(2) Controls, including: (i) The specific goals and objectives of the institution relating to equity risk investments; (ii) Whether the institution's plans are consistent with management's expertise; (iii) Whether the institution has identified and evaluated the risks involved in the activity; (iv) Whether the institution has an ability to identify and resolve on a timely basis problems which might occur; (v) Whether adequate records are being maintained; and (vi) Whether procedures are in place to monitor the performance of the activities. (B) The proposed investment or level of investment is likely to increase either the applicant's risk of default or the financial exposure of the Corporation; specifically that: (1) The goals and objectives of the institution expose it to high probability of loss; or (2) The risks are improperly reflected in the association's business plan, cash flow analysis, and projected profit and loss statement. (C) The equity risk investments of the applicant and its service corporations and operating subsidiaries in equity securities and real estate are not appropriately diversified. Equity risk investments shall be deemed to be "appropriately diversified" if the consolidated equity risk investments of the applicant and its service corporations and operating subsidiaries in equity securities and real estate, when deemed to be those of the applicant, meet the requirements of paragraph (e) of this section; and if (1) The activities are geographically diversified in a manner consistent with the overall business plan of the institution; (2) The types of projects are diversified; and (3) The institution is engaging in activities with a wide range of other parties. (D) The applicant's policies are inconsistent with economical home financing, as evidenced by its failure to comply with the definition of a "quali fied institution" as set forth in § 584.22(b) of this chapter. (iii) In the event that the Principal Supervisory Agent makes any of the findings in paragraph (g)(3)(ii) of this section, he or she may nevertheless approve the application subject to written conditions. (iv) The Office of Regulatory Policy, Oversight and Supervision of the Federal Home Loan Bank System (ORPOS) shall prepare, and disseminate to the Principal Supervisory Agents, standards for the Agents' use in determining whether to approve applications for equity risk investments that are one-to-four family housing projects and government-insured multi-family housing projects. ORPOS may revise these standards from time to time. (4) An adverse determination made by the Principal Supervisory Agent may be challenged by filing, within 30 days of receipt of written disapproval, a petition for reconsideration with the Corporation. The institution shall file its petition with the Office of the Secretary to the Board, and shall send a copy to the Principal Supervisory Agent and, if the institution is statechartered, to the state supervisor. (5) The Corporation shall approve or disapprove an application referred by a Principal Supervisory Agent pursuant to paragraph (g)(3)(i) of this section and grant or deny a petition for reconsideration filed pursuant to paragraph (g)(4) of this section in writing within 30 days of receipt of such application or petition. If the Corporation does not disapprove or deny such application or petition within such time, such application shall be deemed to be approved or such petition granted. (6) An insured institution seeking to make equity risk investments otherwise requiring prior review and approval by its Principal Supervisory Agent or the Board under § 546.2, § 552.13 or § 563.22 or Part 574 of this chapter shall not be required to file an application under this paragraph (g). (h) Expiration date. This section shall expire on April 16, 1989. [50 FR 6928, Feb. 19, 1985, as amended at 50 FR 53272, Dec. 31, 1985; 51 FR 47003, Dec. 30, 1986; 52 FR 8205, Mar. 16, 1987; 52 FR 23802, June 25, 1987] § 563.9-9 Fixed-rate and adjustable-rate mortgage loan disclosures, adjustment notices, and interest rate caps. (a) Definitions. For purposes of this section: (1) "Adjustable-rate mortgage loan" means a mortgage loan, secured by property occupied or to be occupied by the borrower, providing for adjustments to the interest rate which cause a change in balance, term to maturity, or payment levels other than those established by a fixed, predetermined schedule at the time of contracting for the loan. (2) "Fixed-rate mortgage loan" means a loan, secured by property occupied or to be occupied by the borrower, on which the rate, the term, and the amount of the payments are fixed at the time of execution of the original loan documents. Fixed-rate mortgage loans may or may not be fully amortizing and include graduated payment loans on which the schedule of payment adjustments is fixed at the time of executing the original loan documents. (3) "Applicant" means a natural person (or persons) making a loan application. (4) "Home" means real estate as defined by § 541.14 of this chapter, manufactured housing, combinations of homes and business property, and - farm residences or combinations of farm residences and commercial farm real estate. (b) Initial disclosures for adjustable= rate mortgage loans. Insured institutions offering adjustable-rate home loans, except open-end loans, with a term of more than one (1) year and secured by property occupied or to be occupied by the borrower, shall provide two types of written disclosure to = prospective borrowers when an application form is provided or before the payment of a non-refundable fee, whichever is earlier: (1) The booklet titled Consumer Handbook on Adjustable Rate Mortgages published by the Federal Home Loan Bank Board and the Federal Reserve Board, or a suitable substitute. (2) A loan program disclosure for each adjustable-rate home loan program in which the consumer expresses an interest. The following disclosures, as applicable, shall be provided:1 (i) The fact that the interest rate, payment, or term of the loan can change. (ii) The index or formula used in making adjustments, and a source of information about the index or formu la. (iii) An explanation of how the interest rate and payment will be determined, including an explanation of how the index is adjusted, such as by the use of a margin. (iv) A statement that the consumer should ask about the current margin value and current interest rate. (v) The fact that the interest rate will be discounted, and a statement that the consumer should ask about the amount of the interest rate discount. (vi) The frequency of interest rate and payment changes. (vii) Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover. (viii) An historical example, based on a $10,000 loan amount, illustrating how payments and the loan balance would have been affected by interest rate changes implemented according to the terms of the loan program. The example shall be based upon index values beginning in 1977 and be updated annually until a 15-year history is shown. Thereafter, the example shall reflect the most recent 15 years of index values. The example shall reflect all significant loan program terms, such as negative amortization, interest rate carryover, interest rate discounts, and interest rate and payment limitations, that would have been affected by the index movement during the period. 