OCC and OTS: Policy Integration

On December 8, 2011, the Office of the Comptroller of the Currency (OCC) issued a bulletin that outlines the process which the OCC intends to follow to fully integrate the Office of Thrift Supervision (OTS) policy guidance documents into a common set of supervisory policies that applies to both national banks and federal savings associations.

We have been monitoring the integration from its inception and informing our OCC and OTS clients accordingly. [For instance, see our newsletter OCC and OTS Synchronizing (6/8/11)]

If you are one of our OCC or OTS clients, please contact us for further information and discussion.

In this Newsletter
Overview
Process
Process: Phase I
Process: Phase II
Library

Overview

Dodd-Frank required that all functions of OTS relating to federal savings associations, and the rulemaking authority of the OTS relating to all federal savings associations, were transferred to the OCC on July 21, 2011. Consequently, the OCC assumed the responsibility for the ongoing supervision, examination, and regulation of federal savings associations.

Further, Dodd-Frank continues all OTS orders, resolutions, determinations, agreements, regulations, interpretive rules, other interpretations, guidelines, procedures, and other advisory materials in effect the day before the transfer date, while also permitting the OCC to administer these documents with respect to federal savings associations, until the documents are modified, terminated, set aside, or superseded by the OCC, by a court, or by operation of law.

The OCC issued an interim final rule on July 21, 2011, with request for comments that republished, with nomenclature and other technical changes, the OTS regulations formerly found in chapter V of title 12 of the Code of Federal Regulations. (These republished regulations became effective on July 21, 2011, and will be codified in chapter I at parts 100 through 197.1.)

Now, the OCC has announced in bulletin OCC 2011-47 that it is embarking on a comprehensive rulemaking project to integrate, when possible, these former OTS rules with OCC rules applicable to national banks. Concurrently, the OCC is integrating more than 1,000 supervisory policies of the former OTS into the OCC policy framework.

The OCC expects to produce a consistent, supervisory approach and integrated policy platform for national banks and federal savings associations, while recognizing differences anchored in statute.

Process

The OCC will group, to the extent possible, rescission notifications and other announcements related to the integration of OTS guidance, according to a two-phased process.

Process: Phase I

This phase involves rescinding a significant number of documents. The documents rescinded in this phase will include OTS documents that:

• transmitted or summarized rules, interagency guidance, or Examination Handbook sections (not the conveyed guidance or rule itself);

• are no longer useful because of the elimination of the OTS or the passage of time; and/or

• duplicate existing OCC guidance.

Additionally, the OCC will rescind outdated guidance issued to national banks. Forthcoming OCC bulletins will announce these rescissions.

NOTE: In order to minimize confusion, documents will be watermarked as rescinded on the OCC Web site or former OTS Web site, as applicable.

Process: Phase II

This phase focuses on guidance that requires further review, substantive revision, or combination or is considered unique to federal savings associations.

Guidance

Guidance that is linked to regulatory or statutory requirements will be coordinated closely with the concurrent integration of OCC and former OTS regulations. In many cases, guidance cannot be revised or combined until the revisions to the rules on which the guidance is based have been finalized.

Priorities

Prioritization of the work will be influenced by feedback from the OCC's supervision staff as it encounters policy differences in the day-to-day supervision of national banks and federal savings associations.

Cross-References

Former OTS policies and guidance remain applicable to federal savings associations until rescinded, superseded, or revised. In some cases, the OCC may amend an OTS rule, policy, or practice that is cross-referenced in more than one document or affects only a portion of a document.

Duplications

If overlapping guidance exists, any guidance or regulation issued by the OCC after July 21, 2011, that specifically includes federal savings associations in its scope, will prevail. If a document has not been rescinded, but a portion of the content no longer applies, the superseded portion will be grayed out electronically.

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Office of the Comptroller of the Currency
OCC 2011-47 (Bulletin)
Subject: OTS Integration
December 8, 2011

Resecuritizing the RMBS Portfolio

The Comptroller of the Currency (OCC) has recently concluded that the resecuritization of certain residential mortgage-backed securities by a bank is permitted through its subsidiary.

In its Interpretive Letter # 1133 (September 2011), the OCC determined that a bank could consummate a certain type of structured transaction in order to enhance the marketability of the underlying interests and its liquidity position and to address regulatory concerns relating to its exposure to non-investment grade securities.

The OCC's consent was based, among other things, on the petitioning bank's representations that it would adhere to prudential requirements and supervisory guidance on safe and sound banking practices and that it would establish and maintain, to the OCC's satisfaction, "an adequate and effective risk measurement and management program."

Re-Packaging Risk

 Here is a brief overview of this resecuritization plan:

• A real estate mortgage investment conduit (REMIC) is one type of vehicle used for securitizing mortgage loans, and it is subject to a specialized set of tax rules. [A Re-REMIC (Re-REMIC) transaction involves the resecuritization of the residential mortgage-backed securities (RMBS) issued by the REMIC. Re-REMIC transactions can have structural differences.]

• The Re-REMIC Transaction would involve a bank transferring the RMBS to a limited purpose subsidiary of that bank.

• This limited purpose subsidiary would form several trusts and transfer several RMBS to each trust.

• Each trust would then issue new securities backed by the RMBS (Re-REMIC Securities) to the limited purpose subsidiary.

• Thereafter, through its limited purpose subsidiary, the bank would hold the Re-REMIC Securities to maturity, but would have the ability to sell them if market conditions improve. It is believed that the Re-REMIC Securities, on the whole, would be more marketable and liquid than the original RMBS.

