The bulletin is clear that they are 100% risk weighted on CCR.
Answer: The following is quoted from TB 73:
Investment authority and limits for TPSs. At this time, OTS believes that TPSs that otherwise meet the requirements of corporate debt securities set forth at 12 CFR 560.40 are permissible investments for federal savings associations.
Since the only TPSs that savings associations can invest in must meet the requirement of corporate debt securities, they should be reported on SC185, Other Investment Securities.
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SUBJECT: Rabbi Trusts
LINE(S): SO510
SO580
DATE: December 10, 1998
Question: An institution has accounts set up for a trust that its employees participate in. It is termed a "rabbi trust." Rabbi trusts are deferred compensation arrangements where amounts earned by employees are invested and placed in a trust. The institution is merely a conduit between the brokerage and the employee, with the employees solely responsible for contributions. The trust is reported by the institution in Other Assets. The directors and employees can buy or sell stock which the institution must mark-to-market, as a trading asset. The deferred compensation obligation is reported in Other Liabilities.
The question is: where would the income and expense related to the trust be classified in Schedule SO? SO510 refers to pensions "paid directly by the reporting association", and, therefore, the institution felt that SO510 is not appropriate.
Answer: Rabbi trusts are discussed in EITF Consensus No. 97-14. There are four scenarios for deferred compensation arrangements covered by this Consensus. This question relates to the type described in the Consensus as Plan D. In this scenario assets and liabilities of a rabbi trust are consolidated with the employer’s financial statements because in the case of liquidation, the secured creditors would have rights to the trust assets. Assets held by the rabbi trust should be accounted for in accordance with GAAP for the particular asset (i.e., securities are accounted for under SFAS No. 115). The deferred compensation obligation should be classified as a liability and adjusted with corresponding charges (or credits) to expense (income) to reflect changes in the fair value of amounts owed to employees. The EITF consensus states that the income and expense as well as the asset and the liability should be reported separately. We would like to have all of these accounts reported in their appropriate "Other" categories on the TFR. Therefore, the expense should be reported on SO580 (Code 99).
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SUBJECT: Conversion Factors For LIP
LINE(S): CCR460
DATE: December 10, 1998
Question 1: Page 163 of the TFR Instruction Manual provides that LIP will be converted at the 0% conversion factor if - "(1.) LIP that contractually must be disbursed or expire in one year or less".
It appears that in the absence of a contractual obligation to disburse funds within a one-year period, the remaining term of a loan would generally determine whether it meets criteria #1, that the LIP contractually must be disbursed or expire in one year or less. For example, an 18-month construction loan which was originated 8 months ago, thus having a remaining term of 10 months, would satisfy this criteria because in less than 12 months it will be fully disbursed and if not, it would have to be repaid or renewed. In contrast, the same loan with a remaining term of 13 months would not meet the criteria, since the draws might not all be made until after one year had passed. Is this consistent with the intent of this provision?
Answer 1: According to the regulation, if the original maturity of a commitment is one year or less the conversion factor is zero. Generally, when the original maturity of the commitment exceeds one year, the conversion factor is zero only if (1) the institution has a contractual right to separately underwrite each disbursement and the institution does so, or (2) the institution has a contractual right to re-evaluate the lending relationship at least annually and the institution does so. Additional circumstances, but very limited circumstances in which a zero percent conversion credit factor apply are set out in 567.6(a)(2)(iv).
Question 2: If LIP will not be completely disbursed within one year, is the institution required to convert the entire balance at 50% or only that portion that is to be disbursed after one year? For example, assume a $10 million loan with an 18-month term. There are 14 months remaining and $2 million has been disbursed, leaving a $8 million LIP balance. According to the funding schedule, $7 million of the $8 million currently in LIP will be disbursed within 12 months. Would the institution have to convert the full $8 million LIP balance using the 50% factor because the entire amount will not be disbursed within one year, or would it have to convert only $1 million, the amount which will remain undisbursed after one year?
Answer 2: The regulation does not contemplate splitting a single loan into a component which matures within one year and a component which matures later than one year. Instead, the maturity date of the loan is determinative.
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SUBJECT: Liquidity Ratio for De Novo Institutions
LINE(S): SI500
DATE: December 10, 1998
Question: Since there is no prior data to calculate the denominator, how does a De Novo institution report the liquidity ratio during their first reporting quarter?
Answer: A de novo that has no prior data with which to calculate the prior quarter’s liquidity base may use current quarter information in both the numerator and the denominator of the liquidity ratio.
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SUBJECT: Specific Reserves on Servicing Assets
LINE(S): VA118
DATE: December 10, 1998
Question: An institution would like to know if it is appropriate to set up specific reserves on servicing assets at the time the asset is established.
On their books they debit "Gain or Loss on Sale" and directly credit the servicing asset. Conversely, on the TFR, Schedule SO, the Gain on Sale is grossed up, and SO570, Provision for Loss, is debited and a specific reserve on the servicing asset is credited. Hence, net Income is reported on the TFR in accordance with GAAP, but the provision for loss is not.
Is this correct?
Answer: No. Under GAAP it is not appropriate to set up a specific reserve at the time an asset is established; and, therefore, this would not be appropriate reporting on the TFR.
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SUBJECT: Hypothecated Deposits - Down Payments on Construction Loans
LINE(S): SC230
SC710
DATE: December 10, 1998
Question: Assume an institution closes a construction loan for $80,000. The borrower makes a $20,000 down payment to the institution, for which the institution credits LIP for $20,000. This transaction results in a negative $20,000 loan balance.
Is a down payment advanced by the borrower on a construction loan before any of the funds are disbursed, considered a "hypothecated deposit"? If so, should the hypothecated deposit be netted against the loan, or be classified on the other side of the balance sheet, as a deposit or escrow? If it is not a hypothecated deposit, where should the down payment be classified on the balance sheet?
Answer: Yes, this appears to be a hypothecated deposit. Since there is no loan balance to offset, it must be reported as a deposit.
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SUBJECT: Unsolicited Brokered Deposits
LINE(S): SI100
DATE: December 10, 1998
Question: An institution has unsolicited deposits from brokers, for which they do not pay a fee. Must these be reported as brokered deposits on SI100?
Answer: Yes. The deposits in question are brokered if the deposits meet the definitions of brokered deposit at 12 CFR 337.6(a)(2) (2) and the broker meets the definition of deposit broker at 12 CFR 337.6(a)(5). These cites are attached to this Q&A.
The fact that the deposits were not actually solicited by the institution has no bearing on whether the deposits should be classified as brokered deposits. It is a factual determination to classify brokered deposits, and it is the responsibility of each insured depository institution to accurately classify brokered deposits.
FDIC Interpretive Letter 92-73 specifically addresses this issue: "The key here is not whether the bank has solicited the funds, but whether the bank knows or has reason to know that the funds are being placed by a broker. If so, then the bank will be subject to any applicable restrictions on acceptance of brokered deposits based on its capital category. . . Mere knowledge on the part of your institution that it is accepting funds from a broker is sufficient to require that [Bank] be subject to the appropriate restrictions on brokered deposits for adequately capitalized banks.. . . In most instances, we would anticipate that banks, in the normal course of business, will be able to determine when funds are being placed by a broker."
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SUBJECT: CMR Filing Exemption
LINE(S): Schedule CMR
DATE: March 1, 1999
Question: I have completed and transmitted our December TFR. Our capital ratio has just exceeded 12% and our assets continue to be under $300 million. Do we have to file Schedule CMR for December?
Answer: Yes. As stated in the TFR General Instructions, an institution must meet the exemption requirements (assets under $300 million and risk-based capital ratio over 12%) for two consecutive quarters to be exempt from filing CMR. The regional director also has the authority to exempt an institution from filing CMR. See the TFR General Instructions for more information.
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SUBJECT: Grandfathered Qualifying Multifamily Mortgage Loans
LINE(S): CCR465
DATE: March 1, 1999
Question: Does the grandfathering right transfer to the purchaser of multifamily mortgage loans? An institution is going to purchase a large amount of these loans, and they would like to risk weight them at 50% rather than at 100 %.
Answer: The loans may be risk-weighted at 50% by the purchaser if, on March 18, 1994, the loans qualified under the definition of a "qualifying multi-family mortgage loan" as set forth in 12 C.F.R. 567.1 and (as per the instructions at page 159 of the TFR Instruction Manual) the loans met and continue to meet the qualifying criteria before, upon, and after purchase.
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SUBJECT: Valuation of Foreclosed Assets
LINE(S): SC40
DATE: March 1, 1999
Question: At acquisition, the initial carrying amount of foreclosed assets should be established at "fair value less cost to sell". How should the estimated future selling costs be treated - as a reduction in the recorded investment, or as a specific valuation allowance?
Answer: We believe that the authoritative literature (SFAS No. 15 as amended, and SFAS No. 121) requires that, at acquisition: (1) the recorded investment of foreclosed assets be established at "fair value less cost to sell", and therefore (2) no specific valuation allowance be established for the selling costs. In other words, the selling costs are to be treated as a reduction in the initial recorded investment of the foreclosed assets.
For example, assume a foreclosed asset with an estimated fair value of $90 is received in full satisfaction of a delinquent loan (with a recorded investment of $100). Also assume that estimated future selling costs related to the foreclosed asset are $7, so that "fair value less cost to sell" is $83. Under the approach we believe to be consistent with the authoritative literature, at acquisition the initial carrying amount would be established at $83, composed of a recorded investment of $83, with no specific valuation allowance. Further assume that, subsequent to acquisition, the estimated fair value increases by $5, to $95. This would not result in an increase in carrying amount; that is, the carrying amount would continue to be $83, composed of the recorded investment of $83, with no specific valuation allowance.
We recognize that some institutions treat the initial estimate of selling costs as a specific valuation allowance. However, we believe that approach is inconsistent with the authoritative literature. But, because the amount of selling costs generally is not substantial in relation to the fair value, the effect is not expected to be material.
Authoritative Literature
The following is paragraph 28, in its entirety, of SFAS No. 15, as amended by paragraph 24 of SFAS No. 121.
A creditor that receives from a debtor in full satisfaction of a receivable either (i) receivables from third parties, real estate, or other assets, or (ii) shares of stock or other evidence of an equity interest in the debtor, or both, shall account for those assets (including an equity interest) at their fair value at the time of restructuring (see paragraph 13 for how to measure fair value). A creditor that receives long-lived assets that will be sold from a debtor in full satisfaction of a receivable shall account for those assets at their fair value less cost to sell, as that term is used in paragraphs 15-17 of FASB Statement No. 121. The excess of (i) the recorded investment in the receivable satisfied over (ii) the fair value of assets received (less cost to sell, if required above) is a loss to be recognized. For purposes of this paragraph, losses, to the extent they are not offset against allowances for uncollectible amounts or other valuation accounts, shall be included in measuring net income for the period.
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SUBJECT: QTL - Reorganized Entity
LINE(S): SI581, SI582, SI583
DATE: March 1, 1999
Question: An institution reorganized on 9/30/98 and because of the circumstances, was given a new OTS docket number. The new institution reported only one day of information on the TFR, and, therefore, reported its QTL as zero. Do you think it would be more meaningful to have this TFR amended to report the QTL of the former institution?
Answer: Yes. The HOLA does not provide for any exceptions due to an institution’s "reorganization." Thus, for QTL purposes the OTS must treat the institution as the same institution before and after its reorganization, despite its different docket numbers.
For the OTS to monitor the institution’s QTL compliance, the institution should have reported its ATIPs for July 31, 1998, August 31, 1998, and September 30, 1998, in its September 30, 1998 Thrift Financial Report. The July 31 and August 31 percentages should have been for the institution as it existed under the old docket number, and the September 30 percentage for the new docket number.
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SUBJECT: Delinquent FHA/VA Loans Purchased from GNMA Pools
LINE(S): Schedule PD
DATE: March 1, 1999
Question: An institution that services GNMA pools purchases past due loans from these pools. The institution then sells both the servicing and the loans to another institution. Is the new owner/servicer allowed to exclude these loans from Schedule PD as long as they remain delinquent?
Answer: A third party purchaser cannot exclude these delinquent loans from Schedule PD. These loans may be excluded from Schedule PD only by the servicer that purchases them pending FHA/VA resolution.
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SUBJECT: Securities Reclassified from Available-for-Sale
LINE(S): SC860, CCR102, CCR137
DATE: March 1, 1999
Question: An institution reclassified as held-to-maturity securities previously classified as available-for-sale. The unrealized gain reported on SC860 is being amortized over the remaining maturity of the securities. Since the securities are no longer available-for-sale, is the remaining unrealized gain included on CCR102 and CCR137?
Answer: As long as the institution continues to have unrealized gains or losses included in capital (on SC860), the unrealized gains (losses) must be deducted from (added to) regulatory capital on CCR102 and the amount included in assets must be deducted from assets on CCR137.
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SUBJECT: Mutual Funds
LINE(S): SI387
DATE: March 1, 1999
Question: An institution has two mutual funds: one is a U.S. government fund and the other is a mortgage-backed ARM fund. The institution holds these investments to maturity; however, they were instructed by their auditors to adjust these mutual funds to fair value on the TFR. These assets are not being held for sale, but because the unrealized gains and losses, net of taxes, are reported on SC860 and the mutual funds are not reported as available-for-sale on SI387, an edit failure results. Is this OK?
Answer: No. Mutual funds are equity securities and as such are by definition available-for-sale in accordance with SFAS No. 115. Mutual funds should be reported on SC140 (Equity Securities) and on SI385 (Available-for-Sale Securities). The institution must adjust the mutual funds to fair value through an adjustment to SC860.
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SUBJECT: Risk-Weighting of Unrealized Gains
LINE(S): CCR302 and CCR505
DATE: March 1, 1999
Question: If an Institution adds back to Tier 2 capital 45% of the unrealized gain of available-for-sale equity securities on CCR302, what portion of the unrealized gains is included in risk-weighted assets?
An institution owns Freddie Mac stock on which there is an unrealized gain that is included on CCR302. Because they risk-weight Freddie Mac stock at 100% on CCR505, they would like to know if they should add back the unrealized gain when risk-weighting the stock. And if so, how much of the unrealized gain should be added back?
Answer: For those available-for-sale equity securities where up to 45% of the unrealized gains, net of unrealized losses, before income taxes, are included in Tier 2 capital (on CCR302), 100% of those unrealized gains should be included in assets to risk-weight on CCR505. In other words, if a portion of the unrealized gain, net of unrealized loss, is included in Tier 2 capital on CCR302, then the fair value, not just the historical cost, of the equity security should be risk-weighted. This applies to all equity securities that are permissible for both savings associations and national banks, including Freddie Mac stock, Fannie Mae stock, and mutual funds investing in permissible equity investments.
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SUBJECT: SMALL BUSINESS LOANS SECURED BY RESIDENTIAL REAL ESTATE
Line: SC300
Schedule SB
Date: June 16, 1999
Question: Are loans secured by the borrower’s residence to finance small businesses considered small business loans?
Answer: Loans that meet the definition of mortgage loans, for purposes of reporting in Schedule SC, may be classified as mortgage loans or may be classified as nonmortgage loans according to the purpose of the loan, at the option of the reporting institution. However, once classified, these loans should not be repeatedly switched between classifications. Loans secured by a residence may be included in Schedule SB as small business loans only if they are reported on the TFR as nonmortgage, commercial loans on SC300.
Loans that do not meet the definition of mortgage loans either because they are not fully secured by real estate or because the security property is not supported by an appraisal or qualifying evaluation, must be classified as nonmortgage loans according to the purpose of the loan.
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SUBJECT: RISK-WEIGHTING FHA-INSURED SECOND MORTGAGES
Line: CCR460
Date: June 16, 1999
Question: In the revised instructions for March 1999, CCR460 now says to combine first and second mortgage loans in determining the LTV for risk weighting purposes, when both the first and second liens are held by the institution and there are no intervening liens. How does this apply to second mortgages that are 90% insured by the FHA under their "Title One Home Improvement" program.
Answer: The portion of the home improvement loan that is guaranteed by the FHA may be risk-weighted at 20%. It is not necessary to combine the guaranteed portion of a home improvement loan with any other mortgage to the same borrower.
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SUBJECT: AUTOMOBILE FINANCING THROUGH DEALERS
Lines: SC710
SC690
Date: June 16, 1999
Question: An institution contracts with auto dealers to originate auto loans for the institution. The dealers run a credit report on the customer purchasing a car and the dealers issue checks to themselves, drawn on the institution, for the loan. Basically, the institution is advancing funds to the dealer, upon the verification of the credit report of the customer. Since it takes a few days for the loan application drawn up by the dealer to reach the bank, the check payable to the dealer might clear the bank before the loan is put on-line. Once the loan is on-line, the debit on the internal checking account is funded.
If at report date this account has a debit balance, should the debit in deposit accounts (SC710) be reclassified as an accounts receivable?
Answer: The instructions for SC710, under "Do Not Include", Item 8, read as follows:
- Deductions for customers’ overdrafts in NOW and demand accounts unless the right of set-off under a valid cash management arrangement exists for accounts of the same legal entity; report as loans on SC303 (Commercial Loans: Unsecured) or SC345 (Consumer Loans: Open-End: Unsecured);
Therefore, unless a right of set-off against other deposit accounts of the same auto dealership exists and until the consumer loan is approved and established in the records of the savings association, the debit balance should be reported as an unsecured commercial loan on SC303.
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SUBJECT: INCLUSION OF COLLATERALIZED FHLB ADVANCES IN THE LIQUIDITY BASE
Line: SI500
Date: June 16, 1999
Question: When an association pledges liquid assets as collateral for short-term FHLB advances (payable in one year or less), must the association include the advances in its liquidity base (denominator) in computing its liquidity ratio? Liquid pledged assets are not includable as regulatory liquidity, and thus are not included in the numerator of the liquidity ratio.
Answer: Yes. The association must include the short-term advances in its liquidity base. OTS regulation 12 CFR § 566.1(c) defines liquidity base to mean withdrawable accounts plus short-term borrowings. The definition does not take into account whether or not the short-term borrowings are secured by pledged liquid assets.
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SUBJECT: PLEDGED SECURITIES IN QTL
Lines: SI581 - SI583
Date: June 16,1999
Question: Does a mortgage-backed security that qualifies as a Qualified Thrift Investment (QTI) for QTL remain a QTI if it is pledged against borrowings? The TFR instructions state that pledged securities are not eligible for inclusion in regulatory liquidity, but the instructions for QTL do not address this question.
Answer: Yes. Qualified thrift investments are QTIs whether pledged or not.
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SUBJECT: UNDISBURSED BALANCE (LIP) OF LAND DEVELOPMENT LOANS
Lines: CC115
CC105
SC265
Date: June 16,1999
Question: The instructions for CC115, Undisbursed balance of loans closed, Other Mortgage Loans, state "Report the undisbursed balance of permanent mortgage loans of the types reported on SC250 through SC265." An institution has land loans on SC265 for the acquisition and development of land. Funds are advanced over a nine-month period, for developing the land by clearing trees and installing sewer lines, based on the completion status of the project much like a construction loan. On schedule SC, Land is categorized as a Permanent Mortgage. Should the LIP on land development loans be included on CC105 (Mortgage Construction Loans) or CC115 (Other Mortgage Loans)?
Answer: The LIP on land development loans should be reported on CC115, Undisbursed Balance of Other Mortgage Loans.
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SUBJECT: REGULATORY LIQUIDITY - SHORT-TERM ACCOUNTS RECEIVABLE
Line: SI 500
Date: June 16,1999
Question 1: Are short-term accounts receivable from a broker between trade and settlement dates on the sale of securities eligible for inclusion in regulatory liquidity?
Answer 1: Yes. Because brokers, when purchasing securities, typically make payment in three business days, associations may consider such accounts receivable as cash and include the amounts in regulatory liquidity.
Question 2: Are other short-term accounts receivable eligible for inclusion in regulatory liquidity?
Answer 2: A general answer cannot be given to this question. The eligibility of accounts receivable for inclusion in liquidity must be evaluated on a case-by-case basis.
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SUBJECT: ASSISTED LIVING FACILITIES
Line: SC256, SC260, CCR465, CCR505
Date: September 15, 1999
Question: An institution is planning to make a loan for a senior assisted living facility, and wants to know how this will affect their capital. How should this type of facility be reported on SC, which would determine its risk-weight category on CCR? The instructions for SC256 (Mortgages on 5 or More Dwelling Units) say to include retirement homes, while SC260 (Mortgages on Nonresidential Property) includes nursing and convalescent homes. A senior assisted living facility seems to be a hybrid of these two entities.
Answer: The key to the classification of assisted living facilities on Schedule SC is whether the facility's primary function is residential. If the facility's primary use is for permanent residents with separate living quarters, and the revenue received is primarily for residential purposes, the mortgage is properly reported on SC256 as a mortgage secured by multifamily residential property. A change was made to the instructions for March 1999 which deleted assisted living from the definition of nonresidential mortgage loans because certain assisted living complexes have permanent residents with their own apartments and common areas including a dining hall. By definition, these facilities provide "assistance" in the form of healthcare and related services not normally an integral part of unassisted multifamily residential living. If the primary function of an assisted living facility is to house people on a temporary basis and/or the bulk of the revenue received is derived from nonresidential health care activities, similar to a nursing or convalescent home, the loan should be classified as a mortgage on nonresidential property and reported on SC260.