1 A sample disclosure form may be found in the FEDERAL REGISTER issue of May 23, 1988 or may be obtained from the Board. (ix) An explanation of how the consumer may calculate the payments for the loan amount to be borrowed based on the most recent payment shown in the historical example. (x) The maximum interest rate and payment for a $10,000 loan originated at the most recent interest rate shown in the historical example assuming the maximum periodic increases in rates and payments under the program; and the initial interest rate and payment for that loan. (xi) The fact that the loan program contains a demand feature. (xii) The type of information that will be provided in notices of adjustments and the timing of such notices. (xiii) A statement that disclosure forms are available for the creditor's other variable-rate loan programs. (c) Adjustment notices. An adjustment to the interest rate with or without a corresponding adjustment to the payment in an adjustable-rate transaction subject to this § 536.9-9 is an event requiring new dislosures to the consumer. At least once each year during which an interest rate adjustment is implemented without an accompanying payment change, and at least 25, but no more than 120, calendar days before a payment at a new level is due, the following written disclosures, as applicable, must be delivered or placed in the mail: (1) The current and prior interest rates. (2) The index values upon which the current and prior interest rates are based. (3) The extent to which the creditor has foregone any increase in the interest rate. (4) The contractual effects of the adjustment, including the payment due after the adjustment is made, and a statement of the loan balance. (5) The payment, if different from that referred to in paragraph (c)(4) of this section, that would be required to amortize fully the loan at the new interest rate over the remainder of the loan term. (d) Fixed-rate and adjustable-rate mortgage loan disclosures. Not later than three business days following receipt of a written application for a fixed-rate or adjustable-rate mortgage loan, insured institutions shall disclose in writing to the applicant the information specified in this paragraph (d). Disclosures shall be provided for all such loans whether originated by the lender or purchased from an affiliate (as defined in § 583.15) or purchased from an unaffiliated entity as part of a business arrangement or agreement to purchase loans not yet originated. Disclosures shall be delivered or placed in the mail not later than three business days following receipt of a consumer's written application when the application reaches the creditor through an intermediary agent or broker. Loans purchased from an unaffiliated entity in the usual course of business, and previously originated by the entity without guarantees, agreements or understandings that they would be purchased by the institution, may be purchased notwithstanding these disclosures requirements, provided that such loans comply with the disclosure requirements of other federal laws and regulations to which they may be subject. The disclosures shall be in one or more documents other than the loan documents and shall be in plain language. The purpose of these disclosure requirements is to provide a full understanding of the operations and consequences of the loan for which the borrower is applying. If insured institutions elect to disclose the information in paragraphs (d)(1) through (d)(4) of this section as part of their advance disclosures under paragraph (c) of this section, disclosed information need not be repeated. Disclosures do not constitute a commitment on the part of an institution to make a loan to the applicant. At a minimum, the following shall be disclosed: (1) If the loan contract contains a due-on-sale clause, what rights the lender has under the clause. (2) If the loan contract authorizes the imposition of a late charge or a prepayment penalty the amount of the charge or penalty or the manner in which it is to be determined. If the method of calculating the charge or penalty may vary over the term of the loan, the lender shall indicate the approximate minimum and maximum amounts that may be imposed for a loan of the same type and with an ini tial balance comparable to that of the borrower. (3) If the loan contract provides for escrow payments, a statement explaining the purpose of requiring escrow payments, how the amount of escrow payment is established, how the borrower will be notified of any deficiencies in the borrower's escrow account, how such deficiencies will be corrected, whether the borrower will have the option of correcting the deficiency with either pro-rated monthly payments or a lump-sum payment, how any surplus will be returned to the borrower, and the rights of the lender if the borrower fails to make the escrow payments. (4) In the case of non- or partiallyamortized loans (including a loan giving the lender the right to call the loan due and payable after a period of time or upon the occurrence of an event external to the loan), a stateI ment of what information will be contained in the notice of maturity, how far in advance notice of maturity will be provided, whether the institution I has unconditionally obligated itself to refinance the loan, and whether there will be a large payment due at maturity or upon call of the loan. (e) Maximum interest rate caps. All insured institutions making adjustable-rate loans, originated on or after December 8, 1987, whether open-end for closed-end, shall comply with Regulation Z (12 CFR 226.30) by specifying in their credit contracts the maximum interest rate that may be imposed during the term of the