• A "nationally-recognized statistical rating organization" would rate the Re-REMIC Securities based on a credit and cash flow analysis of the underlying loans, rather than based on the RMBS.

Analysis

The OCC determined that the bank could consummate the transaction and hold the Re-REMIC securities resulting from the transaction. According to the OCC's Interpretive Letter, a bank's authority to securitize assets it holds includes the authority to securitize assets that are securities.

The Interpretative Letter states that a bank may securitize the RMBS through a Re-REMIC Transaction and hold the resultant Re-REMIC Securities.

The letter further states that there is no distinction between securitizing internally generated assets and securitizing other permissibly held assets.

The OCC also concluded that a bank may hold the investment-grade Re-REMIC securities as Type V securities. (A Type V security is a security that is rated investment grade; marketable; not a Type IV security; and fully secured by interests in a pool of loans to numerous obligors in which a national bank could invest directly. The aggregate par value of Type V securities held by the bank that are issued by any one issuer may not exceed 2% of a bank's capital and surplus.)

By restructuring its assets in the Re-REMIC transaction, a bank would enhance the marketability of the underlying assets, improving its liquidity position and reducing its amount of non-conforming assets.

The purpose of the Re-REMIC Transaction, then, is to allow for a "better reflection of the true economic value of the nonperforming and nonconforming RMBS as economic conditions improve," and to thereby enhance the marketability of the RMBS assets and the bank's liquidity position.

Some Notes

It should be noted that the Re-REMIC Transaction is not entered into for the purpose of obtaining "capital relief," and, accordingly, a bank would still hold capital against the RMBS (rather than the Re-REMIC Securities) for so long as the RMBS remain on the bank's balance sheet.

Also noteworthy is that the petitioning bank expects, based upon previous discussions with nationally recognized debt rating agencies, that "the aggregate book value of the non-investment grade Re-REMIC Securities will be substantially less than the aggregate book value of the investment-grade Re-REMIC Securities at the commencement of the Re-REMIC Transaction."

The OCC said that this transaction was a "modern variation" of the type of asset restructuring long recognized as permissible for national banks.

LIBRARY

Comptroller of the Currency (OCC)

Resecuritization of Certain
Residential Mortgage-Backed Securities

Interpretive Letter #1133

September 2011

OTS and OCC Synchronizing

On May 25, 2011, the Office of the Comptroller of the Currency (OCC) issued a proposed rule implementing several provisions of the Dodd-Frank Act (Dodd-Frank), including the transfer of functions from the Office of Thrift Supervision (OTS) and changes to national bank preemption and the OCC's visitorial authority.

Under Dodd-Frank, the OCC is required to assume responsibility for the ongoing examination, supervision, and regulation of Federal savings associations on July 21, 2011.

This Notice of Proposed Rulemaking (NPR) is the first step in the OCC's review of its own regulations and those of the OTS to determine what changes are needed to facilitate a smooth regulatory transition. The NPR was published in the Federal Register on May 26, 2011.

Comments Due: June 27, 2011

REVISIONS

The NPR would:

• Revise OCC rules that are central to internal agency functions and operations immediately upon the transfer of supervisory jurisdiction for Federal savings associations, including rules related to OCC organization, the availability and release of information, and post-employment restrictions for senior examiners.
• Amend the OCC's assessment fee rule to include Federal savings associations. Following a transition period, the proposal provides a single assessment schedule for both national banks and Federal savings associations. Banks and thrifts would be subject to identical assessment methodologies, rates, fees, and payment due dates.

Fee Schedule

As part of the transition of Federal thrift supervision from the OTS to the OCC, the OCC would compute assessment fees under both the OCC and OTS schedules for assessments charged in September 2011 and March 2012, and Federal savings associations will pay the lesser of the two fees.

Beginning with assessments charged in September 2012, the OCC will assess institution fees based on a single fee schedule regardless of charter.

Transfer Date

As part of the integration of the aforementioned OTS functions into the OCC, the OCC also plans to issue an Interim Final Rule with a request for comments, effective on the transfer date, that republishes those OTS regulations the OCC has the authority to promulgate and enforce as of the transfer date, renumbered and issued as new OCC rules, with nomenclature and other technical amendments to reflect OCC supervision of Federal thrifts.

The OCC will consider more comprehensive substantive amendments to these regulations, as appropriate, after the transfer date.

Preemption and Non-Preempted State Laws

Included in the NPR are changes to the OCC's regulations necessary to implement certain revisions to the banking laws that took effect on the enactment of Dodd-Frank.

These changes include implementation of a moratorium on changes in control of credit card banks and trust banks, revisions to Federal branch and agency rules to reflect the permanent increase in deposit insurance coverage, and amendments to OCC rules pertaining to preemption and visitorial powers.

These preemption-related amendments would:

• Eliminate preemption for national bank operating subsidiaries.

• Apply national bank and national bank subsidiary preemption standards, as well as the visitorial powers standards applicable to national banks, to Federal thrifts and their subsidiaries.

• Eliminate any ambiguity concerning the preemption standards in OCC regulations by removing language from OCC rules that provides that state laws that "obstruct, impair or condition" a national bank's powers are preempted.
• Revise the OCC's visitorial powers rule to conform to the holding of the Supreme Court's Cuomo decision, as incorporated by Dodd-Frank, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks.

Visit Library

Office of the Controller of the Currency (OCC):
Office of Thrift Supervision Integration (OTS)
(Dodd-Frank Act Implementation)
Federal Register - Vol. 76, No. 102
May 26, 2011