For capital purposes, in order to be properly placed in the 50% risk weight, a multifamily loan must meet the definition of "qualifying multifamily mortgage loan" at 12 CFR 567.1. If so, it can be included on CCR465, in the 50% risk-weight category (see instructions to CCR465), otherwise it would be reported in the 100% category on CCR505. Among the many elements and provisos within that definition, there is a requirement that the loan must be secured by a first lien on multifamily residential properties consisting of five or more dwelling units. The analysis above should be followed in making that determination.
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SUBJECT: PREFERRED DEPOSITS
Line: SI237
Date: September 15, 1999
Question: An institution has collateralized deposits from the local school district. They are not required by state law to secure the uninsured portion of these deposits, but they have done so anyway as a safety measure. Are these reported on SI237 as preferred deposits, or are they included only if the state requires that they be secured?
Answer: Deposits are reported as preferred deposits only if collateralization is required by state law. Therefore, the deposits described above should not be reported as preferred deposits.
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SUBJECT: SET-OFF OF NEGATIVE CASH ACCOUNT
Line: SC110
Date: September 15, 1999
Question: If a cash account with a bank is in a net credit balance at year end and we have federal funds sold to the same bank also at year end, how should the credit balance be reported. Should it be setoff with the fed funds or shown as a deposit liability or as a borrowing? There are no other accounts between the thrift and the bank.
Answer: The deposit overdraft and Fed Funds sold can only be offset if there is a right of set-off under a legally enforceable cash management arrangement for accounts of the same legal entity. (See FASB Interpretation No. 39, paragraph 5). If the accounts meet all the requirements of set-off, the remaining Fed Funds amount should be reported on SC170. If they cannot be offset, the entire Fed Funds Sold should be reported on SC170 and the credit balance should be reported on SC760 (Other Borrowings).
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SUBJECT: LOANS SECURED BY DUPLEXES
Line: SC250/256
Date: September 15, 1999
Question: An institution has one borrower who owns six duplexes, with one loan for all six duplexes. Based on property type this would be classified as a 1-4. However, since there is only one loan on more than four units would it be considered multifamily?
Answer: If there is one mortgage on several duplexes totaling 5 or more units, it is classified as multifamily (5 or more). If there were individual mortgages on each property, they would be classified as single family; that is, each loan could have different terms and each could be foreclosed on or sold separately.
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SUBJECT: LTV CALCULATION WHEN THE FIRST LIEN IS FHA-INSURED AND THE SECOND LIEN IS CONVENTIONAL
Line: CCR460
Date: September 15, 1999
Question: Q&A; No. 63 discussed the LTV calculation when the first lien is conventional and the second lien is FHA-insured, but how is a mortgage loan risk-weighted when the 1st mortgage lien is an FHA loan and a second lien is a conventional loan?
Answer: The 1st mortgage loan is risk-weighted at 20% because it is FHA-insured. However, when determining the risk-weight of the junior lien, the first must be combined with all junior liens. If the combined LTV ratio does not exceed 80% and the second mortgage meets the definition of a qualifying mortgage loan, it may be risk-weighted at 50%. The second mortgage is risk-weighted at 100% when the combined LTV ratio exceeds 80%, the loan is more than 90 days past due, or the loan is not prudently underwritten.
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SUBJECT: RISK WEIGHTING RESIDUAL OF A LOAN PARTICIPATION
Line: CCR460
Date: September 15, 1999
Question: An institution is considering selling a 90% participation in a loan and retaining the remaining 10% principal balance. The participation agreement would give the purchaser a senior position to that of the selling institution. However, the total LTV is still only 70%, it is still a first mortgage loan, and it qualifies in all other ways as a 50% risk-weighted asset.
Given the above circumstances, would the asset still qualify and be risk-weighted at 50%?
Answer: No. The 10% retained by the institution must be risk-weighted at 100% because it is subordinate to the sold participation.
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SUBJECT: DEPOSIT PREMIUM ASSESSMENT BASE
Line: SC710
Date: September 15, 1999 (Revised October 26, 1999)
From time to time we get questions on the computation of the assessment base for TFR filers. The computation is as follows:
Demand Deposits:
SI215 Noninterest-bearing Demand Deposits +SI239 Outstanding Checks Drawn against FHLB and FRB +SI243 Demand Deposits of Consolidated Subsidiaries +SI247 Assets Netted against Deposit Liabilities
(1) = Gross Demand Deposits Less: 16-2/3% Float Deduction
(1) = Adjusted Demand Deposits less Float Deduction
Time and Savings Deposits:
SC710 Total Deposits +SC783 Escrows +SC763 Accrued Interest Payable - Deposits +SI244 Time and Savings Deposits of Consolidated Subsidiaries +SI248 Assets Netted against Deposit Liabilities Less: Gross Demand Deposits - (1) above
= Gross Time and Savings Deposits -SI245 Depository Institution Investment Contracts & Foreign Deposits
= Adjusted Time and Savings Deposits Less: 1% Float Deduction
(2) = Adjusted Time and Savings Deposits less Float Deduction
Total Assessment Base:
Adjusted Demand Deposits less Float Deduction - (1) above + Adjusted Time and Savings Deposits less Float Deduction - (2) above
Total Assessment Base
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SUBJECT: RESERVE FOR UNCOLLECTABLE INTEREST
Line: Schedules SC and VA
Date: September 15, 1999
Question: For tracking purposes, an institution prefers to utilize a reserve for uncollected interest instead of placing severely delinquent loans in nonaccrual status. On which line should the reserve for uncollected interest be reported on TFR Schedule SC? Should the reserve for uncollected interest be treated as a specific valuation allowance in completing TFR Schedule VA?
Answer: Interest income cannot be reported on Schedule SO and interest receivable cannot be reported on Schedule SC that is not collectable at the time of accrual. The institution may continue to accrue for tracking purposes, but not for reporting purposes. Therefore, the reserve for uncollected interest must be deducted from the accrued interest on the TFR; it is not a specific valuation allowance or a charge-off, but rather a direct offset.
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SUBJECT: LOANS COLLATERALIZED BY ACCOUNT RECEIVABLES
Line: PD10 through PD30
Date: September 15, 1999
Question: An institution has revolving commercial loans (no maturity) collateralized by account receivables. The amount of the loan is governed by the size of the collateral. The receivables used for collateral can fluctuate daily. If the debtor of the account receivable becomes past due on the monthly payment, the interest and principal amount is automatically capitalized to the loan. The commercial borrower can borrow additional funds to finance the past due amounts, limited by the maximum loan amount specified in the loan agreement with the institution. Should these loans be reported on PD, and would they be considered TDR?
Answer: No. The loan would be reported on PD only if the commercial borrower were delinquent. As long as the commercial borrower is meeting the terms of its loan with the institution, the loan is not delinquent. This loan would only be TDR if the loan between the institution and the commercial borrower were TDR. The TDR status of the underlying collateral does not cause the loan with the institution to be TDR.
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SUBJECT: FLOATING RATE CMO VALUATION
Line: CMR351, CMR352, CMR359, CMR361, CMR367, CMR368
Date: September 15, 1999
Question: When valuing floating-rate CMOs using Bloomberg, is the pricing on the FMED screens acceptable for self-reporting on Schedule CMR?
Answer: No, the FMED screens help you to determine if derivative mortgage securities are "high-risk." However, this screen does not give accurate prices on floating-rate CMOs, since the prices do not properly take account of the caps and floors embedded in these instruments. As an alternative, Bloomberg's FSPM or FSPD screens should be used to price these securities, since they explicitly account for the caps/floors.
The pricing methodology of either of the latter screens is consistent with OTS requirements for Schedule CMR. However, the FSPM screen uses Bloomberg median prepayment assumptions. The FSPD screen allows the user to customize prepayment assumptions.
For more complete information, see CEO Letter Number 55, April 30, 1996, Subject: CMO Floaters, and attachments, which is available on OTS' website at http://www.ots.treas.gov/docs/r.cfm?25055.pdf.
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SUBJECT: COMPLEX SECURITIES
Line: CMR485
Date: September 15, 1999 (Revised May 16, 2001)
Question: The CMR Instructions now classify Federal Home Loan Bank (FHLB) callable securities as "complex securities," and they are now reported on CMR485 rather than CMR473. Can a small institution use rate shock valuations provided by the FHLB for these securities?
Answer: Yes, the institution can use valuations provided by FHLBs. For other types of securities, the institution would have to get a valuation from a source other than the issuer or the dealer from whom the security was purchased.
NOTE: Effective with the March 2001 report, CMR485 was deleted. You must report market value estimates of complex securities in the CMR section Supplemental Reporting of Market Value Estimates.
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SUBJECT: SERVICING ESCROWS
Line: SC783, CMR777, CMR779, CMR786
Date: September 15, 1999
Question: An institution currently has $24 million of P&I; and T&I; escrows on loans serviced for others. The institution deposits the escrows in accounts at the Federal Home Loan Bank. Because the Federal Home Loan Bank is a depository institution, should the $24 million be reported on SC783 or SC796? If the answer is SC796, how should the amount be reported on CMR? Should they be reported as escrows on loans serviced for others, or should they be reported as Miscellaneous I liabilities?
Answer: Servicing escrows are held in safekeeping for others and as such must be included in Escrows, on SC783. For deposit insurance purposes, escrows are considered a subset of deposits; that is, they are insured as deposits and are included in the deposit premium assessment base. It is irrelevant what the institution does with the funds once they are deposited with them. The issue is the relationship between the institution and the depositors of the escrows.
Servicing escrows should be reported on CMR as follows:
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CMR777:
Tax and insurance escrows on single-family mortgages
serviced for others;CMR779:
Tax and insurance escrows on all other loans serviced
for others;CMR786:
Principal and interest escrows on all loans serviced
for others (single-family, multi-family, consumer loans, etc.)
SUBJECT: Bank-Owned Life Insurance (BOLI)
Line: SC690
Date: December 1, 1999
Question: Question: Can bank-owned life insurance be reported in "Other Investments" so that the income can be included in our net interest margin?
Answer: It is only permissible for a savings association to hold BOLI if it is incidental to banking. That is, if it is useful in connection with the conduct of a saving association's business. This would include insurance for key-persons, on borrowers, purchased in connection with employee compensation and benefit plans, or the cash value of life insurance taken as security for a loan. As such, it is more appropriately reported as an "other asset" rather than an investment. Income from BOLI should be reported as noninterest income.
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SUBJECT: Loans to Executive Officers
Line: SI900 SI910
Date: December 1, 1999
Question: For the purposes of the special report of loans to executive officers, should institutions include loans that officers have guaranteed but not co-signed?
Answer: Generally, loans guaranteed by officers must be included unless, in accordance with the guidelines in Section 215.3 of Regulation O, both of the following apply: the guarantee is (1) a guarantee of a previously outstanding loan, and (2) made for the purpose of protecting the savings association.
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SUBJECT: Aggregate Amount of all Extensions of Credit
Line: SI590
Date: December 1, 1999
Question: An institution has made loans to executive officers and has sold portions of the loans. Should the loans be reported net of the portion sold or gross?
Answer: If the institution holds no recourse on the loans, they should be reported net of the portion sold.
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SUBJECT: Participated Lines of Credit
Line: CC410 CC420
Date: December 1, 1999
Question: An institution is the issuer of credit card loans. Approximately 20% of that is participated out to a bank. The thrift settles daily with the bank on any changes in loans simultaneously with their credit card processor. In other words, when the bank's loans increase, the thrift initially funds that increase but immediately obtains funding from the bank as their participating share.
The question is how to report the unfunded lines of credit on those accounts for which the thrift is the issuer but the participating bank is the owner. Should the thrift report the unfunded lines on just the accounts they own, or do they report on the entire portfolio as the issuer?Answer: As long as the thrift has a firm, noncancelable contract with the bank for all of the unfunded lines, they should report only their share of the unfunded lines. If they have a contract with the bank covering only the funded lines or if the bank can cancel at any time, then they should report the entire unfunded lines.
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SUBJECT: Complex Securities
Line: CMR485 CMR962:968
Date: December 1, 1999
Question: An institution has several securities from the FHLB with call options that were reported as structured securities and rate-shocked on the June TFR. However, some of these securities were callable once, have passed their call date as of September 30, and are no longer callable. Should these continue to be reported as structured securities, or can they be considered simple securities now that the call option has lapsed?
Answer: Once the call option has expired and they are no longer callable, they should be considered simple securities for Schedule CMR purposes.
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SUBJECT: Loan-To-Value (LTV)
Line: CCR
Date: March 15, 2000
Question: When reporting loans on Schedule CCR, if the loan meets all the criteria for 50% risk-weighting except the LTV, but we have a firm commitment to sell, must the loan be risk-weighted at 100% or are there any exceptions?
Answer: If the LTV exceeds 80%, the loan must be risk-weighted at 100%. There are no exceptions for loans with a firm commitment to sell.
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SUBJECT: Accrued Interest Payable on Deposits Included in Liquidity
Line: SI500
Date: March 15, 2000
Question: Can accrued interest payable on deposits that has not been credited to the depositor's account be included in the liquidity base for calculation of the liquidity ratio? It is reported on SC763, Accrued Interest Payable - Deposits.
Answer: Yes. It is helpful for thrifts to add accrued interest to the denominator as it lowers their liquidity ratio. Because the regulation specifies that associations should add accrued interest to the numerator, we consider it appropriate that the denominator be treated the same way. This would apply to deposits and borrowings.
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SUBJECT: Commitments on CMR
Line: CMR-OBS
Date: March 15, 2000
Question: According to the CMR instructions, a commitment is considered firm when there is a rate lock at the time of approval. If an institution sets the rate at "LIBOR + 3" at approval, is that a rate lock and therefore a firm commitment? On one hand, it would seem so, but the actual numerical rate won't be set until the loan is closed. But if it is a firm commitment, what do they use for the rate in column #4 when reporting the off-balance-sheet item?
Answer: In the current CMR we don't consider this to be a reportable rate lock because the interest rate is free to change prior to the loan's closing. You should consider the commitment firm only if the rate is locked at a specified numerical level (e.g., 7.5%).
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SUBJECT: Calculation of LTV Ratios for Single-Family Residential Mortgages
Line: CCR4460 and CCR 505
Date: March 15, 2000
Question: LTV ratios must be considered in determining whether or not single-family residential mortgage loans qualify for 50 % risk weighting on Schedule CCR. If an existing property is purchased at a price lower than the appraised value, which value should be used in the calculation of the LTV ratio? This distinction in the definition of "value" can be material for institutions that routinely grant loans in which purchase prices are significantly below the appraised values.
Answer: The value used in the LTV ratio for risk-weighting purposes should be the lesser of the purchase price or the appraised value.
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SUBJECT: Floating Rate Balloon Note
Line: CMR
Date: March 15, 2000
Question: An institution has a first mortgage 1-4 family real estate loan that floats daily with Wall Street prime - not a true ARM - and is also a balloon note. Where is this reported on CMR?
Answer: The mortgage should be reported in the current market index, "6 Month or Less" column. Because it's not indexed to Treasury, LIBOR, or COFI, the instructions on page 183 for reporting its margin apply. The WARM is based on the time until the balloon payment is due. The time until the next payment reset is based on how often the payment changes. (Even though the interest accrual rate changes daily, I assume the payment changes less frequently, say monthly.)
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SUBJECT: Available-For-Sale Loans
Line: CMR
Date: March 15, 2000
Question: Can loans held for sale be reported in the 30 day repricing category in the appropriate CMR bucket? That is, can the "next reset" be said to be at the end of the next month since they are supposed to be priced to market each month until the sale date?
Answer: No, assets must be reported according to their actual contractual characteristics, including interest rate reset date, not according to when the institution plans to sell it. While assets available for sale are reported on the balance sheet at fair value, on Schedule CMR we collect the amount of outstanding principal and need the actual contractual terms to estimate the market value of those assets in several different interest rate environments.
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SUBJECT: Firm Commitments to Sell Mortgage Loans Included in Liquidity
Line: SI500
Date: March 15, 2000
Question: Pursuant to OTS regulation 12 CFR 566.1(g)(13), mortgage loans described in 12 U.S.C. 1465(b)(1)(C)(vii) are liquid assets. This latter regulation describes the loans as mortgage loans on the security of first liens on residential real property that qualify as backing for mortgage-backed securities issued by FannieMae or FreddieMac or guaranteed by GinnieMae; and that have one year or less remaining until maturity, or are subject to an "agreement" (including a repurchase agreement, put option, right of redemption or takeout commitment) that requires purchase of the loans within one year by a capital compliant insured institution, primary dealer in U.S. securities, or registered broker or dealer.
We have firm commitments, usually lasting only for a few months, to sell mortgage loans of the type that 12 U.S.C. 1465(b)(1)(C)(vii) describes. Are these firm commitments considered "agreements" under the cited U.S. code, thereby qualifying as liquid assets?
Answer: If the loans underlying the commitments are specific loans that are either existing on the institution's books or identified in the institution's pipeline as specific loans being processed, the firm commitments are considered "agreements" and would qualify as liquid assets. Firm commitments to sell mortgage loans that do not identify specific existing loans or specific loans in a pipeline are not "agreements" under the code.
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SUBJECT: Farm Loans
Line: SC250, SC260
Date: March 15, 2000
Question: The general instructions for real estate loans discuss the issue of the collateral having more than one use. When the collateral has a residence with more value than the remaining acreage, is this a farm loan or a residential loan in spite of any farming activity? Is there any "size" of acreage that would automatically make the loan a farm loan?
Answer: There are no hard and fast rules on the definition of farm land. However, if the value of the home equals or exceeds the value of the remaining acreage, the loan may be classified as residential. There is no size of acreage that would automatically make the loan a farm loan.
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SUBJECT: Callable CDS
Line: CMR
Date: March 15, 2000
Question: A thrift offers a callable certificate of deposit product. The customer may hold the CD at a fixed rate for 5 years but the thrift may call the CD at anytime after 1 year. How is this reported on the CMR in terms of original and remaining maturity (CMR Section Fixed Rate Fixed Maturity Deposits)?
Answer: The preferred way to report this CD is to report the maturity as 5 years and report the value of the call option in the Reporting of Market Value Estimates, in CMR942 through CMR948. However if you do not have the value of the call option, you can report the CD as fixed rate, fixed maturity with the call date as the maturity. Please note that providing the OTS with the market value estimate of the call option will result in more accurate results from the interest rate risk model.
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SUBJECT: Dollar Roll Clearing Account
Line: Schedule SC
Date: March 15, 2000
Question: An institution finances the purchase of MBSs with reverse repos. Each month that the dollar roll is not settled, they either remit or receive the difference between the buy and new sell prices. This amount is recorded in a "Dollar Roll Clearing Account." Where is the clearing account reported on the TFR?
Answer: The clearing account is a due to/from broker account and should be reported in Other Assets or Other Liabilities, as appropriate.
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SUBJECT: LTV-Deferred Loan Fees
Line: Schedule CCR
Date: March 15, 2000
Question: When reporting loans on schedule CCR, if the loan meets all the criteria for 50% risk-weighting except the LTV, but the deferred fees (e.g. "points") would reduce the LTV from 81% to 79%, would this loan qualify for 50% or 100% risk-weighting?
Answer: In this case, the loan would be risk-weighted at 50%. Loans may be risk-weighted at recorded investment, which is the principal balance adjusted for certain amounts, including deferred loan fees, premiums, and discounts.
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SUBJECT: Leasing Activities
Line: SC306, SC330, and SC690
Date: June 5, 2000
Question: The Home Owners' Loan Act (HOLA) and OTS regulation 12 C.F.R. 560.41 authorize thrifts to engage in two types of leasing activities: finance leasing and general leasing. Does the institution's elected HOLA investment authority for a lease determine the classification for reporting purposes? For example, could a general lease for HOLA investment authority purposes be one that must be accounted for in the Thrift Financial Report (TFR) as a direct financing lease?
Answer: Regardless of which HOLA investment authority the institution elects, it must report leases in the TFR in accordance with generally accepted accounting principles (GAAP). Under SFAS No. 13, "Accounting for Leases," a savings association as a lessor will generally account for a lease as either an operating lease or direct financing lease (sometimes referred to as a capital lease), depending on the lease terms. For an operating lease, the institution should report the property leased to others on TFR line SC690, "Other Assets", using code 10. In contrast, for a direct financing lease, the institution should not report the property leased to others as an asset. Rather, the institution should report the lease receivable as an asset, because the accounting for a direct financing lease is similar to that for a loan. Specifically, for a direct financing lease, the institution should report the lease receivable on either TFR line SC306, "Commercial Loans: Direct Financing Leases", or TFR line SC330, "Closed-end, Consumer Loans: Other, Including Leases". The institution's elected HOLA investment authority for a lease will not necessarily determine the classification for reporting purposes. For example, a general lease for HOLA investment authority purposes could be a lease that must be accounted for under GAAP as a direct financing lease.
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SUBJECT: Auto Leases
Line: SC330
Date: June 5, 2000
Question: An institution is planning to start an auto lease program. It appears that these leases will be reported as direct financing leases on SC330 - Other Consumer Loans, Including Leases. What happens if a lessee returns an auto either at the maturity of the lease or prior to term after paying off the lease contract? It is not repossessed, but returned. Should it be reported in Other Assets, SC690, or Other Repossessed Assets, SC430?