obligation. (f) Exception. The disclosures in paragraph (b) of this section are not required in connection with the extension of consumer credit as defined in § 561.38 of this subchapter even if it is secured by a borrower-occupied home as long as the home is not the primary security for the loan. [50 FR 32010, Aug. 8, 1985, as amended at 53 FR 18266, May 23, 1988] 88 563.10-563.12 [Reserved] § 563.13 Regulatory capital requirement. tory capital, as defined in § 561.13 of this subchapter. An insured institution's regulatory capital requirement under this section may be superseded or modified by an individual capital requirement established under § 563.14. Any reference in this chapter of Title 12 to compliance with the capital requirements of § 563.13 shall be deemed to require compliance with this section as superseded or modified by an individual minimum capital requirement established under § 563.14 or by a capital directive issued pursuant to § 563.14-1. Compliance with the requirements of this section and § 563.14, if applicable, shall be deemed to constitute compliance with the reserve requirements of section 403(b) of the National Housing Act (12 U.S.C. 1726(b)). (b) Minimum required amount. Except as otherwise provided in this section, the minimum regulatory capital requirement for any calendar quarter (commencing with the quarter ending March 31, 1987) shall be an amount equal to the sum of an institution's liability component and contingency component minus its maturity matching credit. An institution shall not use the maturity matching credit to reduce its required amount of regulatory capital below 3 percent of total liabilities for the period from December 31, 1986, until December 31, 1989, or to reduce its required capital below 4 percent of total liabilities on or after January 1, 1990. (1) General definitions: For purposes of this section: (i) "Total liabilities" means total assets net of loans in process, specific reserves, and deferred credits other than deferred taxes, minus regulatory capital as defined in § 561.13 of this subchapter. (ii) "Base liabilities" means the lower of an institution's level of total liabilities on January 1, 1987, (beginning of day) or the institution's total liabilities at the end of the quarter for which regulatory capital is being computed. (iii) "Increased liabilities” means an institution's total liabilities in excess of its base liabilities. 30-039 0-89--11 (iv) "Liability component," except as otherwise provided in this section, means an amount of capital equal to (A) For the period commencing January 1, 1987, and ending when an institution's liability factor reaches 6 percent, an institution's base liabilities amount plus its increased liabilities amount; and (B) Thereafter, 6 percent of total liabilities. (2) Calculation of base liabilities amount. (i) "Base liabilities amount" means an amount of capital which equals the greater of (A) An institution's base liabilities multiplied by the liability factor for a quarter, or (B) An institution's base liabilities multiplied by its base ratio. (ii) "1987 base factor" means the minimum required amount of net worth under the former net worth regulation (12 CFR 563.13(g)(2) (1986)), ("former net worth regulation") calculated as of December 31, 1986, excluding the contingency component and before reduction for qualifying balances. This is the institution's 1987 base factor under the former net worth regulation. (iii) "Base ratio” means a percent derived from a ratio (A) with a numerator equal to an institution's 1987 base factor; and (B) with a denominator equal to the institution's total liabilities as of December 31, 1986. (iv) "April calculation" means the median return on assets of all insured institutions for the calendar year preceding computation of the April calculation multiplied by the appropriate percentage. The percentage to be used for insured institutions in the standard group is 75 percent. The percentage to be used for insured institutions in the lower group is 90 percent. The Board will compute and publish the calculation in April of each year. (v) "Liability factor" means the percentage rate in any given quarter applied to an institution's base liabilities at the end of that quarter to calculate its base liabilities amount for that quarter. (A) Institutions with base ratios equal to 3 percent (the "standard group") shall have initial liability factors of 3 percent. This percentage will change each July 1 by one-half of the most recent April calculation for the standard group and will change by the same percentage the following January 1. (B) Institutions with liability factors below 3 percent ("lower group”) shall have initial liability factors equal to their base ratios. This percentage will increase each July 1 by the higher of one-half of the most recent April calculation for the lower group or 90 percent of the institution's own return on assets (data based on its most recent annual report) for the prior calendar year. This liability factor will increase by the same percentage on the following January 1. If for any quarter an institution's liability factor computed under this method exceeds the liability factor of the standard group (as published with the Board's April calculation), the institution shall from that time forward use the liability factor of the standard group. (C) Institutions with base ratios exceeding 3 percent (the "higher group") shall have initial liability factors equal to their base ratios. Such an institution's liability factor shall remain constant until that liability factor is exceeded by the standard group's liability factor (as published with the Board's April calculation). From that time forward, such an institution's liability factor shall be the standard group's liability factor. (3) Calculation of increased liabilities amount. The “increased liabilities amount" means an amount of capital equal to 6 percent of an institution's total liabilities in excess of its base liabilities. (4) Calculation of contingency component-(i) Definitions. The terms defined in this paragraph are used in determining the contingency component, but may also be used elsewhere in this section. (A) "Fully phased-in requirement" means an amount of capital equal to 6 percent of total liabilities plus the contingency component minus the maturity matching credit. (B) "Net fully phased-in requirement" means an amount of capital equal to 6 percent of total liabilities plus the incremental capital requirement on fixed reserve elements of the |