Answer: If the terms of the lease are met, the auto should be reported in Other Assets, SC690, as Code 10. However, if the institution assumes physical possession of an auto because the terms of the lease are not met, the auto should be reported as Other Repossessed Assets on SC430.
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SUBJECT: Closed-End Home Equity Loans
Line: SC316
Date: June 5, 2000
Question: An institution has a closed-end home equity loan. The car for which the loan proceeds were used also collateralizes the loan. Is this loan categorized on the TFR by purpose as an automobile loan or as a home equity loan?
Answer: If the auto substantially secures the loan, and the lien on the home is taken merely as an "abundance of caution," the loan should be reported as an auto loan on SC323.
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SUBJECT: Uninsured Deposits
Line: SI235
Date: June 5, 2000
Question: An institution has CDs over $100,000 that are structured as follows:
Are any of these reported as "uninsured deposits" on SI235?
- Public funds secured by stand-by letters of credit issued by FHLB;
- Public and private funds Insured by private deposit guaranty bonds; or
- CDs used for loan collateral, which if the bank were closed, would be netted against the loans and would not create a claim against the FDIC.
Answer: Yes, all three of these should be reported on SI235. While it is correct that there may be some special treatment of these deposits in the event of the institution's failure, the amounts of these deposits in excess of $100,000 are uninsured under the deposit insurance laws and regulations.
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SUBJECT: QTL for Trust-Only Charters
Line: SI581, 582, 583
Date: June 5, 2000
Question: Are institutions with trust-only charters required to calculate QTL?
Answer: Yes. All OTS chartered savings associations must comply with QTL regulations unless they have a specific statutory exemption.
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SUBJECT: Fee Income on Individual Security Sales
Line: SI860
Date: June 5, 2000
Question: An institution maintains a financial services office that sells mutual funds to customers as well as individual equity securities. The financial services office receives a commission on every securities transaction. Should this income be included on line SI860 (Fee Income from the Sale and Servicing of Mutual Funds and Annuities), even though the sale is of an individual stock rather than a mutual fund or annuity as the instructions refer? Evidently, several stock transactions have occurred, but obtaining a query of the individual commissions from the customers is burdensome.
Answer: No, do not include commissions on sales of individual equity securities. Only fee income from mutual fund and annuity sales and servicing should be reported on SI860.
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An institution has a financial services department as a subsidiary. This department receives fees for setting up stock and equity mutual fund accounts for walk-in customers. The assets are entrusted to a third party corporation. The consolidated subsidiary of the institution receives a 20% commission for the referral. The customer makes the investment decision, while the financial services department acts as a conduit. They do not file an ARTA report with the FDIC. SUBJECT: Mutual Fund Referrals
Line: SI350, SI800:830
Date: June 5, 2000
Question 1: Should accounts such as that described above be reported as trust assets on SI350?
Answer 1: The type of activity described does not appear to be an activity requiring trust powers; therefore, it would not be included on the TFR or the ARTA.
Question 2: Should these accounts be reported with mutual fund and annuity sales on SI810:830 even though the association is merely a conduit for the third party?
Answer 2: Yes. The amount of sales should be reported on SI810:830. In addition they should report the amount of income (referral fee) on SI860.
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SUBJECT: Qualifying Multifamily Mortgage Loans
Line: CCR465
Date: June 5, 2000
Question: The CCR instructions for qualifying multifamily mortgage loans require three criteria to be met for grandfathered loans (from March 18, 1994 forward) to qualify for 50% risk-weighting. Assume that the LTV ratio is satisfied but that the occupancy rate has fallen below the minimum 80% requirement since 3-18-94. Can the institution include these loans in the 50% risk-weight category if the average annual occupancy rate has increased over time to exceed 80% for the past year?
Answer: Yes. If a multifamily property does not qualify for 50% risk weight one year, it can still qualify in future years. It does not have to continuously qualify.
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SUBJECT: Callable Bond Past Call Date
Line: CMR485
Date: June 5, 2000
Question: An institution has a bond that was callable that they reported on CMR485. The call date passed without the bond being called. Should it be moved out of the structured securities line and reported as if it were now a fixed-maturity bond?
Answer: Yes, if the security is no longer callable, it should be moved out of CMR485.
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SUBJECT: Face Value of Liabilities with Options, Edit R960
Line: CMR950
Date: June 5, 2000
Question: The CMR instructions state: "reporting of market value estimates is optional for liabilities such as callable bonds". The instructions also state: "If the reporting savings association chooses to report its estimates of the market value of options on liabilities, it should also report, in CMR950, the principal value of the liabilities in which those options are embedded. Otherwise, leave CMR950 blank."
If the institution does decide to rate shock their FHLB callable bonds, is it mandatory that CMR950 be completed for the principal value of the underlying liabilities? If so, must CMR945 always be less than 40% of the base case value on CMR950, as indicated in the TFR edits?
Answer: Yes, CMR950 should be completed if anything is reported in CMR942 through CMR948. There might be cases where CMR945 exceeds 40% of CMR950, but it would be unusual for the value of the embedded option to reach that large a size. The most likely reason for an edit to be triggered for a callable bond is that the institution may be reporting the estimated market value of the bond in CMR942-948, rather than the value just of the embedded call option.
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SUBJECT: Convertible FHLB Advances
Line: CMR942:948
Date: June 5, 2000
Question: How should a ten-year convertible advance from the Federal Home Loan Bank be reported on CMR where a call option exists? The FHLB may call the bonds on any quarterly payment date. If the market interest rates should rise by over 25 basis points from the current levels, the bonds would probably be called. Q&A; No. 94 refers to callable CD's, but would convertible advances be treated in a similar manner?
Answer: To report callable FHLB advances follow the instructions for Schedule CMR on page 216.
Callable borrowings: Callable borrowings are fixed-rate, fixed maturity borrowings that can be called by the issuer at certain dates before the borrowings' maturity date. Report the remaining maturity of callable borrowings using either Option 1 or Option 2, below.
Option 1: Report the remaining maturity of the borrowings based on their stated maturity, and report in CMR942 through CMR948 the market value of the call option in the seven interest rate scenarios.
Option 2: Report the remaining maturity of the borrowings based on their next call date.
In addition refer to the guidance in Thrift Bulletin 13a-1 concerning market value estimates for structured advances.
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SUBJECT: Balloon Loans
Line: CMR
Date: June 5, 2000
Question: The loan review of an institution discloses that they originate single-family balloon loans; however, these loans are reported on section CMR as adjustable mortgage loans. I am not positive if these should be reported as balloon loans or adjustable mortgage loans on CMR.
An example of one of these loans is as follows:
$72,000 Loan - 7.75% fixed for a one-year term, with a 20-year amortization. The note calls for the entire indebtedness to be paid in full in one year. After each year the loan extends for another year at the institution's current loan rate. The note also states that if the borrower makes any prepayments within the first 5 years of the loan a prepayment penalty will apply. My understanding is that management is not charging customers a prepayment penalty if they pay off the loan at the renewal period each year. However, if they prepay during midyear, in the first 5 years, then a prepayment penalty will be charged.
At each yearly renewal, the loan is given the then-current loan rate for new loans. The managing officer states that they have always renewed these loans each year; however, they reserve the right to refuse to renew a loan.
Where should these loans be reported?
Answer: The loan described here is referred to in the Schedule CMR instructions as a "call loan" (page 179, item 4 near the bottom of the page). A call loan is categorized as fixed or adjustable rate based on the frequency with which it may be called. If it is subject to call (and thus potential coupon reset) at least every 5 years, it is reported as an ARM (see item 3 under "Include" on page 181); otherwise as a fixed rate mortgage.
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SUBJECT: Defered Tax Credits
Line: SC50, SC690/SC790
Date: September 11, 2000
Question: An institution receives tax credits for investing in a joint venture partnership with limited liability. The participating parties comprise other financial institutions that are investing in the California Affordable Housing Fund. Tax credits are received as a benefit for participating in this fund. Where should this investment be reported on the TFR? Where should the deferred tax credits be reported?
Answer: The investment should be reported on SC50, Equity Investments Not Subject to SFAS No. 115. The deferred tax credits should be reported as a deferred tax asset component of the institution's deferred taxes.
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SUBJECT: FHLB Non-Interest-Earning Deposits
Line: SC162
Date: September 11, 2000
Question: An institution is reporting FHLB non-interest-earning accounts on line SC162 (Interest-earning Deposits in FHLBs) and on CMR461 (Cash, Non-interest-earning Demand Deposits, Overnight Fed Funds, Overnight Repos). These deposits are used to compensate for money needed to pay for wires, ACH drafts, sweep transfer funds, swap pools, regular deposits from branches, lock box fees, direct deposit transfers and in-clearing check processing. If any money remains after clearing items are paid, then the extra funds are transferred to an interest-earning account. The institution is classifying the non-interest-earning account on line SC162, because it is a deposit with the Federal Home Loan Bank.
Typically, items reported on SC162 should also be reported on line CMR476, with interest-earning deposits. However, because the time deposits are non-interest-earning, the institution is reporting them on line CMR461. Should line SC162 include non-interest-earning FHLB deposits even though the title of the TFR line is "Interest-earning Deposits in FHLBs"?Answer: It is acceptable to report this account on SC162; although, if the account is material, it should be reviewed by an examiner. The reporting in CMR with cash items on CMR461 is also appropriate.
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SUBJECT: Regulatory Liquidity
Line: SI500
Date: September 11, 2000
Question: In the regulatory liquidity calculation, which should be used for investments: par, book or market value? Does it make a difference if the investments are available-for-sale or held-to-maturity?
Answer: Section 566.1(g) defines liquid assets as ". . . the book value of the following unpledged assets . . . ," provided that any "principal and interest on such assets are not in default and a savings association's investments in such asset do not exceed any applicable limitations on such investments by the savings association." Additionally, OTS will not object if the institution uses market value to calculate the cash equivalent. It does not make a difference if the investments are available-for-sale or held-to-maturity since it is the asset type rather than the accounting classification that determines whether the asset is liquid. Therefore, you may use market value or book value regardless of whether they are available-for-sale or held-to-maturity.
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SUBJECT: Liquidity, Callable Agency Notes
Line: SI500
Date: September 11, 2000
Question: In calculating regulatory liquidity, how are callable agency notes included? What maturities are used for any agency notes for classification as a liquid asset?
Answer: Callable agency notes, depending on the features, could fall into either of two categories:
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- 566.1(g)(3) - Obligations issued or fully guaranteed as to principal and interest by certain agencies of the United States (including FHLBs, FannieMae, and FreddieMac). There are no maturity requirements.
- 566.1(g)(9) - Corporate debt obligations and commercial paper denominated in dollars. The corporate debt obligation must be rated in one of the four highest categories by the most recently published rating of such obligations by a nationally recognized investment rating service, be marketable, mature in three years or less, not be convertible to common stock.
SUBJECT: QTL - Loan Pools
Line: SI581, 582, 583
Date: September 11, 2000
Question: Are investments in pools of loans or securities backed by or representing an interest in education loans or small business loans eligible to be included as qualified thrift investments?
Answer: Yes. Since education loans and small business loans count without limit, investments in pools of loans or securities backed by such loans also count without limit.
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SUBJECT: Overdrafts on Checking Accounts
Line: CMR335, CMR336
Date: September 11, 2000
Question: An institution has appropriately moved overdrafts on checking accounts (customer deposits) to the consumer loan category on the TFR. Although there is a one-time overdraft fee, no interest is charged. How should these overdrafts be reported on the CMR as far as whether they are adjustable or fixed, and what would be reported for a WARM etc?
Answer: The overdrafts should be reported as fixed-rate consumer loans with a weighted average remaining maturity (WARM) of 36 months and a weighted average coupon (WAC) of 0.01%.
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SUBJECT: Exchange Rate Contracts
Line: CMR Off-Balance Sheet Positions
Date: September 11, 2000
Question: If an institution is involved in exchange rate contracts, what contract code should be used to report these off-balance sheet items on CMR?
Answer: Exchange rate contracts are not reported on Schedule CMR because they are not interest rate sensitive.
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SUBJECT: Risk-Weighting Accrued Interest
Line: CCR
Date: December 19, 2000
Question: How should we risk-weight accrued interest? Should we include it with the asset or risk-weight it at 100%?
Answer: You may risk-weight accrued interest with the asset against which it was accrued. However, if you cannot easily break out your accrued interest by asset type, you may risk-weight it at 100%.
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SUBJECT: Overdrafts in Cash Accounts
Line: CMR675
Date: December 19, 2000
Question: Where should we report an overdraft in the thrift's cash account (negative cash balances) on Schedule CMR?
Answer: In Schedule CMR you should report negative cash balances on CMR675. If this is the only amount for which you report a WAC on CMR678, you should report a WAC of one basis point (0.01%). Likewise, if this is the only amount for which you report a WARM on CMR711, you should report a WARM of one month.
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SUBJECT: Money Market Mutual Funds
Line: SC140
CMR461Date: December 19, 2000
Question: Where should we report Money Market Mutual Funds owned by the savings association in Schedule SC and CMR?
Answer: Report money market mutual funds as follows:
Schedule SC on SC140 (Equity Securities Subject to SFAS No. 115)Schedule CMR on CMR461 (Cash, Non-interest-earning Demand Deposits, Overnight Fed Funds, Overnight Repurchase Agreements) - see the instructions for CMR464.
Because you do not report money market mutual funds on CMR464, you do not report them on CMR582 (Equity Security & Non-mortgage-related Mutual Funds).
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SUBJECT: Risk Weighting Interest-Rate Contracts
Line: CCR
Date: December 19, 2000
Question: Per CCR instructions, under Credit Equivalent Amount of Interest-Rate and Exchange-Rate Contracts, we require an association to risk weight the replacement cost of interest-rate contracts. Does this pertain to interest-rate contracts entered into, but not yet effective?
Answer: Yes. If they are entered into, they are off-balance-sheet items, and therefore are a part of the savings institution's risk-weighted assets. You should follow the instructions for off-balance-sheet assets 12 CFR 567.6(a)(2)(v). You may also look at the instructions for the conversion of off-balance-sheet assets in Schedule CCR in the Thrift Financial Report Instruction Manual.
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SUBJECT: Qualifying Multifamily Loans - Assumption
Line: CCR465
Date: December 19, 2000
Question 1: If a different borrower assumes a "grandfathered" qualifying multifamily mortgage loan, can the institution continue to risk-weight the loan at 50 percent? ("Grandfathered" is an informal term that refers to a multifamily mortgage loan that met the definition of Qualifying Multifamily Mortgage on March 18, 1994, and continues to meet those requirements. March 18, 1994 was the effective date of a change in the definition for Qualifying Multifamily Mortgage.)
Answer 1: Yes, provided that: (a) OTS examiners do not take exception to the underwriting or the assumption transaction, and (b) there is no adverse information about the new borrower or the security property. If the savings institution advances new funds at the time of the assumption, OTS will generally view the assumption as a new loan for this purpose, in which case it will not receive the capital treatment of a grandfathered loan. There may be some exceptions for an immaterial amount of new funds.
Question 2: If a multifamily loan qualifies for a 50 percent risk-weight under the current rule and a different borrower assumes the loan, can the institution continue to risk-weight the loan at 50 percent using the loan and property history prior to assumption, as long as it continues to meet the qualifying criteria?
Answer 2: Yes, provided that, (a) OTS examiners do not take exception to the underwriting or assumption transaction, and (b) that there is no adverse information about the new borrower or the security property.
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SUBJECT: Write-Down of Beneficial Interessts Pursuant to EITF Issue No. 99-20
Line: Schedule SO
Date: March 27, 2001
Question: As a result of applying the consensus in EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," we will recognize an other-than-temporary impairment of our beneficial interests in securitized financial assets. We will report this impairment by writing down the beneficial interests to fair value, with a corresponding charge to earnings. Where on Schedule SO should we report this charge?
Answer: If, prior to the impairment charge, you treated the beneficial interests as interest-bearing assets, then you should include the charge to earnings on line SO321, Net Provision for Losses on Interest-Bearing Assets. You treated an asset as interest bearing if you included the related income on line SO11, Total Interest Income. On the other hand, if you treated the beneficial interests as non-interest-bearing assets, then you should include the charge to earnings on line SO570, Net Provision for Losses on Noninterest-Bearing Assets. You treated an asset as noninterest bearing if you included the related income in line SO40, Total Noninterest Income.
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SUBJECT: SFAS No. 115 Adjustments in Cash Flow Amounts
Line: CF180
Date: March 27, 2001
Question: When calculating the cash repayment of principal on CF180 should we include adjustments we make to the balances for the mortgage pool securities for unrealized gain and losses?
Answer: Yes. We determined that most institutions are including SFAS No. 115 adjustments with the cash repayments on CF180 and have amended the instructions for March 2001 to reflect actual practice. We will change the caption of CF180 on the March 2002 form.
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SUBJECT: Interpretation of Q&A No. 72 - Single-Family Construction Loans
Line: SC230, SC235
Date: March 27, 2001
Question: We are having an interpretation problem with Q&A No. 72. In our construction loans we have 20 houses in the same subdivision on one mortgage issuing partial releases as each home is sold and closed. The purpose of the loan is clear, as well as, use of its proceeds - funds are used to build free-standing, single-family detached houses that are for sale to the general public. Should we classify these as multi-family or as single-family construction loans?
Answer: Q&A No. 72 applies to permanent mortgage loans. It was not intended to apply to construction loans. The instructions for SC230, Construction Loans on 1-4 Dwelling Units, respond to your question. Item number 1 under Include states: "Construction loans to developers secured by tracts of land on which single-family houses, including town houses, are being constructed." A master loan to a builder to build single-family homes should be classified on the TFR as a single-family construction loan.
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Question: Schedule LD instructions state: SUBJECT: Combining Junior and Senior Loans for LTV Delinquency Reporting
Line: LD210 through LD260
Date: June 13, 2001
"In determining the LTV ratio, you must combine all loans secured by the same property regardless of whether you classify the loan as a mortgage or consumer loan in Schedule SC. If you hold a junior lien, you must include all liens senior to your lien in the LTV calculation, even if you do not hold all the senior liens."Must we combine a junior loan that is delinquent with a senior loan that is current in reporting the amount of delinquent high LTV on Schedule LD?
Answer: No. You report only the loan that is delinquent in the past due and nonaccrual section. However, you must report the combined loans in the high LTV balances if combined they meet the criteria for high LTV loans.
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Question: Certain insurances and government guarantees do not cover the entire recorded investment. Is it correct that any level of insurance on loans originated at greater than 90% LTV will exempt them from being reported on this schedule? SUBJECT: Partial PMI
Line: Schedule LD
Date: June 13, 2001
Answer: No. For loans insured by PMI, the loan does not have to be reported provided the insurance will cover first loss down through 90% LTV. For example, if a loan is originated for 95,000 on a 100,000 property and it is covered by 75% PMI, the PMI will cover the loss down to $71,250 (75% of 95,000). This brings the uninsured loan down to 71% LTV, a level less than 90%, and the loan does not have to be reported. However, if the loan is covered by other insurance where the lender takes the first loss, then the entire loan balance must be reported. An example of this is when the insurer covers 75% of the loss of a high LTV loan and the lender must cover the first 25% of the loss. In this situation the entire loan balance must be reported as high LTV.
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Question: Should we report all outstanding recorded investments in loans that had been originated at LTVs in excess of 90% regardless of their current calculated LTV? SUBJECT: Original vs. Current LTV Calculation
Line: Schedule LD
Date: June 13, 2001
Answer: No, report only loans where the current balance is equal to or greater than 90% LTV based on the appraisal or evaluation at origination. A more recent appraisal or evaluation may be used if available and if it meets your institution's own appraisal standards and the appraisal standards of OTS regulations.
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Question: If a high LTV loan is participated out and the institution retains a portion of the loan, would the sale and the remaining participation be reported as high LTV? SUBJECT: High LTV Loan Participations
Line: Schedule LD
Date: June 13, 2001
Answer: Yes, the portion retained by the institution would be reported on Schedule LD and the sold participation would be reported as a sale in the quarter in which it was sold.
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Question: If an institution is aware of a decrease in the value of property securing a loan, even though the bank has not changed the terms of the loan or received a new appraisal, should they change the appraisal value in the system and report the loan as a high LTV loan? SUBJECT: LTV - Decrease in Property Value
Line: Schedule LD
Date: June 13, 2001 (Revised November 6, 2001)
Answer: No. LTV is typically calculated at origination, based on the total loan commitment divided by the value of the collateral. If the LTV increases to in excess of 90% solely due to a decline in the value of the collateral, you do not have to report the loan on Schedule LD as a high LTV loan.
However, where either (1) the LTV exceeds 90% at origination, or (2) subsequent to origination the loan exceeds 90% LTV because you advance additional funds or you release part of the collateral, then you must report the loan on Schedule LD as a high LTV loan.
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Question: If a loan does not have PMI or Government guarantee, but has other collateral pledged (such as a certificate of deposit), would it be reported on Schedule LD? SUBJECT: LTV - Additional Collateral
Line: Schedule LD
Date: June 13, 2001
Answer: If the institution or another institution issues a CD to the borrower and you have a validated hypothecation agreement, the CD amount may be reported as additional collateral. Other acceptable collateral is defined in the real estate lending regulations as:
"any collateral in which the lender has a perfected security interest, that has a quantifiable value, and is accepted by the lender in accordance with safe and sound lending practices. Other acceptable collateral should be appropriately discounted by the lender consistent with the lender's usual practices for making loans secured by such collateral. Other acceptable collateral includes, among other items, unconditional irrevocable standby letters of credit for the benefit of the lender."
After appropriate discounting, the other acceptable collateral may be used in the calculation of loan-to-value.
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Question: If a revolving home equity line of credit was underwritten with an LTV greater than 90%, should we report every draw over the entire life of the loan in the origination section? SUBJECT: Disbursements of Lines of Credit
Line: Schedule LD
Date: June 13, 2001
Answer: Yes, report each disbursement, the same as you report them in Schedule CF.
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Question: In reporting Past Due and Non-Accrual Balances where multiple extensions of credit have been made on the same property, should we report the entire recorded investment or only the loan that is overdue? SUBJECT: High LTV Past Due Loans
Line: LD210 - LD260
Date: June 13, 2001
Answer: You report only the loans that are past due.
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Question: Should charge-offs and sales be reported if the loan has an LTV greater than or equal to 90% at the time of charge-off, at the beginning of the quarter, or does the LTV calculation revert back to point of origination? SUBJECT: High LTV Charge-offs and Sales
Line: LD310 - LD320
Date: June 13, 2001
Answer: Charge-offs and sales should be reported on Schedule LD if the loan was reported on schedule LD either in the prior or current quarter.
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Question 1: We have a new product that is basically an overdraft demand deposit account repayment plan. We are allowing qualified individuals with overdraft demand deposit accounts to pay the overdraft amount in installments. The individual's demand deposit account goes to zero and the overdraft is recorded in a separate account. The customer is not charged origination fees, interest, or finance charges. They do not sign loan documents but they do sign a repayment plan agreement. We have established a loan loss reserve for these in cases of nonpayment. From our Bank's point of view, these are not technically loans. Should we classify them as Other Consumer Closed End loans on SC 330? SUBJECT: Installment Overdrafts
Line: SC330, SC345
Date: June 13, 2001
Answer 1: We consider these assets loans even though you do not charge the customers interest. Because these are overdraft lines of credit, they should be reported on SC345 where overdraft plans are reported even though each overdraft is paid in installments.
Question 2: Should the provision for loss expense be reported on SO570, Net Provision for Losses on Non Interest Bearing Assets?Answer 2: No. The provision for loss should be reported on SO321, because the assets being reserved against are loans, even though you do not charge the customers interest.
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Question 1: We have loans secured by both the commercial and residential real estate of a borrower. The residential real estate is a single-family house. Do I report this loan on the TFR, as a non-residential or residential loan? SUBJECT: Loans on Mixed Use Property or on Two Properties
Line: SC250, SC260
Date: June 13, 2001
Answer 1: You should report loans secured by property with more than one use or secured by several properties with different uses, such as residential and commercial, in the data field that describes the property type comprising the largest percentage of the value of the properties securing the loan. If you make a loan secured by commercial property, but take a second on the borrower's home as additional collateral on the loan, the loan should be reported as a nonresidential property loan.
Loans secured by single-family housing with incidental commercial use should be classified as a 1-4 family mortgage loan. However, a house used almost exclusively for commercial purposes in a neighborhood of single-family homes should be classified as a nonresidential real estate loan. For example, a structure originally built as a single-family house that is used as a doctor's office but also has an apartment leased out for living quarters would be classified as nonresidential if the commercial use generates a higher proportion of income than the residential apartment.
Question 2: Would the risk-weighting for capital calculations be the same?Answer 2: In general, yes. Such loans should be risk weighted based on the classification of the loan in Schedule SC. However, residential loans are 100% risk weight unless they meet either the definition of Qualifying Mortgage Loan or Qualifying Multifamily Mortgage Loan in 12 CFR section 567.1.
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Question: An institution is making nonconstruction "bridge" loans where they provide financing between the purchase of a new home and the sale of the old home. The customer pays interest-only (no principal) until the sale of the old home is closed, at which time the bridge loan is paid off. Where should these bridge loans be reported? SUBJECT: Nonconstruction Bridge Loans
Line: Schedules SC, LD, CCR, and CMR
Date: June 13, 2001
Answer: Typically these loans are secured by a junior lien on one of the residences. If this is the case, the loan should be reported with second mortgages. In Schedule SC these would be reported on SC250, and in Schedule CMR, these would be reported on CMR311 or CMR312. During the time that the bridge loan is outstanding, it must be combined with all other liens on the same property to determine high LTV for reporting on Schedule LD and in determining risk weight for Schedule CCR of the bridge loan and all other liens on the same property held by the institution.
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Question: Should CC330, Commitments To Sell Loans, include loan sales that are "best effort" commitments? None of the loans that we sell are mandatory commitments. The loans are identified in our system, but if the loan sale is not consummated, there is no exposure for our institution. The TFR Instruction Manual reads, "Report outstanding commitments to sell whole mortgage and nonmortgage loans and participating interests." SUBJECT: "Best Effort" Commitments to Sell Loans
Line: CC330
Date: June 13, 2001
Answer: You should report as commitments the amount of loans that you expect to sell pursuant to a "best effort" commitment. This expectation may be based on your past performance and on knowledge of your current portfolio and your existing commitments to originate and purchase loans.
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Question: How would an institution report the combined carrying value when there is a disparity in the appraisal amount on the two loans being combined? For example, a first lien was written for $100,000 five years ago on a property appraised at 150,000. Its outstanding balance is now $90,000. A second lien is written for $50,000, when the new appraisal amount is $200,000. SUBJECT: Combined Loan to Value with New Appraisal
Line: CCR460
Date: June 13, 2001
The combined carrying value is now 140,000, which is less than 80% of the value at the origination of the junior lien, but exceeds 80% of the value at origination of the first lien.
Answer: In general, you should use the more current appraisal in this type of situation. However, the appraisal must meet your institution's own appraisal standards and the appraisal standards of OTS regulations. Appraisals are subject to review by OTS examiners. Note that in order to combine liens for risk weighting purposes, there must be no intervening lien. If there is an intervening lien, you must risk weight the two loans separately.
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Question: On Schedule SC where should we report pass-through securities backed by mortgages that are home equity loans? Some of the home equity loans may not have an appraisal or evaluation, but all are secured by a lien on residential real estate. Prior to securitization, most of these loans would have been classified as nonmortgage, home equity loans. SUBJECT: Pass-through Securities Backed by Home Equity Loans
Lines: SC185, SC210, SC215
Date: September 10, 2001
Answer: Because the loans are evidenced by a lien on the underlying real estate and the securities are pass-through securities, the securities should be reported with pass-through mortgage securities on SC210 or SC215.
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Question: The instructions for SC345 under Include, item 2 say to include overdrafts of consumer NOW and demand accounts. Does the word consumer include only single customer accounts or should we include NOW and demand accounts set up for commercial purposes? SUBJECT: Overdrafts of Commercial NOW and Demand Accounts
Lines: SC303, SC345
Date: September 10, 2001
Answer: Overdrafts of commercial accounts should be reported as commercial loans on SC303.
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Question: Is it correct that, upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", in 2002, we will no longer amortize goodwill? SUBJECT: SFAS No. 142 - Amortization of Goodwill
Line: SO560
Date: September 10, 2001 REVISED September 20, 2001
Answer: Yes, however, not all unidentifiable intangible assets are goodwill for purposes of SFAS No. 142. Most importantly, the unidentifiable intangible asset established pursuant to SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions", although commonly referred to as goodwill, is not goodwill. Therefore, this asset must continue to be amortized after adoption of SFAS No. 142 in 2002, in accordance with the specialized amortization requirements of SFAS No. 72. (The exact adoption date of SFAS No. 142 in 2002 will depend on your fiscal year-end.) This amortization should be included in line SO560, "Amortization of goodwill". This is significant because all the unidentifiable intangible assets created in most branch acquisitions are SFAS No. 72 unidentifiable intangible assets, and therefore are not goodwill.
Pursuant to paragraph 8 of SFAS No. 142, that Statement does not change the accounting prescribed in SFAS No. 72. Paragraph B19 of SFAS 142 reads:
"The Board decided that this Statement should not change the accounting for an unidentifiable intangible asset recognized in an acquisition of a bank or thrift institution that is prescribed in SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions". The Board noted that SFAS No. 72 does not refer to the unidentifiable intangible asset as goodwill, and concluded that it would not be appropriate to account for that intangible asset as if it were goodwill without a full reconsideration of the issues associated with that industry, which is beyond the issues addressed in this Statement."
SFAS No. 72 applies to the purchase method acquisition of a depository institution, including branches of a depository institution, where the fair value of the liabilities assumed exceed the fair value of the tangible and identifiable intangible assets acquired. Under SFAS No. 72, that excess constitutes an unidentifiable intangible asset. However, that asset is not referred to in the Statement as goodwill. SFAS No. 72 goes on to specify an amortization method for the unidentifiable intangible asset.
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Question: Should delinquent loans that management establishes a reserve for uncollected interest be reported as "nonaccrual" on Schedule PD? Is there some technical difference that would not require these loans to be reported as nonaccrual since management uses a reserve instead of placing the loan on nonaccrual on their loan system? SUBJECT: Definition of Nonaccrual Status
Lines: Schedule PD
Date: September 10, 2001
Answer: If interest on a loan is accrued and in the same reporting period the interest is reversed on the income statement by establishment of a reserve, the loan is in nonaccrual status. If a portion of the interest remains on the income statement after establishment of the reserve, then the institution could consider the loan still in accrual status. It does not matter whether they no longer accrue or if they accrue and reverse the accrual; either way they are not reporting income from the loan. If they are not reporting income from the loan, the loan is in nonaccrual status.
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Question: The TB72a, "Interagency Guidance on High Loan-to-value Residential Real Estate Lending" states that loans that are to be sold promptly (defined as 90 days from origination), without recourse, to a financially responsible third party may be excluded from supervisory LTV limits. Do these loans need to be reported on Schedule LD if they equal or exceed 90% LTV? SUBJECT: High LTV Loans Originated for Sale
Lines: Schedule LD
Date: September 10, 2001 (Revised October 25, 2001)
Answer: Thrift Bulletin 72a states:
"As set forth in the Interagency High LTV Statement, the Agencies will generally determine that when a lender sells a newly originated loan within 90 days, it has demonstrated its intent to sell the loan 'promptly' after origination. Conversely, when a lender holds a loan for more than 90 days, an institution has not demonstrated the intent to sell 'promptly.'"
"The Guidelines state that loans that are to be sold promptly after origination, without recourse, to a financially responsible third party may be excluded from supervisory LTV limits."
Therefore, if these loans have been originated for sale without recourse within 90 days of origination and you have a history of selling loans within 90 days of origination, you are not required to include these loans in Schedule LD. However, any uninsured, high LTV loans originated for sale that are more than 90 days old on the TFR reporting date, must be reported on Schedule LD.
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SUBJECT: High LTV Purchases
Lines: LD410, LD420
Date: September 10, 2001
Question: For Purchases (LD 410 and 420) the instructions read: "Report the cost of all high LTV loans...purchased from other entities." What is included in the definition of "cost"?
Also, are purchases reported one time only, not cumulatively, or the total value of purchased loans or pools carried by an institution?
Answer: The cost is the institution's cost to acquire the loans. This would include adjustments for the discount, premium, etc. Purchases are reported for the quarter only; they are not cumulative.
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SUBJECT: High LTV Sales
Lines: LD450, LD460
Date: September 10, 2001
Question: When reporting loan data where the loans have been sold, does this mean sold servicing released, sold on the secondary market, or both?
Answer: Sold means any type of sale or other disbursement (other than a charge-off) that removes the loan from the balance sheet, even if servicing or a residual is retained.
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SUBJECT: Small Business Loans Secured by Personal Residence
Lines: Schedule LD
Date: September 10, 2001
Question: We have commercial loans that have 1-4 family residential properties as collateral. They have no other collateral. The loans are for small businesses collateralized with their home. Should these loans be considered mortgages for purposes of Schedule LD?
Answer: In schedule SC they may be reported either as single-family mortgages or as secured commercial loans on SC300. However, because 1-4 dwelling units secure these loans, they must be reported on Schedule LD if the LTV of all loans secured by the property equals 90% or more.
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SUBJECT: Liquidity in QTL
Lines: SI581, 582 and 583
Date: September 10, 2001
Question: Line 4 of the QTL worksheet is for Regulatory Liquidity. Since OTS rescinded the regulation for regulatory liquidity, should we disregard this line in the QTL calculation?
Answer: OTS is in the process of revising the QTL worksheet. Line 4 will be recaptioned: Liquidity (cash and marketable securities). The calculation of line 4 is based on the lesser of the thrift's liquid assets or 20% of total assets. We define liquid assets as cash plus marketable securities excluding mortgage-backed securities included on line 12 of the worksheet.
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SUBJECT: CCR - Reporting GNMA Mutual Funds
Lines: CCR302, CCR405, CCR450
Date: September 10, 2001
Question: A bank holds $16 million in a mutual fund that is secured by 80% GNMA securities and 20% Treasuries. The investment is available for sale, with a SFAS No. 115 unrealized gain of $300 thousand reported on CCR302. The mutual funds are risk weighted on line CCR40, 0% risk weighting, along with other GNMA securities held. Is this reporting correct?
Answer: Mutual funds, regardless of the portfolio of the fund, may be included with equity securities in determining the amount of the unrealized gain to report in supplemental capital on CCR302. However, mutual funds may not be risk weighted at less than 20%, including those invested in GNMA and Treasury securities. The mutual fund should be reported on CCR450 in 20% risk weight.
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SUBJECT: Combined Loan to Value with New Appraisal
Line: CCR460
Date: September 10, 2001
Question: How would an institution report the combined carrying value when there is a disparity in the appraisal amount on the two loans being combined? For example, a first lien was written for $100,000 five years ago on a property appraised at 150,000. Its outstanding balance is now $90,000. A second lien is written for $50,000 and the new appraisal amount is $200,000.
The combined carrying value is now 140,000, which is less than 80% of the value at the origination of the junior lien, but exceeds 80% of the value at origination of the first lien.
Answer: In general, you should use the more current appraisal in this type of situation. However, the appraisal must meet your institution's own appraisal standards and the appraisal standards of OTS regulations. Appraisals are subject to review by OTS examiners.
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SUBJECT: Matured CDs in CMR
Line: CMR771
Date: September 10, 2001
Question: Where should we report CDs that have matured, but have not yet been rolled over in Schedule CMR? They earn no interest.
Answer: You should report them temporarily with demand deposits on CMR771.
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SUBJECT: Recalculation of LTV
Line: Schedule LD
Date: December 3, 2001 (Revised May 29, 2003)
Question 1: Are we required to continuously recalculate the LTV based upon current loan balance so that one quarter a loan may be 100 or greater and the next it is 90-99% LTV depending upon the balance at the end of the quarter, or does it stay in one category for life until paid off?
Answer 1: You are not required to recalculate LTV unless the loan is negatively amortizing. However, it may be to your advantage to recalculate when you project the loan might no longer be a high LTV loan. You may move the loan to a lower category as the balance of the loan decreases. If you do not wish to go through the expense of recalculating the LTV, you may continue to report it as a high LTV loan.
Question 2: If we hold a second mortgage where another institution holds the first lien, the LTV calculation only includes the original first mortgage balance at time the second was taken. Do we need get updates from the other institution on what the balance of the first mortgage is each quarter-end for our LTV calculation?
Answer 2: Generally no, you are not required to get the balance of the first mortgage each quarter. You need the balance of the senior mortgage held by another institution only if you wish to recalculate LTV. For example, if the LTV at origination is 98%, it may take some time before the loan falls below 90% with normal amortization. Therefore, you may want to update the balance of the senior lien for LTV calculation only when you project the combined LTV will be below 90%. You are not required to recalculate LTV quarterly unless either the senior or junior liens permit negative amortization and you have reason to believe one of these loans is negatively amortizing and could potentially put the LTV above 90 percent.
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SUBJECT: Construction Loans
Line: Schedule LD
Date: December 3, 2001
Question: Should we include construction loans on 1-4 dwelling unit properties in Schedule LD?
Answer: Yes. You should include all loans, both permanent and construction, secured by 1-4 family residential properties in Schedule LD if they meet the requirements for reporting.
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SUBJECT: Construction Loans - Insured or Government Guarantee
Line: Schedule LD
Date: December 3, 2001
Question: Please further define "insured" and "government guarantee" as they relate to FHA/VA underwritten, closed construction loans that are under construction at the reporting date. These loans have not converted to permanent loans. They will not be submitted for final insurance from FHA or VA until rolled over to a permanent loan.
The same scenario applies to conventional construction loans, where as the loan has been underwritten and approved for PMI. The final insurance certificate is effective when the loan rolls over to a permanent end loan.
Answer: Yes. If the loans are not FHA/VA insured and do not have PMI at the date of the report because they have not yet met insurance standards (such as completion of construction and conversion to a permanent loan) and their LTV is 90% or more, they must be included in Schedule LD. They should be included in the balances outstanding, and if originated, purchased, and/or sold during the quarter, they must be reported on the corresponding activity lines. See also Q&A; No. 153 for qualifying loans pending FHA/VA insurance.
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SUBJECT: FHA/VA Insurance Pending
Line: Schedule LD
Date: December 3, 2001
Question: We originate permanent FHA/VA loans that exceed 90% LTV. However, at the date of the TFR although all papers have been filed, we may not have received the insurance certificate. Should we include these on Schedule LD?
Answer: If the institution has a history of obtaining FHA/VA approval and fully expects to obtain it for the pending loans, the loans do not have to be included in Schedule LD. See also Q&A; No. 152.
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SUBJECT: Private Mortgage Guarantee
Line: Schedule LD
Date: December 3, 2001
Question: We have several loans where we have a private party guarantee the portion of the loan exceeding 80%. Do these loans have to be reported on Schedule LD?
Answer: Yes, if the loans have an LTV of 90% or more, they are still high LTV loans, and must be reported on schedule LD.
We only accept guarantees from federal government agencies and only certain PMI policies from established PMI insurance companies. Generally, we will recognize only those insurance companies whose PMI insurance is accepted by Fannie Mae or Freddie Mac.
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SUBJECT: Commercial Loans Secured by Deposits
Line: SC300, SC310
Date: December 3, 2001
Question: We have a commercial loan that is secured by a certificate of deposit. Should we report the loan on the TFR as a secured commercial loan on SC300 or elsewhere?
Answer: For the purposes of compliance with HOLA, you can designate the loan as either a secured commercial loan or a loan on deposits, to the extent that it is fully secured by the deposit and you have a lien or a pledge on the deposit securing the loan. Any amount that is unsecured must be designated as an unsecured commercial loan.
For purposes of the TFR, you may report the loan as either a loan on deposit or a commercial loan, but do not split up the loan. If the loan is fully secured by the deposit, you may report it on SC310, Loans on Deposits, or on SC300, Secured Commercial Loans. Otherwise it should be reported on SC303, Unsecured Commercial Loans.
If you want to be able to include this loan in Schedule SB, Small Business Loans, you must report it as a commercial loan on either SC300 or SC303.
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SUBJECT: Small Business Loan Limit for QTL
Line: SI581, 582 and 583
Date: March 20, 2002
Question: According to an OTS release from Thursday, December 20, 2001 on the Internet at http://www.ots.treas.gov/docs/r.cfm?77187.html, OTS has raised the dollar limit in the definition of small business loans under (HOLA) from $1 million to $2 million. For purposes of reporting the Qualified Thrift Lender Test on TFR Schedule SI lines SI581 through SI583, should we now consider "Small Business Loans" as commercial loans that are $2 million or less?
Answer: Yes, for QTL purposes, small business loans are now $2 million or less. However, the definition of small business loans in Schedule SB will remain unchanged from previous periods.
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SUBJECT: Purchases Subordinated Securities
Line: Schedules SC, CC, and CCR
Date: March 20, 2002
Question: We recently purchased a $200 subordinated "second loss" mortgage-backed security. Our security is part of a $1,000 security structure, along with a $700 senior security and a $100 "first loss" position, both which are owned by unaffiliated third parties. With respect to risk-based capital, the $200 subordinated security is rated "BB" under the specific criteria of the ratings-based approach in 12 CFR part 567. The security qualifies for the ratings-based approach pursuant to 12 CFR Part 567.6, and the 200% risk-weight applies. How do we report amounts related to the security on the TFR?
Answer: An instrument such as this provides credit enhancement to other instruments, and is subject to specialized regulatory capital treatment. Therefore, in addition to reporting on Schedule SC, you should report amounts related to this instrument on Schedules CC, SI, and CCR, as follows.
Schedule SC
You should report the $200 subordinated security on line SC150, "Mortgage Derivative Securities".
Schedule CC
You should report the $200 subordinated security on line CC465, "Amount of Direct Credit Substitutes on Assets in CC455". In addition, you should report $900 ($200 + $700) on line CC455, "Total Principal Amount of Off-Balance-Sheet Assets Covered by Recourse Obligations or Direct Credit Substitutes".
Schedule SI
You should report the $200 subordinated security on line SI404.
Schedule CCR
You should report $400 ($200 x 2) for the $200 subordinated security on line CCR505, "100% Risk-Weight: All Other Assets", to reflect a risk-weighting of 200%.
SUBJECT: Residual Interests
Line: Schedules SC, CC, SI and CCR
Date: March 20, 2002
Question: We own a $100 nonsecuritized residual interest in the form of a credit-enhancing interest-only strip, as defined in 12 CFR Part 567.1. We recently acquired the residual interest in connection with the origination and securitization of a $1,000 pool of mortgage loans. All of the other beneficial interests in the securitized loans were sold to investors. In addition, we service the $1,000 in loans for the investors. Our Tier 1 capital, prior to any adjustment for this instrument, is $300. As a result, the $100 credit-enhancing interest-only strip exceeds 25% of Tier 1 capital of $75 ($300 x 25%). So, for Tier 1 leverage (core) capital, pursuant to 12 CFR Part 567.12, we must deduct $25 ($100 - $75). In addition, for risk-based capital, pursuant to 12 CFR Part 567.6, we must deduct or otherwise adjust for the remaining $75 ($100 - $25). How do we report amounts related to the residual interest in the TFR?
Answer: An instrument such as this provides credit enhancement to other instruments, is related to an obligation to service loans for others, and is subject to specialized regulatory capital treatment. Therefore, in addition to reporting the residual on your balance sheet on Schedule SC, you should report this instrument on Schedules CC, SI, and CCR, as follows:
Schedule SC, Statement of Condition
You should report the $100 interest-only strip on line SC655, "Interest-Only Strip Receivables and Certain Other Instruments".
Schedule CC, Commitments and Contingencies
You should report the $100 interest-only strip on line CC468, "Amount of Recourse Obligations on Assets in CC455". In addition, you should report $1,000 on line CC455, "Total Principal Amount of Off-Balance-Sheet Assets Covered by Recourse Obligations or Direct Credit Substitutes".
Schedule SI, Supplemental Information
You should report $1,000 on line SI390, "Loans Serviced for Others". (Note: The full $1,000 security is reported as loans serviced for others. See Item 2 in the instructions for SI390.) Also, you should report the $100 interest-only strip on line SI402, "Residual Interests in the Form of Interest-Only Strips".
Schedule CCR, Consolidated Capital Requirement
For Tier 1 leverage (core) capital purposes, you should report $25 (net of any corresponding deferred tax liability) of the interest-only strip on line CCR133, "Disallowed Servicing Assets, Disallowed Deferred Tax Assets, Disallowed Residual Interests, and Other Disallowed Assets". The $25 reported here represents a deduction for Tier 1 capital. Also, you should report $25 of the interest-only strip on line CCR170, "Disallowed Servicing Assets, Disallowed Deferred Tax Assets, Disallowed Residual Interests, and Other Disallowed Assets". The $25 reported here represents a deduction for adjusted total assets (the denominator in the Tier 1 leverage (core) ratio).
In addition, for risk-based capital purposes, you may elect one of the following methods:
- Under the "simplified" method, you should report $75 (net of any corresponding deferred tax liability) of the interest-only strip on line CCR375, "Deduction for Low-Level Recourse and Residual Interests". Under this method, CCR64, "Assets to Risk Weight," will not include any amount related to this residual interest. The $75 reported on CCR375 represents a deduction for Tier 1 risk-based and total risk-based capital (the numerators in the risk-based capital ratios), in addition to the $25 deduction reflected on line CCR133.
- If you elect the "super risk-weight" method, you should report $75 (net of any corresponding deferred tax liability) of the interest-only strip on line CCR605, "Amount of Low-Level Recourse and Residual Interests Before Risk-Weighting". On line CCR62, "Risk-Weighted Assets for Low-Level Recourse and Residual Interests", the electronic filing software will compute $938 ($75 x 12.5). The $938 reported here represents an adjustment for risk-weighted assets (the denominator in the risk-based capital ratios), in addition to the $25 deduction reflected on line CCR133.
SUBJECT: Loans Held For Sale
Line: Schedules SC
Date: March 20, 2002
Question: We recently decided to sell certain mortgage loans 1) that were not originated or otherwise acquired with the intent to sell, and 2) where the fair value has declined below the recorded investment, due to a decline in credit quality. At the time of transfer into the held-for-sale (HFS) account, we reduced the carrying amount of the loans to fair value. Consistent with the March 2001 "Interagency Guidance on Certain Loans Held for Sale" (TR-240), we reflected this reduction as a write-down of the recorded investment, with a corresponding reduction in the allowance for loan and lease losses (ALLL). Accordingly, line SC283, Allowance for Loan and Lease Losses on Mortgage Loans, does not include any amount related to these HFS loans. However, this treatment appears to be inconsistent with the guidance in the December 2001 AICPA Statement of Position 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others". Paragraph 8.c. of SOP 01-6 appears to prohibit a write-down prior to the transfer to the HFS account. Is the required treatment for TFR purposes consistent with generally accepted accounting principles (GAAP)?
Answer: Yes. We believe that the required treatment for TFR purposes spelled out clearly in TR-240 is consistent with GAAP. However, we acknowledge that the language in paragraph 8.c. of SOP 01-6 could be interpreted to prohibit the treatment required by TR-240 referred to above. Paragraph 8.c. of the SOP reads: "At the time of the transfer [of the loans] into the held-for-sale classification, any amount by which cost exceeds fair value should be accounted for as a valuation allowance." It is unfortunate that the words "valuation allowance" were used in the statement quoted above from the SOP, rather than the words "reduction in carrying amount". Most GAAP authoritative pronouncements regarding credit loss allowances on loans do not address the timing of write-downs or charge-offs. Unfortunately, the SOP appears to do just that. However, as a result of our discussions with certain AICPA representatives, we understand the following: 1) the statement quoted above from the SOP was not intended to prohibit or prescribe write-downs of the recorded investment (resulting in a new cost basis), prior to the transfer into the held-for-sale classification; and 2) this clarification will be included in the AICPA's revised industry accounting and auditing guide that applies to savings associations (and various other forms of financial institutions). Accordingly, follow the guidance in TR-240.
SUBJECT: Servicing Escrows
Line: SC783
Date: March 20, 2002
Question: We have demand deposit accounts for tax and insurance escrows and principal and interest custodial accounts that we hold for loans that are serviced by our parent holding company. Should these be reported as deposits or as escrows?
Answer: Because it is your holding company and not the institution itself that has the escrow agreement with the owners of the loans, these accounts should be reported on your balance sheet as deposits. Escrows reported on SC783 should be accounts where the institution is a party to the escrow agreement.
SUBJECT: Qualifying Multifamily Residential Mortgage Loans - Maturity Requirement
Line: CCR465
Date: March 20, 2002
Question: CCR465, 50% Risk Weight of Qualifying Multifamily Residential Mortgage Loans, requires that loans meet all seven of the criteria listed in our TFR instruction manual. Criteria #2 is "Original minimum maturity for repayment of principal on the loan is not less than seven years." Would a loan with a 5 year balloon loan and a 20 year period to full amortization qualify?
Answer: This multifamily residential mortgage loan would not meet the criteria to qualify for 50% risk weighting. The criteria track a federal statute and are very specific as to minimum term.
SUBJECT: Qualifying Multifamily Residential Mortgage Loans - Payment History
Line: CCR465
Date: March 20, 2002
Question: Re: 12 CFR 567.1, Qualifying multifamily mortgage loan.(1)(iii) "When considering the loan for placement in a lower risk-weight category, all principal and interest payments have been made on a timely basis in accordance with its terms for the preceding year;. . ."
We would appreciate your guidance in regard to whether or not loans that have been on the books less than twelve months, and paid timely, also qualify for the 50% risk-weight.
Answer: We generally look for one year of history because this is in keeping with the statute.
SUBJECT: Investments in Nonoperating Entities
Line: Schedule CMR
Date: March 20, 2002
Question: We recently made an investment in an SBIC (small business investment company). We report it with other investments on Schedule SC, line SC185. How should I report it on CMR? If it is considered a security, then I have to provide a rate and a WAM. However, the SBIC was just created and has not made any loans. We will share on a pro-rata basis in the gains/losses, once the SBIC is up and running. But at this time a yield is indeterminable.
Answer: You may report the SBIC as an other asset (CMR543 - Misc I) until the SBIC is up and going.
SUBJECT: Qualifying Single Family Residential Mortgage Loans
Line(S): CCR460
Date: June 10, 2002
Question: On 5/10/02, a final rule was published in the Federal Register that removed the 80% LTV limit for Qualifying Mortgage Loans. The new definition of Qualifying Mortgage Loans in 12 CFR part 567.1 lists several criteria, including prudent underwriting, relating to the LTV ratio (See the Interagency Real Estate Lending Guidelines at 12 CFR 560.101.)
Would loans with LTV ratios over 90% still qualify for 50% risk weight as long as they conform to the underwriting standards found in the Interagency Guidelines for Real Estate Lending?
Answer: The Real Estate Lending Guidelines urge savings associations as well as other types of banking organizations, to require appropriate credit enhancement if a mortgage exceeds 90% LTV. See 12 CFR 560.101, and the footnote in the section on supervisory loan-to-value limits. While not prescribed by regulation, these guidelines constitute a supervisory presumption of safety and soundness. To overcome that presumption a bank or thrift must demonstrate to the examiners' satisfaction that a loan over 90% LTV is both prudently underwritten, and that it qualifies for the 50% risk weight in spite of the absence of private mortgage insurance or other appropriate credit enhancement. Such a loan would not typically qualify for the 50% risk weight.
SUBJECT: Recourse Rule - 120-Day Exception
Lines(S): Schedule CCR
Date: June 10, 2002
Question: How does the November 2001 Recourse Capital Rule apply to 1-4 family loan sales? And what is the 120-day exception?
Answer: In general, Recourse involves selling assets where:
- You agree to buy the assets back if there is a problem
- You sell the assets with credit-enhancing representations and warranties that reduce credit risk for the purchaser while retaining credit risk for the seller
- You retain servicing and you have an agreement to absorb or otherwise be responsible for losses on the assets you service (with the exception of Servicer Cash Advances as defined)
- You retain a subordinate interest in the assets you have sold
In a simple example where you have sold 1-4 family loans with recourse, you would have to multiply the full amount of the assets you have sold by a 100% conversion factor, effectively bringing them back on your balance sheet for risk-based capital purposes. (See 567.6 for complete detail.)
The 120-day exception allows a contract period during which qualifying single-family mortgage loans may be returned to the seller, without the selling institution having to treat the loan sale as a recourse sale. The return period stipulated in the contract must not exceed 120 days. A sale that allows a return period of 180 days is a recourse sale immediately from the first day. Therefore if you wish to take advantage of the exception, it is important that your contract return periods do not exceed 120 days. The 120-day exception applies only to 1-4 family loans originated within one year prior to the sale. The loans must meet the criteria for 50% risk weight according to the definition of "qualifying mortgage loan."
Refer to the definition of Recourse in 12 CFR 567.1 for a more detailed description. In section 567.1 you will also find the definitions of "credit-enhancing representations and warranties," "qualifying mortgage loan", and "servicer cash advance."
SUBJECT: Commercial Loans Secured By GNMA Securities
Line: SC300, CCR450, CMR325
Date: June 10, 2002
Question : We have a commercial loan that is 105% secured by GNMA securities. When I read the TFR instructions my interpretation is this loan should be reported on SC300 Secured Commercial Loans. On Schedule CCR I am interpreting that this loan should be reported on CCR405, Securities Backed by Full Faith and Credit of US Government, since the collateral is GNMA securities. On CMR I will record it on CMR325.
Answer 1: SC: Yes, you are correct, the loan should be reported on SC300, Secured Commercial Loans, as long as the loan is fully secured.
Answer 2: 	CCR: The capital regulations include in the 20% risk weight category, "That portion of assets collateralized by the current market value of securities issued or guaranteed by the United States government or its agencies...". You should report an asset fully collateralized by GNMAs on CCR 450, "Other 20% Risk Weight Assets". This treatment only applies to assets issued or guaranteed by the United States government or its agencies and does not apply if the collateral is FNMA or FHLMC securities.
We recommend that you monitor the value of the collateral and require the borrower to provide additional collateral should the value of the securities fall or the loan balance increase. To the extent the loan is not fully collateralized by the by the securities, the remainder of the asset would not be 20% risk weighted. It would be risk weighted as an unsecured commercial loan at 100% on CCR505.
Answer 3: 	CMR: You are correct. This loan should be reported on CMR325 or CMR326, depending on whether it is fixed-rate or adjustable-rate.
SUBJECT: Loan Classification
LINE(S): Schedule SC
DATE: June 10, 2002
Question: We have both consumer and business loans that are secured by real estate with both a first and second lien. We do not have information available concerning the use of the proceeds of the loan and we do not always get an appraisal (particularly for consumer loans). We look at a recent tax assessment to value the property and to determine the loanable amount. The loan-to-value would be no greater than 80%. Should we classify these loans as mortgage loans?
Answer: It depends on the size of the loan. If the loan is $250,000 or more, a tax assessment generally would not be sufficient. If the loan is under $250,000, you may use an evaluation pursuant to TB 55a, in which the property's value is determined by market information, including property tax assessments. However, someone in your institution needs to make a determination of the assessment, determine the condition of the property and whether it accurately reflects market value, and then sign and date the evaluation report. You may want to review TB55a, Interagency Appraisal and Evaluation Guidelines, at http://www.ots.treas.gov/docs/84042.pdf and it might be advisable for you to contact your OTS examiner to assist you in determining the classification of your loans.
SUBJECT: Adjustments To Loan Documentation Subsequent To Origination
LINE(S): Schedule LD
DATE: June 10, 2002
Question: On Schedule LD, if subsequent to origination, but before the reporting date, a correction or amendment is posted to a loan, should we report the loan net of this adjustment, such as PMI added to the loan or a correction of appraisal or purchase price that was entered incorrectly?
Answer: Yes, you should include corrections and amendments such as the ones you have listed when calculating LTV and report only loans without PMI or government guarantee where the current balance of the loan is equal to or greater than 90% LTV. See also Q&A; No. 126.
SUBJECT: QTL Test - Mortgages Originated And Sold
LINE(S): SI581, SI582, SI583
DATE: June 10, 2002
Question: Please clarify QTL line 20 - 50% of Residential Mortgage loans originated and sold within 90 days. Regarding "originated and sold," must the term "originated" be narrowly interpreted, or can it also include loans purchased?
Answer: The QTL worksheet instructions for that line item read:
"Enter 50% of loans on domestic residential housing that the association originated and sold within 90 days of origination, provided that the association sold these mortgage loans during the quarter for which this calculation is being made."
Loan originations could include loans purchased as long as the purchasing institution's name appears on the mortgage documents. That is, where the residential mortgage loans are originated by another entity in the name of the reporting institution and then purchased or transferred to the reporting institution they may be considered originated by the reporting institution.
SUBJECT: Credit Life Insurance On Consumer Loans
LINE(S): CMR513
DATE: June 10, 2002
Question: We have consumer loans on which we sell credit life insurance up front; this insurance is added to the principal balance and amortized over the life of the loan. Are we supposed to report these loans NET of this unearned insurance on CMR? If not, where is the unearned insurance amount reported?
Answer: You should report these loans net of the unearned insurance on Schedule SC, but on Schedule CMR, you should report the unamortized amount of the insurance on CMR513.
SUBJECT: Definition Of Outstanding Balance
LINE(S): Schedule CMR
DATE: June 10, 2002
Question 1: Does "Outstanding Balance" in CMR (pg 1602) mean the same thing as "Recorded Balance" in SC (pg. 208)? Schedule SC has 11 items by which the principal balance must be adjusted for, but CMR instructions just say "outstanding balance". Should balances on SC and CMR be calculated in the same manner?
Answer 1: "Outstanding Balance" for Schedule CMR is defined on page 1602 as: "the principal balance, net of LIP and before any yield adjustments or deductions for valuation allowances." In most cases, outstanding balance as reported in Schedule CMR is face value less charge-offs." Therefore "outstanding balance" in CMR is not the same as "recorded balance" in SC because outstanding balances in CMR are not adjusted for yield adjustments or specific valuation allowances. In Schedule CMR yield adjustments are reported on CMR504 and CMR513, and specific and general valuation allowances are reported on CMR507 and CMR516.
Question 2: Does an "outstanding balance" for CMR include late charges that have not yet been paid and finance charges (interest) that have been billed but not paid? For that matter, should the "outstanding balance" include any fees that are outstanding or should these unpaid fees be netted from the principal balance for CMR purposes? Also in the case of Mortgage Loans that capitalize interest, should this capitalized interest be netted from the principal balance on SC or CMR?
Answer 2: The outstanding balance reported in CMR should include late charges and interest only if they are capitalized to the loan. That is, if the loan contract permits late charges and unpaid interest to accrue to principal and permits the accrual of interest after the addition of these charges, then they become part of the principal balance that would be reported as outstanding balance. However, in most cases late charges, unpaid interest, and other fees do not become part of the principal balance unless the loan is restructured. Late charges, accrued interest, and other fees that are not part of the principal balance are reported on CMR502 and CMR512. In Schedule SC you can report accrued interest and other fees either with the loan balance or separately on SC272, Accrued Interest Receivable. Only interest for which collection is probable should be accrued.
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SUBJECT: Construction Mezzanine (Bridge) Loans
LINE(S): Schedules CMR And SC
DATE: June 10, 2002
Question: Can you please advise as to whether SC250 is the correct place to put the following loans and also let me know where they should go on CMR?
Here are the details of the loans:
The builder sells the model homes to an investor with whom we have a loan. The loans are on single-family model homes in developments throughout our lending area. The loans are fully secured by the model home and its contents. The loans have maturities between 6 and 18 months, with an extension provision. They are interest-only, fixed-rate loans.
Answer: If the loans require a new loan contract once the houses are sold to individuals, these loans are mezzanine construction loans and should be reported as construction loans on SC230 and in CMR.
If there are separate loans for each residence and if the loans automatically roll over to permanent loans after the units are sold to individuals, they could be reported as permanent mortgages on 1-4 dwelling units on SC250. In CMR they should be reported as fixed-rate, single-family balloon mortgages until they transfer to the individual and begin amortization.
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SUBJECT: New Accounts-Name Change
LINE(S): Schedule CMR
DATE: June 10, 2002
Question 1: If an account is held in a joint tenancy and one of the joint owners passes away, we remove the decedent from the account without any modification to the rate, type, term, balance, or maturity date of the account. Does this constitute a new account?
Answer 1: Yes, it would be considered a new account.
Question 2: Would an ownership change to the individual (beneficiary) who may have assumed the funds as a result of an owner's death be a new account?
Answer 2: Yes, as would an ownership change mandated by a divorce or lawsuit.
Question 3: In determining whether there was a matured CD during the quarter that rolled over into a new CD, do we need to look for matches for all owners on both the new and matured CD's?
Answer 3: Yes you need to look at all owners. If the ownership is not exactly the same, the certificate would be considered new.
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SUBJECT: New Accounts-Acquisitions
LINE(S): Schedule CMR
DATE: June 10, 2002
Question: Are deposits acquired via Bank acquisitions reported as new deposits?
Answer: Yes, deposits acquired as part of an acquisition are considered new deposits.
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SUBJECT: New Accounts-Maturity
LINE(S): Schedule CMR
DATE: June 10, 2002
Question 1: Does the term "Original Maturity" refer to the original maturity of the opening of the account, or most recent maturity date from most recent term. For example: Mary Smith opened her first CD with the Bank on January 23, 1985 for a one-year term. At it's maturity, her account was rolled over and continued to be rolled over each year for the same term. Her most recent maturity date was January 23, 2002. Which maturity date is considered the 'original maturity date' for CMR calculation purposes
Answer 1: The original maturity is the maturity of the most recent (current) account, January 23, 2002.
Question 2: Many customers have multiple certificates and in some cases they could come due simultaneously. Which one do you use to compare to any new CD's opened during that quarter?
Answer 2: We prefer that you use the maturing CD with the longest term, thus you would be reporting the fewest new accounts.
Question 3: In the case of a nonrenewable CD, is a rollover of the funds to another CD automatically "new" or do we still look at the term of the maturing CD compared to that of the new CD?
Answer 3: You should look at the term of the maturing CD compared to the new CD, regardless of whether the CD was renewable or nonrenewable.
Question 4: If a customer has a 6-month CD that matures and is rolled over for the same term (6 months) during the quarter and this same customer comes in and opens a new 3-month CD during the quarter, would we report nothing as "New", because there was no change in the maturity bucket for this customer.
Answer 4: Yes, you are correct; the example you gave would not be a new account.
Question 5: If a customer opened a 3-month CD during the quarter and rolled over another CD from a 24-month term to a 6-month term during the same quarter, would there be no "new" account, because both terms now fall under the 0-12 month category and one of the accounts is not new? Or would the 6-month CD be considered new this quarter, because the renewed CD had an original term of 24 months? Or would both CDs be new because one is actually new, and the other changed from 13-36 months to less than 13 months (a change in maturity bucket).
Answer 5: In a rollover, any change in maturity bucket would be considered a new account, if the account holder did not previously hold a CD of that maturity bucket. Therefore, both of these accounts would be "new" accounts.
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SUBJECT: Definitions Of Withdrawals
LINE(S): Schedule CMR
DATE: June 10, 2002
Question 1: Is the criterion for "withdrawals" those where the CD holders were actually penalized during the quarter or is it all withdrawals on CDs (including the ones with waived penalties) during the quarter?
Answer 1: The criterion is withdrawals during the quarter where contract stated that the customer would incur a penalty and the customer withdrew prematurely knowing (or should have known) that they would incur a penalty.
Question 2: Assume a customer has a $10,000 5-year CD. The CD is scheduled to mature on December 31, 2006. On January 1, 2003, the customer withdraws $2,000.00. The bank imposes an early withdrawal penalty but allows the remaining $8,000 balance to continue to maturity. What should be reported on CMR 604, 618, 633, & 642 for the March 2003 quarter - $2,000 or $10,000?
Answer 2: $2,000
Question 3: Same as Question 2 above except that the bank imposes an early withdrawal penalty and closes the CD. What should be reported on CMR 604, 618, 633, & 642 for the March 2003 quarter?
Answer 3: $10,000
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SUBJECT: Checking Account Sweeps
LINE(S): SC730
DATE: September 5, 2002
Question: We offer a sweep account for commercial checking accounts. The entire amount of the account is swept into a repo with a higher rate at night. The customer is informed that the entire amount is not insured. Should this amount be reported on SC730?
Answer: If the sweep occurs before close of business, the customer's funds that are removed from the deposit account are not insured and should be reported on SC730. If the sweep occurs after close of business, all of the customer's funds remain in deposits.
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SUBJECT: Suspected Terrorists Deposits
LINE(S): SC710, Deposits
DATE: September 5, 2002
Question: Do financial institutions continue to report deposits that belong to a suspected terrorist and have been seized by the financial institution on SC710?
Answer: As long as there is no reason to believe that the institution itself will ultimately be the owner of the funds, they would continue to report the deposits on SC710 of the TFR.
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SUBJECT: Loans Past Maturity
LINE(S): Schedule PD
DATE: September 5, 2002
Question: We have a portfolio of construction loans that require interest-only payments due monthly with the principal due at maturity. Some of these loans are past their maturity date. The borrowers have continued to pay the contractual monthly interest payments. Should these loans be excluded from Schedule PD?
Answer: If management has restructured or extended a loan - formally or informally, then the loan would not be past due. An informal extension (not the same as a restructuring) is when the bank has agreed to accept interest payments until the property is rented or sold. The extension should be for a limited and reasonable length of time and the bank should get the extension in writing. From the borrower's perspective, if he is doing what the bank has told him, the loan is not in default and does not have to be reported in Schedule PD.
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SUBJECT: LTV Calculation - Credit Life Insurance
LINE(S): Schedule LD
DATE: September 5, 2002
Question: When calculating high loan-to-value on a junior lien that has credit life or accident insurance, should I include the premium of the policy in the loan principal amount?
Answer: Yes. The life insurance is part of the recorded investment in the loan and should be included in calculating LTV.
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SUBJECT: Loan Commitments
LINE(S): Schedule CC
DATE: September 5, 2002
Question: We have some confusion regarding whether the balance reported as commitments should contain the total loan commitments made to customers as of the reporting date, or if the balance should be reduced by an estimated "fall out" percentage of the loan commitments.
For example, if we have $20 million in outstanding loan commitments and we project a fall out balance of $5 million, should we report the total $20 million, or should we report $15 million on line CC280?
Answer: You should report the entire $20 million on CC280 because that is your commitment. The $15 million is a projection.
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SUBJECT: Retirement Accounts
LINE(S): SI210, IRA/Keogh Accounts
DATE: September 5, 2002
Question: Should SEP and SIM accounts should be included in Line SI210, IRA & KEOGH Deposits?
Answer: Yes, you should include SEP and SIM accounts in SI210. The only retirement accounts we would not want included are 401K accounts and similar plans.
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SUBJECT: Loans to Executive Officers
LINE(S): SI900 - SI930
DATE: September 5, 2002
Question: If a loan is originated to an executive officer and sold 100% without recourse in the same quarter it was originated, should it be reported on SI900 through SI930?
Answer: Yes. It should be included on SI900 through SI930 because these lines collect activity data, not balance sheet data.
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SUBJECT: Trust Preferred Securities
LINE(S): HC520 and HC530
DATE: September 5, 2002
Question: Are Trust Preferred Securities that are reported as Liabilities on HC 300 also included on lines HC520 and HC530 as debt?
Answer: Yes. Trust Preferred Securities, along with other "mezzanine" type securities such as convertible debt securities and redeemable preferred stock should be included as debt on HC520 or HC530, as appropriate. The dividends on these instruments should also be included on HC560, Interest Expense for the Quarter.
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SUBJECT: Intangibles
LINE(S): HC510
DATE: September 5, 2002
Question: I am looking for clarification regarding Schedule HC line 510. The instructions state to include intangible assets and includes as items #6 and #7 computer software costs and loan servicing contracts. The instructions further state that these examples of intangible assets are taken from FASB Statement No. 141. I am unable to find a reference to them in FASB Statement No. 141. Could you please supply a reference?
Answer: You can find the reference in FASB Statement No. 141, Appendix A, paragraph number A14, "Examples of Intangible Assets that Meet the Criteria for Recognition [as Intangible Assets] Apart from Goodwill." Item d.(8) is "Servicing contracts such as mortgage servicing contracts" and item e.(2) is "Computer software and mask works." Paragraph A23 further defines contract-based intangible assets, and paragraph A26 defines computer software and mask works.
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SUBJECT: Minimum Pension Liability
LINE(S): Schedule CCR
DATE: September 5, 2002
Question: We adjusted our minimum pension liability due to the decline in the stock market. We charged the unrealized loss, net of tax, to an equity account. Can you please let me know if and where this belongs on CCR?
Answer: The adjustment for minimum pension liability is one of several items included in accumulated other comprehensive income (AOCI), a separate component of GAAP capital. For TFR purposes, it should be included in SC890. You do not adjust regulatory capital for this amount. Unlike gains and losses on available-for-sale securities and cash flow hedges, this minimum pension liability amount remains in regulatory capital.
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SUBJECT: Offsetting Commitments to Sell and Purchase Securities
LINE(S): Schedule CCR
DATE: September 5, 2002
Question: May firm commitments to sell and to purchase mortgage-backed securities be offset prior to on-balance-sheet conversion?
Answer: There is no specific provision in our capital rule allowing for offset of sales and purchases in this circumstance. It would have to be reviewed on a case-by-case basis by your OTS examiner. However, as with bilateral netting of contracts, the commitments on both sides would have to be with the same counter party, probably with some type of netting contract in place, with the same type of security on both sides of the transaction, and the transaction differing only in amount where one side could be subtracted from the other.
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SUBJECT: CMO Risk Weighting
LINE(S): Schedule CCR
DATE: September 5, 2002
Question: If a private CMO as well as a Fannie Mae or Freddie Mac CMO were AAA rated, would it qualify for 20% risk weighting? Are there any circumstances (other than stripped CMOs and MBS's with recourse) whereby a AAA CMO would not qualify for 20% risk weighting?
Answer: For a private-issue CMO to receive 20% risk weight, it must meet the criteria for 20% risk weight under the ratings-based approach in 12 CFR 567.6(b)(3). Refer to the rule for the specific criteria. In general, the criteria will depend upon whether the CMO is a traded CMO or a nontraded CMO.
- A traded CMO must have a long-term rating by a nationally recognized statistical rating organization (NRSRO) in the highest or second highest investment grade. If rated by two or more NRSROs, you must use the lower rating; and no NRSRO may have rated the CMO worse than one grade below investment grade.
- A nontraded CMO must be rated by more than one NRSRO, and the lower rating must be used. Again, it must be in the highest or second highest investment grade. No NRSRO may have rated the CMO worse than one grade below investment grade.
Refer to the rule for additional criteria.
A Fannie Mae or Freddie Mac CMO would typically be 20% risk weight. There are some exceptions. For example, Fannie and Freddie POs and IOs that are not credit enhancing are risk weighted at 100%. If a Fannie or Freddie CMO were found to, in substance, have IO or PO characteristics, even though not a pure IO or PO, you could also use the 100% risk weight category.
Furthermore, whether a GSE-issued CMO, or a private-issued CMO, OTS reserves the right to look to the substance of the security, and require an appropriate amount of capital for the risk, regardless of how the risk is characterized by others.
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SUBJECT: Derivative Instruments and Hedges
LINE(S): Schedules SC and SO
DATE: December 10, 2002
The following information was included in the December 2000 Financial Reporting Bulletin. We repeat it here to answer many questions we have received concerning reporting derivatives in the TFR.
Schedule SC, Statement of Condition
- You must report all derivative instruments as defined in SFAS No. 133 either as assets or liabilities at fair value, and include them in line SC690, "Other Assets", or line SC796, "Other Liabilities and Deferred Income." Where derivative instruments represent one of the three largest items comprising the total other assets or other liabilities, report them as code 20.
- For a fair value hedge, reflect the effective portion of the accumulated fair value gain or loss on the hedged assets or liabilities as an adjustment to the carrying amount of the hedged assets or liabilities. Most interest-rate sensitive assets and liabilities are "eligible" for a qualifying fair value hedge, including loans, securities, servicing assets, deposits, FHLB advances, and other borrowings.
- For a cash flow hedge, the effective portion of the accumulated fair value gain or loss on the derivative instruments is considered "accumulated other comprehensive income (loss)", which is reported on SC890, "Other components of equity capital".
Schedule SO, Statement of Operations
Report all changes in the fair value of derivative instruments not reflected in the second and third items above, including the ineffective portion of the fair value gain or loss related to fair value and cash flow hedges, as either income or expense. OTS has not taken a position as to where on the income statement such amounts should be reported; that is, as interest income or expense, or noninterest income or expense. Report such amounts on the TFR in a manner consistent with that reflected in the institution's audited financial statements.
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SUBJECT: Overdrawn NOW Accounts
LINE(S): Schedule PD
DATE: December 10, 2002
Question: We include overdrawn NOW accounts in Consumer Loans on SC345. Do we need to report in Schedule PD accounts that have been in overdraft status over 30 days?
Answer: Yes. The overdraft loan is assumed due the date your bank pays the overdraft. If it is now more than 30 days past due, it should be reported in Schedule PD.
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SUBJECT: Loans Sold with Recourse - 120 Day Limited Recourse
LINE(S): CC455, CC468
DATE: December 10, 2002
Question: When we report our loans sold with recourse balance on Schedule CC, should it be adjusted by loans that meet the 120-day exception rule? On Schedule CCR, we can deduct loans that meet the 120-day exception from our loans sold with recourse total.
Answer: No, you cannot reduce loans sold with recourse reported on CC455 by loans for which recourse is limited to 120 days. You should report all recourse in effect as of the end of the quarter in Schedule CC including recourse that is for a limited period. The definition of recourse on Schedule CC does not follow the capital rules. If an institution has recourse liability at the date of the report, they should report the amount of recourse in CC468 and the total amount of the principal on CC455, regardless of how long the recourse lasts.
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SUBJECT: Loans to Executive Officers
LINE(S): SI590, SI900-SI930
DATE: December 10, 2002
Question: If an extension of credit is made to an executive officer that will be sold in the next quarter should we include that loan?
Answer: Yes. The loan should be reported on SI900 - SI930 because these lines collect activity during the quarter. Any loan remaining on the books at close of business at quarter-end should be reported on SI590 - 595, even if it will be sold after quarter-end.
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SUBJECT: LTV - Other Credit Enhancement
LINE(S): CCR460
DATE: December 10, 2002
Question: In the TFR instruction manual for 50% risk weight, for CCR460, it states "report the carrying value...if such loans meet all of the following criteria". Our question concerns 3b: "The extension of credit is insured to at least a 90 percent LTV by private mortgage insurance, or there is other appropriate credit enhancement to bring the effective LTV down to 90 percent or less." Could you please clarify the meaning of "other appropriate credit enhancement" and if possible include some examples?
Answer: The answer to this question may be found in the preamble to the new regulation that raised from 80% to 90% the LTV to get the lower risk weight of 50%. That preamble was published in the Federal Register on May 10, 2002. In pertinent part it says appropriate credit enhancements include PMI and "readily marketable collateral." That term is defined in a footnote as "insured deposits, financial instruments, and bullion in which the lender has a perfected security interest...salable under ordinary circumstances with reasonable promptness at a fair market value...appropriate(ly) discounted".
First key point: None of this is new. It is only reiterated now because we raised the LTV, but it has existed in the Real Estate Lending Guidelines for years (12 CFR 560.101).
Second key point: The overwhelming credit enhancement of choice, because of its acceptance and ease of use, will still be traditional PMI. Any other of these more esoteric credit enhancements will need to pass supervisory muster.
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SUBJECT: Best Effort Commitment
LINE(S): CMR Optional Commitments
DATE: December 10, 2002
Question: Do our best effort commitments, which are commitments to sell the loan at a fixed rate, fixed price, if and only if the loan closes, meet the definition of an optional commitment to sell loans? And thus, should they be included in Schedule CMR, Optional Commitments to Purchase or Sell MBS?
Answer: Yes, the best effort commitments should be reported as optional commitments. The time for expiry (maturity) should be based on the expected time for closing based on your best guess, and the reported notional amount should be based on your best guess as to the percentage of commitments that normally close.
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SUBJECT: Comercial Line of Credit Secured by Real Estate
LINE(S): SC260, SC300
DATE: March 14, 2003
Question: We have a new product, which is a business revolving line of credit fully secured by nonresidential real estate. The line of credit is underwritten as a mortgage loan meeting the requirements of a fully secured mortgage loan.
Should we report this loan on SC260, Nonresidential Mortgage Loan? Or can we elect either SC260 or SC300, Secured Commercial Loan.
Answer: If you have underwritten the loan as a mortgage; that is with an appraisal or evaluation and the LTV when combined with any more senior liens the line of credit can never exceed 100% LTV, you should report it as a nonresidential mortgage loan on SC260. Otherwise the loan should be reported on SC300.
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SUBJECT: Renovation Loans
LINE(S): SC260
DATE: March 14, 2003
Question: Should the following loan be classified as a permanent loan or a construction loan? Facts: Approved a loan of $500 thousand. Of this balance, $150 thousand will be held back and disbursed at a scheduled time. The purpose of the holdback is to make substantial improvements to the property. The payment terms of the loan are interest-only for 24 months, after which time, the entire loan balance is due.
Based on our review of the TFR Instruction Manual, Schedule SC, SC 230, loans to be reported as construction loans include:
Combination construction-permanent loans on 1-4 dwelling units until construction is completed or principal amortization payments begin, whichever comes first.Our interpretation of this guidance is that renovation/rehabilitation does not constitute construction. Is this correct?
Answer: You are correct. Because this is an occupied, existing building, you should classify the loan as a permanent, single-family mortgage, reported on SC250. However, if the estimated cost of repairs exceeded the purchase price, we would have to reevaluate our answer on a case-by-case basis.
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SUBJECT: Charge-Offs on Credit-Card Receivables
LINE(S): VA145, VA155, Va580
DATE: March 14, 2003
Question: During the most recent quarter, we wrote off $1,000 in uncollectable credit card receivables. This amount consisted of $700 in principal and $300 of capitalized finance charges and fees. Therefore, consistent with our accounting policy, 1) the $700 write-off of principal is reported on VA580, Charge-offs of Credit Cards, and 2) interest income on line SO170 has been reduced by $300. Is this correct?
Answer: You must report the full charge-off on credit-card receivables of $1,000 on VA580. However, to permit the reconciliation of valuation allowances to balance, you should report $300 on line VA145, Adjustments, because the $300 reduced interest income and did not reduce valuation allowances. As a result, the net reduction of valuation allowances included in the reconciliation will be $700 ($1,000 - $300).
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SUBJECT: Acquired Troubled Debt Restructured
LINE(S): VA941-VA955
DATE: March 14, 2003
Question: Our institution acquired another institution through a merger. One of the loans acquired from them was a performing TDR loan. At the time of the acquisition, the loan had been performing for more than one year. Therefore, we considered this loan as a performing loan at the time of acquisition, not as a TDR. Is this correct?
Answer: You do not have to report acquired TDR loans as new TDR, since you did not restructure them. However, you should report it in VA941 unless it was restructured at a rate equal to or exceeding the market rate at the time of restructuring and after the first year the borrower is in compliance with the terms of the restructured contract.
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SUBJECT: QTL - Life Insurance
LINE(S): SI581-SI583
DATE: March 14, 2003
Question: Is the cash surrender value of life insurance policies on senior management includable for QTL purposes.
Answer: No. The cash surrender value on life insurance policies on senior management of an institution is not includable for QTL purposes.
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SUBJECT: Insider Loans - Loans to Spouses
LINE(S): SI590
DATE: March 14, 2003
Question: TFR instructions indicate that a related interest is defined by Regulation O as either:
That definition does not include relatives of an executive officer, director, or principal shareholder. Therefore, presumably loans to executive officers’ spouses do not need to be included with Insider Loans on the TFR. Is this a correct interpretation or is it addressed elsewhere?
- A company, other than an insured depository institution or a foreign bank, that is controlled by an executive officer, director, or a principal shareholder.
- A political or campaign committee that is controlled by or the funds or services of which will benefit an executive officer, director, or principal shareholder.
Answer: Although spouses of executive officers are not 'related interests' under Reg O, loans to spouses may be subject to Regulation O under the 'tangible economic benefit' rule (12 CFR 215.3(f)). This rule states: "an extension of credit is considered to be made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider." There is guidance to when such a loan to a spouse would not be covered by 215.3(f):
This guidance is found in a Staff Opinion of the Federal Reserve dated May 23, 1980. Under the Federal Reserve Regulatory Service (FRRS), it can be found as citation FRRS 3-1081.1 [TOP]
- The spouse is creditworthy;
- The proceeds of the loan are not transferred, or used for the direct benefit of, the executive officer; and
- The loan is repaid from the separate income of the spouse.
SUBJECT: CMR - Rounding Remaining Maturities
LINE(S): CMR
DATE: March 14, 2003
Question: When calculating the remaining maturity for the fixed-rate, fixed-maturity deposits section, should the remaining maturities, shown below, be categorized as 4 to 12 months or 13 to 36 months?
Remaining maturity of 12 months 5 days??Remaining maturity of 12 months 15 days??Remaining maturity of 12 months 16 days??Remaining maturity of 12 months 25 days?Currently, if the remaining maturity is 12 months 15 days, we put it in the 13 to 36 month bucket. If the remaining maturity is 12 months 14 days, we put it in the 4 to 12 month bucket.Answer: You are correct. Months should be rounded based on a 30-day month. Round down with fourteen days or less and round up with fifteen or more days.
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SUBJECT: CMR - Definition of Early Withdrawal
LINE(S): Schedule CMR
DATE: March 14, 2003
Question: If we have a $10,000.00 fixed-rate, fixed-maturity CD subject to a penalty for early withdrawal that is automatically renewable and matured on 2-10-03 but was not redeemed until 2-15-03, would the $10,000.00 be reported in one of fields CMR604, CMR618, CMR633 or CMR642? There was a 10 day grace period.
Answer: You do not have to report this CD as an early withdrawal, because it was withdrawn during the grace period and, therefore, would not be subject to a penalty
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SUBJECT: CMR - Mortgage Pipeline
LINE(S): Schedule CMR - Financial Derivatives and Off-Balance-Sheet Derivatives
DATE: March 14, 2003
Question: We have an agreement with a third party for the origination of mortgage loans. At year-end, we will have a pipeline of approved borrowers of $50 million in approved loans. These loans are not on our balance sheet as of year-end.
As soon as a loan funds, we have an agreement with the third party to sell the loan to them in two weeks at par. Therefore, we have no interest rate exposure in the transaction as the funding price and subsequent loan sale price are identical (par). The third party is exposed to interest rate changes between the origination commitment date through to the loan resale date. We earn a fee for each loan that funds. This fee is not impacted in any way by changing interest rates.
Must we report firm commitments to originate mortgages and a commitment to sell the same mortgages?
Answer: No you do not have to report the commitments to originate and commitments to sell the same mortgages, provided you never have any interest rate risk exposure associated with those loans.
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SUBJECT: Mortgages with Additional Collateral
LINE(S): SC260
DATE: June 6, 2003
Question: How would you report (on schedule SC) a loan secured by a nonresidential (doctor’s office) property, when the LTV is 105% with real estate only and a securities account is taken as additional collateral?
The instructions for the category say to only report loans fully secured by real estate in the mortgage category. The loan is supported by an appraisal.
Answer: We consider a 105% LTV mortgage loan with sufficient additional collateral to bring it to a 100% LTV to be "fully secured." Therefore, you may report the entire loan as a mortgage loan.
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SUBJECT: Foreclosed Property During Redemption Period
LINE(S): SC415
DATE: June 6, 2003
Question: After the court has issued a foreclosure judgment, the borrower has a certain time period in which they can reinstate the loan and pay it off. During this redemption period, the borrower can live in the property.
Is the property is considered a "repossessed asset" for TFR reporting at the point in time when (1) the foreclosure judgment is made (even though the borrower can still redeem the loan), (2) after the sheriff's sale (even though in some states the redemption period continues), or (3) after the redemption period has expired and the bank has marketable title.
Answer: You may consider the transfer from loan to repossessed property to occur at the time the judgment is made.
At the time the judgment is made, the bank has control of the property. The borrower's interest in the property is contingent on their reinstating the loan. An exception would be made if it appears likely that the borrower will reinstate the loan. However, if that were the case, the bank would probably not have foreclosed on it.
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SUBJECT: Retail Repurchase Agreements
LINE(S): SC710
DATE: June 6, 2003
Question: I would like to get your input on the classification of retail repurchase agreements on Schedule SC. The OTS examiners are currently reviewing our TFR. Based on Q&A; no. 177, they indicate that the repos should be reported on SC710, Deposits, if the sweep occurs after close of business, or reported on SC730 if the sweep occurs before close of business. In our situation, it appears that the sweep occurs after close of business and therefore, should be reported in deposits on SC710.
However, the sweep account agreements clearly state that the funds are not FDIC insured. Where should the retail repurchase agreements be reported? If they were included in SC710, the repos would be included in our FDIC assessment base.
Answer: The instructions for Schedule SC710 state that SC710 must include ALL deposits (as further described in the instructions). The matter of insurance coverage is a separate issue that does not impact whether or not deposits are subject to assessment or included in your assessment base. Insurance coverage is not necessarily dependent upon an "agreement" with the customer; insurance coverage is determined by the Federal Deposit Insurance Act. Therefore, the sweep account retail repurchase agreements that you described should be reported on SC710, Deposits.
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SUBJECT: Mortgage Loan Commitments
LINE(S): CC280 - CC300
DATE: June 6, 2003
Question: We hold mortgage loans in our pipeline for which we have a legally binding rate lock commitment, but the underlying loans have not yet been approved (i.e., they are in the process of being underwritten). We were required to report these commitments as outstanding commitments in a recent SEC filing because of the legally binding rate lock commitment. Should these commitments be reported on Schedule CC of the TFR as an outstanding commitment?
Answer: Generally you would not need to report these commitments in CC280 through CC300 because the loans have not been approved.
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SUBJECT: Brokered Deposits
LINE(S): SI100-110
DATE: June 6, 2003 (Revised June 30, 2003)
Question: Are deposits from the following two sources considered brokered deposits?
Source 1: The deposit broker initiates the transaction between the bank and the customer; however, the actual transfer of the cash is direct from the customer to the bank. Are these Brokered Deposits?
Source 2. A Consolidated sub of the Bank is a Deposit Broker. This sub originated deposits for the Bank. Fee are paid to the Sub but eliminated through Consolidation. Are these Brokered Deposits?
Answer: Source 1 is a brokered deposit under 12 CFR 337.6. A deposit broker can facilitate the deposits; it doesn't matter if the customer transfers the cash directly to the thrift rather than the broker.
Source 2 is not as clear-cut. Under the statute, an “employee” of the insured depository institution is not a “deposit broker” (12 U.S.C. 1831f(g)(2)(B)). But an “employee” does not qualify unless he is “employed exclusively by the insured depository institution” (12 U.S.C. 1831f(g)(4)). Therefore, if the individual is an employee of both the subsidiary and the thrift, then he is not an “exclusive” employee of the thrift, and any deposits procured by him are brokered deposits. In addition, if an individual procuring deposits were an employee of the holding company or an affiliate, then the deposits would also be brokered deposits. For deposits not to be considered brokered deposits, an individual acting as a deposit broker must be exclusively employed by the thrift. Consolidation (for accounting purposes) of a subsidiary that employs an individual acting as a deposit broker typically does not make such an employee an "exclusive" employee of the thrift
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SUBJECT: QTL - Lot Loans
LINE(S): SI581-583
DATE: June 6, 2003
Question: Is a loan that is used to develop and improve land (Lot Loans) includable as a mortgage loan for QTL purposes if the loan will, at a later time, be converted to a mortgage loan when an additional loan is provided to build a dwelling on the land for which the original lot loan was given.
Answer: The Thrift Activities Handbook Section 270, Qualified Thrift Lender Status, states on page 270.3 that:
"Associations may include ADC loans in QTI without limit provided the association is reasonably certain the property will become domestic residential housing. Moreover, to count as QTI, an ADC loan must meet at least one of the following criteria:
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- The loan is for property zoned exclusively for residential use.
- The loan is for property zoned to permit residential use and there are restrictions in the deed to the property that limit its use to primarily residential dwellings.
- The borrower will construct dwelling immediately on nearly all the residentially zoned property."
SUBJECT: QTL - Marketable Equity Securities
LINE(S): SI581-583
DATE: June 6, 2003
Question: Are there any restrictions for counting marketable securities as liquid assets?
Answer: You may consider any marketable security as a liquid asset for QTL purposes. A security is marketable if it may be sold with reasonable promptness at a price that corresponds reasonably to its fair value.
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SUBJECT: Federal Farm Credit Bank Bonds (FFCB)
LINE(S): Schedule CCR
DATE: June 6, 2003
Question: We recently purchased Federal Farm Credit Bank Bonds (FFCB). Should we risk weight these bonds at 100%?
Answer: You may risk weight Federal Farm Credit Bank Bonds at 20% because the Federal Farm Credit Bank is a government-sponsored enterprise.
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SUBJECT: Callable Multifamily and Nonresidential Mortgage Loans
LINE(S): CMR281
DATE: June 6, 2003
Question: The CMR instructions are clear for Single-Family first mortgage loans that are callable. They should be included in CMR096-CMR120 (Balloon Mortgages and MBS). How should multifamily and nonresidential mortgage loans that are callable be handled? Should they be reported on CMR 281 (Balloon Mortgage)?
Answer: Yes, we concur that callable multifamily and nonresidential mortgage loans should be reported as balloon loans on CMR281.
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SUBJECT: Overdraft Protection and Fees
LINE(S): SC303/345
DATE: September 4, 2003
Question: An institution provides overdraft protection (not a line of credit) on its individual and commercial deposit accounts. It charges an overdraft protection fee when it covers an NSF check under the terms of the overdraft protection agreement. How should the overdraft amount be categorized on the TFR? If some of the amounts are later deemed uncollectable, how should they be reported?
Answer: Report the overdraft amounts and related uncollected fees as loans, depending on the type of deposit account. Report overdrafts and uncollected fees on individual deposit accounts on line SC345, Credit Cards and Related Plans. Report overdrafts and uncollected fees on commercial deposit accounts as unsecured commercial loans on line SC303, Unsecured Commercial Loans. Include the appropriate amount of allowance for loan losses for these accounts on line SC357, Allowance for Loan and Lease Losses.
For overdraft amounts reported on lines SC345 and SC303 deemed uncollectable, charge-off such amounts to valuation allowances, and report as charge-offs on lines VA580 and VA520, respectively, reducing ALLL on SC357. Do not charge-off uncollectable overdraft amounts to any other accounts, such as income or expense accounts.
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SUBJECT: Intangible Pension Asset
LINE(S): SC660
DATE: September 4, 2003
Question: Per FASB 87, "Employer's Accounting for Pensions," we have recognized on our balance sheet an intangible asset and accumulated other comprensive income.
Should we report the intangible asset on SC 660, "Goodwill and Other Intangible Assets?"
Answer: Yes, you should report this intangible asset on SC660.
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SUBJECT: 90% LTV
LINE(S): Schedules LD and CCR
DATE: September 4, 2003
Question: Why does LD require the reporting of loans 90% and above and CCR460 require 100% risk weighting of mortgages on single-family dwellings with an LTV higher than 90%? If LTV equals 90%, then the institution must classify the loan on LD. However, the same loan would escape 100% risk-weight on CCR. CCR provides a capital treatment differing from the treatment on schedule LD.
Answer: Any difference between the treatment in LD and CCR in almost all cases should be immaterial. The requirements are comparable except for an LTV of exactly 90%, which may occur at origination, but would be exactly at 90% LTV only until the first payment is received, and then, unless it negatively amortizes, it will be lower than 90%. Consequently, the instructions for Schedule CCR were recently re-written to include loans in the beneficial 50% risk weight up to and including 90%.
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SUBJECT: Lines of Credit on Nonresidential Property
LINE(S): CC300/CC420
DATE: September 4, 2003
Question: Should we report all unused line of credits on CC420," Commercial Lines" regardless of where the funded loan is reported on Schedule SC? We have a commitment to fund a revolving line of credit on a mortgage loan on nonresidential property, reported on line SC260. During the quarter we disbursed amounts to the borrower, which I will report on line CF260, Mortgage Loans Disbursed: Nonresidential. Should I report the remaining commitment to fund the revolving line of credit on line CC420?
Answer: You are correct to report the disbursements on CF260; however, you should report the unused line on CC300, Mortgage commitments on All Other Real Estate. CC420 contains lines of credit on commercial loans that are not secured by real estate.
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SUBJECT: Sub S Corp Dividends
LINE(S): SI630
DATE: September 4, 2003
Question: I have a Subchapter S corporation that reports it's distributions to stockholders on SI670 Other Adjustments to Equity. Their rationale is that the IRS defines these distributions as "distributions" rather than "dividends". Therefore, they do not believe the distributions fit the definition of cash dividends to be reported on line SI 630.
Answer: For regulatory reporting purposes distributions from a Sub S Corporation are considered dividends and should be reported on SI630.
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SUBJECT: Reducing Low Level Recourse By Contingent Liability
LINE(S): CCR375
DATE: September 4, 2003
Question: We sell loans to FannieMae under an arrangement whereby we retain limited recourse of 4%. At the time of sale, based on our historical loss experience, we record a liability of 0.35% for this off balance sheet credit exposure. For purposes of the regulatory capital deduction for low-level recourse on line CCR375, may we reduce the limited recourse of 4% by the recorded liability of 0.35%?
Answer: Yes, assuming no other relevant facts. Note that capital before the deduction for low level recourse has already been reduced for the recorded liability.
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SUBJECT: CD Maturity on a Nonbusiness Day
LINE(S): CMR
DATE: September 4, 2003
Question: The last calendar day of a quarter falls on a Saturday or Sunday, and the last business day is Friday. Would an 18 month fixed-rate, fixed-maturity CD that is automatically renewable and matures on the last day of the quarter, be reported in the 13 to 36 Original Maturity In Months column and on the line for Balances Maturing in 13 to 36 months rather than the line for Balances Maturing in 3 Months or Less?
Answer: You should treat the CD as if it rolled over on Friday, the last business day of the quarter, and automatically renewed. Therefore, it would have an 18-month maturity.
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SUBJECT: Construction/Permanent Loans
LINE(S): CMR
DATE: September 4, 2003
Question: Could you please tell me if I am reporting the following loan correctly on schedule CMR? Assume the following loan:
A construction/permanent loan on a multi-family residential building having a commitment of $1,000,000. The loan has a 1 year construction period and then rolls to a 30 year permanent loan. The loan has a known fixed rate for the first three years and then will become a variable rate loan thereafter. The loan has a prepayment penalty if paid off within the fixed rate period. At quarter end, $600,000 has been disbursed and $400,000 remains in LIP.
Reported on CMR as:
$600,000 is reported on line CMR 262 (MFR - fully amortizing - adjustable rate loan)
$400,000 is reported on CMR 802 (Off B/S - firm commitment to originate ARM loan).
Answer: The suggested reporting is incorrect. Instead, this construction/permanent multifamily loan should be reported on CMR as follows:
(1) The disbursed part ($600,000) should be reported as fixed-rate Construction Loan in CMR292 with WARM of 12 months,[TOP](2) The undisbursed part ($400,000) should be reported as Construction LIP in OBS part of CMR using code 9502 with WAM less than one year since construction phase is partially completed, and
(3) The permanent commitment should be reported as a firm commitment to originate a $1,000,000 mortgage using contract code 2216 in OBS part.
SUBJECT: Zero Coupon State/Municipal Bonds
LINE(S): Schedule CMR
DATE: September 4, 2003
Question: Are zero coupon state/municipal bonds that do not feature a call option reported in schedule CMR on lines 479-481 with the other municipal bonds or are they reported lines 470-472 under zero coupon securities?
Answer: You should report them as zero coupon securities.
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SUBJECT: INTERCOMPANY RECEIVABLES/PAYABLES
LINE(S): Schedule SC
DATE: December 5, 2003
Question: We have placements to other entities within our holding company corporate structure. We have reported these intercompany borrowings in SC760 as Other Borrowings. This quarter our intercompany account is a receivable. Should we report this receivable as a negative amount in Other Borrowings or reclassify it to Other Assets? that do not feature a call option reported in schedule CMR on lines 479-481 with the other municipal bonds or are they reported lines 470-472 under zero coupon securities?
Answer: If the account is a non-interest-bearing receivable from the holding company or affiliates, it should be reported in Other Assets (SC690) using code 13. Non-interest-bearing payables to the holding company or affiliates are reported in Other Liabilities (SC796) using code 17.
However, interest-bearing receivables should be reported in Commercial Loans (SC303) and interest-bearing payables should be reported in Other Borrowings (SC760).
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SUBJECT: COMPUTER SOFTWARE
LINE(S): SC660 and SO560, Goodwill and Other Intangibles
DATE: December 5, 2003
Question: We have purchased computer software that is included with fixed assets and is included in our depreciation schedule. Should we report the purchased computer software on line SC55, “Office Premises and Equipment, or on line SC660, ”Goodwill and Other Intangible Assets”? Also, where should we report its depreciation or amortization?
Answer: Pursuant to FASB Statement No. 141, computer software is a technology-based intangible asset. Accordingly, you should report computer software on line SC660. In addition, you should report the amortization of computer software on line SO560, “Goodwill and Other Intangibles Expense”.
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SUBJECT: Foreclosure On Loans Purchased From Ginnie Mae Pools
LINE(S): VA952
DATE: December 5, 2003
Question: The instructions for schedule PD allow for certain delinquent FHA/VA loans purchased from a Ginnie Mae pool to be excluded from Schedule PD. Conversely, it appears that these same FHA/VA loans, when foreclosed on, are to be reported as foreclosures in VA952.
If an institution is planning to step up their activity in purchasing these delinquent loans (where the risk to the institution is minimal), is it correct to reflect a large foreclosure activity figure even if the loans are made up of the same loans that are excluded from PD?
Answer: Yes, loans purchased from a Ginnie Mae pool, although currently excluded from Schedule PD, must be included in foreclosed asset activity, VA952.
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SUBJECT: Including Subsidiary in Schedule FS
LINE(S): Schedule FS
DATE: December 5, 2003
Question: We have a majority-owned subsidiary of our Bank that provides investment advisory services (for a fee) for customers. The subsidiary does not have trust powers or custody of the assets. They strictly provided investment advice. In Schedule FS, do we need to report the fiduciary assets of this investment advisory subsidiary or do we just report the fiduciary assets related to the segment of our Trust Department that has trust powers and custody of the assets.
Answer: You should include the fiduciary related assets and the fiduciary related fee income of the subsidiary that renders investment advice for a fee in Schedule FS. Schedule FS is completed on a consolidated basis. Therefore, fiduciary or related services of a GAAP consolidated subsidiary should be reported.
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SUBJECT: Farm Services Agency (FSA) Guaranteed Loan
LINE(S): Schedule CCR
DATE: December 5, 2003
Question: A thrift purchases a participation interest in the guaranteed portion of a Farm Services Agency (FSA) guaranteed loan. What is the proper risk weighting?
Answer: The Farm Services Agency is a federal agency under the United States Department of Agriculture. Since it provides conditional guarantees on various types of agricultural related loans, the 20% risk weighting is appropriate. However, this 20% is dependent on the thrift owning a participation interest in only the guaranteed portion of an FSA loan.
The FSA is authorized to provide loan guarantees of up to 95% of the principal amount of various agricultural related loans. However, the FSA encourages a secondary market in the guaranteed portions of such loans, noting “The existence of the secondary market makes guaranteed loans more liquid. By reselling the guaranteed portion, lenders reduce interest rate exposure, increase their lending capabilities, and generate fees.” As long as the thrift purchases only an interest in the guaranteed portion of such loans, the 20% risk weighting is appropriate.
However, if the thrift purchases whole loans, only the guaranteed portion of the loans would qualify for the 20% risk weighting.
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SUBJECT: Arms At Their Floor
LINE(S): Schedule CMR
DATE: December 5, 2003
Question: Our home equity loans are tied to prime rate, but have a floor of 6%. These loans are at their floor rate (6%), and have been for sometime. The instructions tell us to report ARMs with coupons that are currently at their lifetime caps, as fixed rate mortgages. Does the same hold true for ARMs at their floor?
Answer: Yes, they should be reported as fixed rate, 2nd mortgage loans, if the loans will remain at their 6% floor even after a 200 basis point upward shock. Should rates rise considerably in the future, the loans should once again be reported as ARMs.
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SUBJECT: TFR Posting Schedule on FDIC Web Site
LINE(S):N/A
DATE: March 1, 2004
Question: What is the estimated turnaround time between the date of submission of the TFR and when it is posted on the FDIC website?
Answer: The first TFRs are posted on the FDIC web site the Friday following the tenth day after the due date (40th days after the report date). TFRs must pass all OTS Preliminary Edits prior to posting. The data is updated every week, and new TFRs passing all preliminary edits are added. TFRs for the prior quarter are updated twice in the quarter, approximately 125 and 150 days after its report date. A final TFR is last updated approximately 150 days after its report date.
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SUBJECT: Sallie Mae Pass-Through Securities
LINE(S):SC182
DATE: March 1, 2004
Question: We have two types of Sallie Mae investments. One type is a Sallie Mae corporate bond, which, as a nonmortgage debt instrument, clearly would be reported on SC130, U.S. Government, Agency, and Sponsored Enterprise Securities. The other type is a Sallie Mae pass-through security, collateralized by the underlying student loans. Since this second type is not actually a debt instrument, would we report the investment on SC182, Securities Backed by Nonmortgage Loans?
Answer: Yes. Report Sallie Mae pass-through securities on SC182, Securities Backed by Nonmortgage Loans. In Schedule CMR Sallie Mae pass- through securities should be reported as nonmortgage loans and in Supplemental Reporting using code 182, Education Loans.
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SUBJECT: Flexible Spending Accounts
LINE(S):SC712
DATE: March 1, 2004
Question: Our bank is offering a flexible spending account (FSA) in the Medical portion of its benefits plan. These funds will be held in a general ledger account. As the administrator disburses funds for the FSA reimbursements, we will transfer amounts to cover them to the internal checking account that is being utilized by the administrator. Prior to transfer to the checking account, we hold the funds withheld from the employee, which will eventually be paid to the administrator. Where should we report these on the TFR?
Answer: The funds withheld from employees for flexible spending accounts should be reported with other employee withholdings in Escrows on SC712.
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SUBJECT: FHLB Advance Prepayment Penalties
LINE(S):SC720, SO230, and SO580
DATE: March 1, 2004
Question: How should we report prepayment penalties on FHLB advances? Should we always report these penalties as an expense? Are there any circumstances under which we should capitalize the penalties and amortize them as a yield adjustment
Answer: Generally, prepayment penalties will be expensed as part of the cost of extinguishing the original FHLB advance. This is true even when there is an exchange of one advance for another if the new terms are substantially different from those of the original advance. In some limited circumstances, the penalty may be deferred and amortized if the modification of terms is relatively minor, although this is less common. In the reporting of FHLB advance prepayment penalties, an institution must follow GAAP, including EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments. Under this consensus, the accounting treatment for prepayment penalties in the situation where a new advance replaces an existing advance depends on whether the change is considered a:
1. Prepayment of a FHLB Advance (Exchange of Debt):
- Description
: A more substantive change that is viewed for accounting purposes as the extinguishment of the existing debt and the creation of new debt.- Accounting
: The penalty is immediately expensed as a cost of the extinguishment of the original FHLB advance.- TFR Reporting
: The penalty should be taken as an immediate charge to SO580, Other Noninterest Expense.-or-
2. Modification of an existing FHLB Advance:
- Description
:A minor modification to the existing debt- Accounting
: The penalty is deferred and treated as a yield adjustment to be recognized over the remaining life of the modified advance.- TFR Reporting
:
o Schedule SC - The unamortized deferred penalty is netted against the par amount of the advance and reported in SC720, Borrowings: Advances from FHLBank.
o Schedule SO - The penalty should be amortized using the level yield method over the remaining term of the replacement advance by periodic charges to SO230, Interest Expense: Advances from FHLBank.A new advance is considered substantially different from the original advance if the present value of the cash flows under the terms of the new advance is at least 10 percent different from the present value of the remaining cash flows under the terms of the original advance. The discount rate to be used to calculate the present value of the cash flows for both the new and original advance is the effective interest rate, for accounting purposes, of the original advance. EITF 96-19 gives additional guidance to be used in the present value calculations for purposes of applying the 10 percent test.
Thus, if the difference in the present value of the new and original advance is 10 percent or more, the transaction is viewed as the extinguishment of the original advance with the prepayment penalty included in determining the loss on extinguishment (i.e., immediate charge). If the difference in present values is less than 10 percent, the penalty is amortized as an adjustment of interest expense over the remaining term of the replacement or modified advance.
The above Q&A; summarizes the accounting for FHLB prepayment penalties. We recommend you fully review the GAAP literature (including EITF 96-19) and consult with your external auditors. Your OTS Regional Accountant may also be contacted for additional assistance.The above Q&A; summarizes the accounting for FHLB prepayment penalties. We recommend you fully review the GAAP literature (including EITF 96-19) and consult with your external auditors. Your OTS Regional Accountant may also be contacted for additional assistance.
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SUBJECT: Internet Deposit Listings-Brokered Deposits
LINE(S):DI100
DATE: March 1, 2004
Question: A company operates a website at which our institution posts interest rates on CDs. In order to post our rates, we must pay a subscription fee. Are deposits obtained through this web site brokered deposits?
Answer: A paid posting on an Internet website is equivalent to a paid advertisement in a newspaper. Whether the Internet company should be classified as a deposit broker depends upon (1) whether the company provides assistance to the depositor in placing the deposit or communicating with the depository institution; or (2) whether the company charges a fee based upon the number or volume of deposits placed at the depository institution.
A listing service is not a deposit broker if the following requirements are satisfied:
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- The person or entity providing the listing service is compensated solely by means of subscription fees (i.e., the fees paid by subscribers as payment for their opportunity to see the rates gathered by the listing service) and/or listing fees (i.e., the fees paid by depository institutions as payment for their opportunity to list or post their rates). Further, the listing service does not require a depository institution to pay for other services offered by the listing service or its affiliates as a condition precedent to being listed.
- The fees paid by depository institutions are flat fees; they are not calculated on the basis of the number or dollar amount of deposits accepted by the depository institution as a result of the listing or posting of the depository institution's rates.
- In exchange for these fees, the listing service performs no service except the gathering and transmission of information concerning the availability of deposits. This information may include an insured depository institution's name, address (including e-mail address), telephone number and interest rates. Except for providing this information, the listing service does not serve as a liaison between depositors and depository institutions. For example, the listing service does not pass information about a depositor (or potential depositor) to a depository institution.
- The listing service is not involved in placing deposits or confirming the placement of deposits. Any funds to be invested in deposit accounts are remitted directly by the depositor to the insured depository institution and not, directly or indirectly, by or through the listing service.
SUBJECT: Liabilities for Credit Losses for Off-Balance-Sheet Exposures
LINE(S):Schedule CCR
DATE: March 1, 2004
Question: On Schedule SC, we report a liability of $70,000 (on line SC796) for credit losses associated with off-balance-sheet exposures. It is comprised of $50,000 associated with letters of credit and $20,000 associated with sales of loans with recourse. May some of the $70,000 potentially be included in Tier 2 capital, as part of the allowance for loan and lease losses (ALLL) reported on CCR350?
Answer: Yes. For Tier 2 capital purposes, you may potentially report ALLL on CCR350 up to $50,000 - the amount associated with letters of credit. You may not include any portion of the liability related to transfers of loans or other assets reported as sales with recourse. In addition, the amount you ultimately report on CCR350 is limited to 1.25% of gross risk-weighted assets.
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SUBJECT: Excess Alll
LINE(S):Schedule CCR
DATE: March 1, 2004
Question: On Schedule SC, our allowance for loan and lease losses (ALLL) of $150,000 is comprised of $100,000 associated with mortgage and nonmortgage loans on SC283 and SC357 and $50,000 associated with letters of credit on SC796. However we include only $90,000 of the total ALLL in Tier 2 capital on SC350, as this amount represents 1.25% of our risk-weighted assets reported on CCR75. Therefore may we reduce our risk-weighted assets by $60,000 ($150,000 less $90,000) by reporting this amount as excess ALLL on CCR530?
Answer: No. You may report excess ALLL on CCR530 of only $10,000 ($100,000 less $90,000). Excess ALLL may include only those amounts appropriately reported as contra-assets on SC283 and SC357. Therefore, CCR530 may not include an amount reported as a liability on SC796. You have excess ALLL to report on CCR530 only if the amounts on SC283 and SC357, combined, exceed the amount reported on CCR350.
In addition to the facts you provided, assume the following: Tier 1 capital of $800,000 and subtotal risk-weighted assets of $7,200,000. The table below shows the relevant computations.
First, you compute includable ALLL of $90,000 ($7,200,000 times 1.25%). Second, you compute total risk-based capital of $890,000 ($800,000 plus $90,000). Third, you compute excess ALLL of $10,000 ($100,000 less $90,000). Note that includable ALLL of $90,000 is less than the $100,000 of ALLL associated with loans; that is, the ALLL reported as contra-assets. Fourth, you compute risk-weighted assets total of $7,190,000 ($7,200,000 less $10,000).
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Dollars in Thousands Tier 1 capital $ 800 Risk-weighted assets, subtotal $ 7,200 $ 7,200 ALLL, percent limit 1.25% ALLL, includable 90 90 ALLL, excess 10 (10) ALLL, in assets 100 ALLL, in liabilities 50 ALLL, total $150 Total risk-based capital $ 890 Risk-weighted assets, total $ 7,190
SUBJECT: Boli Investment Limitation, Definition of Total Capital
LINE(S):CCR39, SC615, and SC625
DATE: March 1, 2004
Question: OTS Regulatory Bulletin 32-26 states that savings associations may not invest more than 25 percent of their total capital in bank-owned life insurance (BOLI). Is total capital the same as Total Risk-based Capital?
Answer: Yes. Total capital is the same as Total Risk-based Capital. Use the amount that you report on Schedule CCR39, Total Risk-based Capital. Follow the TFR Instructions for Schedule CCR to calculate the amount on CCR39, which (as indicated in the instructions) is net of any deductions you make on Lines CCR370 and CCR375.
In summary:
Tier 1 (Core) Capital (following the instructions for CCR20) + Allowable Tier 2 (Supplementary) Capital (following the instructions for CCR35) - Equity Investments and Other Assets Required to be Deducted (following the instructions for CCR370) - Deduction for Low-Level Rsource and Residual Interests (following the instructions for CCR375) = Total Capital=Total Risk-based Capital
[TOP]SUBJECT: Risk-Weighting Available-for-Sale Equity Securities with Unrealizes Losses
LINE(S):CCR506
DATE: March 1, 2004
Question: On SC860 we report net unrealized losses (after deducting unrealized gains and adjusting for taxes) on available-for-sale equity securities. How should we risk-weight these securities, since we cannot add back the net loss on CCR180 or CCR302?
Answer: If these equity securities are permissible for savings associations and therefore qualify to be risk-weighted at 100%, report on CCR506 the fair value (rather than the cost) of these securities.
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SUBJECT: GNMA Buy-Back Program
LINE(S):Schedule PD
DATE: June 4, 2004
Question 1: In the March 2004 Schedule PD Instructions, the "Do Not Include": paragraph states, "delinquent FHA, FmHA, or VA 1-4 dwelling unit, residential mortgages in foreclosure status...". Would following examples be considered in "foreclosure status"?
We would like to clarify this Schedule PD exclusion, because from a risk perspective, it appears that each of these scenarios has similar risk, and therefore we believe should be treated similarly in Schedule PD.
- An FHA-insured loan greater than 30 days delinquent, but for which no formal communication of intent to foreclose has been provided to the borrower.
- An FHA-insured loan for which formal communication of intent to foreclose has been provided to the borrower, but legal foreclosure has not yet taken place.
- An FHA-insured loan currently in bankruptcy, and as a result the savings association may not immediately foreclose.
Answer 1: The term “foreclosure status” is not clearly defined. Until further guidance is issued, you may consider the term “in foreclosure status” as it applies to loans in, or previously in, the GNMA program to include loans that your institution intends to foreclose on. That is they are loans in your foreclosure pipeline.
Question 2: Our second question pertains to the same paragraph in the Schedule PD Instructions, where it states, "were required to return to your balance sheet". We would like to confirm that the OTS is referring to the delinquent Ginnie Mae Buybacks that are eligible for repurchase and therefore required to be shown on the balance sheet, as required by FASB Statement No. 140, even though those are not owned by the savings association.
Answer 2: Yes, that is the intent of that phrase.
Question 3: Our final question relates to how OTS may use Lines PD195, PD295, and PD395 on the UTPR Report. We are interested in whether OTS might deduct these loans from the Nonperforming Loans reported in the Asset Quality Section of the UTPR, since the savings association has minimal risk in those loans. If not, will the UTPR present the information from those lines separately.
Answer 3: The UTPR will present guaranteed loans separately, directly beneath total delinquent loans. That is, on one line we will present PD10; PD20; PD30 and PD20+PD30, and below it PD195; PD295; PD395; and PD295+PD395, and then another line for total past due loans less loans wholly or partially guaranteed by the U.S.
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SUBJECT: Revolving Lines Of Credit – As Refinancings
LINE(S):CF361
DATE: June 4, 2004
Question: We have revolving lines of credit secured by 1-4 dwellings and some secured by commercial property that expire in one year. If we renew these lines with the same terms at the end of the one-year expiration period, must we report them as refinancings on CF361? We continue these loans with the same loan number.
Answer: Yes. If the term of a loan is extended, the loan is modified and should be reported as a refinancing on CF361.
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SUBJECT: Lines Of Credit To A Service Corporation
LINE(S):SI588
DATE: June 4, 2004
Question: Must a savings association report on SI588 available lines of credit that the association has granted to its service corporation? While these are not loan balances outstanding currently, they may become outstanding balances in the future if drawn upon by the service corporation.
Answer: No. If the line of credit is unfunded or it is not otherwise recognized as a balance sheet asset, then the savings association is not required to include the amount of the line for purposes of calculating its aggregate investment (both debt and equity) in service corporations. Therefore, the association is not required to report the line of credit on SI588 (Aggregate Investment in Service Corporations).
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SUBJECT: Transactions With An Affiliated Bank
LINE(S):SI760
DATE: June 4, 2004
Question: An institution under a bank holding company buys and sells participations with its sister bank. Would these be reported on SI760?
Answer: No.
Under 12 CFR 223.52 (the Federal Reserve’s 23B reg), sister bank transactions are not covered by 23B. It states that all transactions are covered except for transactions cited under 223.41, which cites the sister bank exception
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SUBJECT: Holding Company’s Dividends From Thrift Subsidiary
LINE(S):HC525
DATE: June 4, 2004
Question: Our holding company, in its parent only financial statements, does not treat dividends from its wholly-owned thrift subsidiary as income. Using the equity method of accounting, the holding company records the thrift subsidiary’s net income as an increase in its investment in subsidiary (an asset), and as equity in net income of thrift subsidiary (an item of income). The holding company records dividends from the thrift subsidiary as an increase in cash or intercompany receivable, and as a reduction in its investment in subsidiary. Therefore, in the parent only column of Schedule HC, the holding company reports zero on HC525, Reflected in Net Income for the Quarter: Dividends: From Thrift Subsidiaries. Is this reporting correct?
Answer: No. In the parent only column of Schedule HC, your holding company should report dividends from its thrift subsidiary on HC525. Typically, under the equity method of accounting used for parent only financial statements, a holding company’s equity in the net income or loss of its subsidiaries is presented as two separate components: (1) dividends from subsidiaries – that is, the distributed income component; and (2) equity in undistributed income or loss of subsidiaries – the undistributed income or loss component. Accordingly, your holding company should report on HC525 the distributed income component of the holding company’s equity in income or loss of its thrift subsidiary.
For example, assume that the holding company’s equity in the net income of its thrift subsidiary is $10 million; and that dividends declared by, and received from, the subsidiary are $3 million. The holding company’s net income on a parent only basis reported on HC250, “Net Income for the Quarter”, would include the $10 million. The holding company would report the $3 million on HC525. Note that the holding company’s $7 million ($10 million - $3 million) undistributed income component of its equity in income of the thrift subsidiary would not be reported separately on Schedule HC.
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SUBJECT: Trust Preferred Securities
LINE(S):HC445/HC670
DATE: June 4, 2004
Question: Our holding company (a) has a $3 million investment in all the common stock of an entity that issued trust preferred securities of $97 million to third parties, and (b) has borrowed $100 million from that entity, which is all of the proceeds from that entity’s issuance of common stock and trust preferred securities ($3 million + $97 million). During the quarter, our holding company incurred $2 million in interest on the borrowing (which was equal to the dividends paid by the investee entity on the trust preferred securities). Pursuant to FASB Interpretation No. 46 and other relevant sources of GAAP, our holding company does not consolidate this investee entity. How should our holding company report these amounts on Schedule HC?
Answer: We understand that, for most financial institution holding companies, under GAAP, it is appropriate not to consolidate the investee entity that issues trust preferred securities. Accordingly, the holding company, on both a parent-only and a consolidated basis, reports separately: (a) its investment in the common stock of the entity (an asset); (b) its borrowing from the entity (a liability); and (c) its interest incurred on the borrowing (an expense).
Your holding company should report the amounts above as follows:
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- Include its $3 million investment in the common stock of the entity on both HC210 (for parent only) and HC600 (for consolidated), “Total Assets”.
- Include the balance of its borrowing of $100 million on both HC220 (for parent only) and HC610 (for consolidated), “Total Liabilities”.
- Report the balance of its borrowing of $100 million on both HC445 (for parent only) and HC670 (for consolidated), “Included in Total Liabilities (Excluding Deposits): Trust Preferred Instruments”.
- Reflect the interest of $2 million on the borrowing on both HC250 (for parent only) and HC640 (for consolidated), “Net Income for the Quarter”.
- Report the interest of $2 million on the borrowing on both HC545 (for parent only) and HC710 (for consolidated), “Reflected in Net Income for the Quarter: Interest Expense: Trust Preferred Instruments”.
SUBJECT: Net Deferred Tax Assets
LINE(S):CCR133/CCR270
DATE: June 4, 2004
Question 1: We have included in other assets on SC689 a net deferred tax asset (that is, deferred tax asset components, net of deferred tax liability components) of $2.4 million. Is this the amount that is subject to the regulatory capital limitation for deferred tax assets outlined in TB 56?
Answer 1: Not necessarily. The net deferred tax asset subject to the regulatory capital limitation is not simply the amount included on SC689. Rather, that amount should be adjusted for any additions or subtractions to the net deferred tax asset related to intangible assets, disallowed servicing assets, disallowed residual interests, other disallowed assets, and accumulated gains and losses on certain available-for-sale securities and cash flow hedges included on CCR265, CCR270, and CCR280, in computing adjusted total assets on CCR25.
For example, assume also that (1) available-for-sale (AFS) debt securities reflect unrealized losses of $1.0 million; (2) the net deferred tax asset of $2.4 million includes a deferred tax asset component of $0.4 million associated with the unrealized losses on AFS securities; and (3) equity capital reflects a reduction of $0.6 million for the unrealized losses on AFS securities of $1 million net of the associated deferred tax benefit of $0.4 million.
In this case, the net deferred tax asset subject to the regulatory capital limitation is $2.0 million (not $2.4 million). This $2.0 million is computed as $2.4 million less $0.4 million. The $0.4 million adjustment represents the deferred tax asset component associated with the unrealized losses on AFS securities of $1.0 million. You report $0.6 million on CCR180, representing the unrealized loss on AFS debt securities. This adds the unrealized losses on AFS securities, net of income taxes, to equity capital in computing Tier 1 (core) capital on CCR20. You also report $0.6 million on CCR280 to compute adjusted total assets on CCR27. The total amount included on CCR280 related to unrealized losses on AFS securities is a net addition of $0.6 million, representing a gross addition to AFS securities of $1.0 million for the pretax amount, net of a subtraction from the net deferred tax asset of $0.4 million for the associated income taxes.
Note the table as follows ($ in millions):
Net deferred tax asset included in other assets on SC689 $2.4 Adjustment for deferred tax asset component associated with unrealized losses on AFS securities included on CCR280 (0.4) Net deferred tax asset subject to regulatory capital limitation $2.0 Or, for example, assume instead that (1) AFS debt securities reflect unrealized gains of $1.0 million; (2) the net deferred tax asset of $2.4 million includes a deferred tax asset liability component of $0.4 million associated with the unrealized gains on AFS securities; and (3) equity capital reflects an increase of $0.6 million for the unrealized gains on AFS securities of $1 million net of the associated deferred tax liability of $0.4 million.
In this case, the net deferred tax asset subject to the regulatory capital limitation is $2.8 million (not $2.4 million). This $2.8 million is computed as $2.4 million plus $0.4 million. The $0.4 million adjustment represents the deferred tax liability component associated with the unrealized gains on AFS securities of $1.0 million. You report $0.6 million on CCR180. This deducts the unrealized gains on AFS securities, net of income taxes, from equity capital to compute Tier 1 (core) capital on CCR20. You also report $0.6 million on CCR280 to compute adjusted total assets on CCR27. The total amount included on CCR280 related to unrealized gains on AFS securities is a net reduction of $0.6 million, representing a gross reduction to AFS securities of $1.0 million for the pretax amount, net of an addition of the net deferred tax liability of $0.4 million for the associated income taxes.
Note the table as follows ($ in millions):
Net deferred tax asset included in other assets on SC689 $2.4 Adjustment for deferred tax asset component associated with unrealized losses on AFS securities included on CCR280 0.4 Net deferred tax asset subject to regulatory capital limitation $2.0 As you can see, the net deferred tax asset subject to the regulatory capital limitation depends on the additions or subtractions to the net deferred tax asset related to various items, including accumulated gains and losses on certain AFS securities.
Question 2: We have included in other assets on SC689 a net deferred tax asset (that is, deferred tax asset components, net of deferred tax liability components) of $2.4 million. As we made regulatory capital adjustments to this amount, the net deferred tax asset subject to the regulatory capital limitation outlined in TB 56 is $2.0 million. How do we determine the portion of this amount that is includable in Tier 1 (core) capital?
Answer 2: TB 56 requires you to limit the amount of net deferred assets under FASB Statement No. 109 that may count toward regulatory capital. Application of the limit depends on the possible sources of taxable income available to you. In other words, there may be sources of deferred tax assets that are not generally limited. These assets are:
- Taxes paid in prior carryback years
- Future reversals of existing taxable temporary differences.
To the extent that realization of deferred tax assets depends on an institution’s future taxable income generally, deferred tax assets (other than the ones listed above) are limited for regulatory capital purposes to the lesser of:
For example, with respect to the net deferred tax asset that is subject to the limitation of $2.0 million, assume that (1) the amount that can be realized from taxes paid in prior carryback years is $0.9 million, and (2) realization of the remaining amount of $1.1 million ($2.0 million less $0.9 million) depends on your future taxable income - all of which can be realized within one year. Assume also that your Tier 1 (core) capital before the deduction for disallowed deferred tax assets is $10 million.
- The amount you can realize within one year, or
- 10% of core capital
In this example, the net deferred tax asset includable in Tier 1 (core) capital is $1.9 million, computed as $0.9 million plus $1.0 million. The $1.0 million is computed as the Tier 1 (core) capital subtotal of $10 million times 10%. Note that the $0.9 million whose realization is not dependent on future taxable income is not subject to the limit, but that the $1.1 million whose realization is dependent on future taxable income is limited. With respect to the latter, the amount you can realize within one year of $1.1 million exceeds the 10% of Tier 1 (core) capital subtotal of $1.0 million, and therefore you must use the lower $1.0 million number.
Question 3: We have included in other assets on SC689 a net deferred tax asset (that is, deferred tax asset components, net of deferred tax liability components) of $2.4 million. As we made regulatory capital adjustments to this amount, the net deferred tax asset subject to the regulatory capital limitation outlined in TB 56 is $2.0 million. In addition, we have determined that the net deferred tax asset that is includable in Tier 1 (core) capital) is $1.9 million. What is the amount of the deduction for disallowed deferred tax assets that we should include on CCR133 and CCR270?
Answer 3: The amount of the deduction is $0.1 million, computed as $2.0 million less $1.9 million.
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SUBJECT: Interest-Only Mortgages
LINE(S): CMR Assets
DATE: August 31, 2004
Question Our institution is engaging in new lending products that provide an interest-only payment term. This feature can be for up to 10 or 15 years and applies to fixed- and adjustable-rate 1-4 family first mortgage loans. Principal amortizes over the remaining period (20 or 15 years, respectively) after the interest-only term. Pre-payment of principal is at the borrower’s option for the entire 30-year loan term. Where on Schedule CMR should these new loan types be reported?
Answer Until further notice, these loans should be reported in CMR as if they are amortizing loans. For example, if the loans you describe had a coupon of 6.25%, the dollar balance should be reported in CMR003, the WARM in CMR008, the WAC in CMR013, and any portion that is FHA/VA guaranteed in CMR018.
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SUBJECT: FHLB Overdrafts
LINE(S): SC760, CMR Liabilities
DATE: August 31, 2004
Question We have an overdraft at the FHLB of $575,000 and reported this in SC760--Other Borrowed Money. Where in Schedule CMR should this amount be reported?
Answer FHLB overdrafts should be reported in the CMR section – “Fixed-Rate, Fixed-Maturity FHLB Advances, Other Borrowings, Redeemable Preferred Stock, and Subordinated Debt” under the appropriate maturity and coupon lines. For example, assuming these overdrafts have a remaining maturity of 0 to 3 months and a coupon under 3%, the amount would be reported in CMR675
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