The federal Office of the Comptroller of the Currency, or OCC, regulates national banks’ ownership of a category of real estate called “other real estate owned,” commonly shortened to OREO. It has been more than 20 years since OCC updated these regulations. That changed on October 22, 2019 when OCC amended the regulations and issued a final rule, effective December 1, 2019, which addresses two areas: (i) clarifying the rules for holding and disposing of OREO, and (ii) eliminating outdated capital rules. The OCC summary explained that the purpose of the amendments is to clarify and streamline the regulation for national bank OREO activities, and to apply that framework to the OREO activities of Federal savings associations.
OREO is bank owned real estate, acquired by the bank in full or partial satisfaction of a debt, and former banking premises, which are held as non-earning assets. The regulations are based on the idea that banks are not, and should not, be in the real estate investment business; they should rather lend money to people who are. As observed after the 2008 credit crisis and ensuing recession, a large portfolio of real estate owned by a bank is not a good thing; it may be a sign that loans are defaulting, resulting in borrowers surrendering properties to the bank, or the bank acquiring properties through foreclosure. A growing OREO portfolio may also be a red-flag to regulators of impending greater problems. The Treasury Department, through OCC, therefore, sets the rules by which banks may hold this nonproductive real property, how they appraise it, how they dispose of it, and how they record the investment proceeds.
The amendments generally maintain the existing standards, including definitions of OREO, market value, and recorded investment amount, and then extend the standards applicable to national banks to Federal savings associations through the OCC’s supervisory powers over Federal savings associations granted in the Dodd-Frank Act. There are a few clarifications however to the older rules worth noting.
First, when an institution acquires OREO by merger or acquisition, the relevant holding period commences on the effective date of the transaction, but does not include any time the acquired entity held the OREO. Second, OREO may now be disposed of under the rules in other ways approved by OCC such as by donating or escheating OREO, or by negotiating early termination of OREO leases; Federal savings associations may also transfer OREO to a service corporation. Third, an appraisal may not be required at acquisition, if doing so would be unreasonable or unsafe due to holdover tenants or squatters, but must be updated as soon as the bank gains access. Fourth, Generally Accepted Accounting Principles, or GAAP, now apply to OREO. Fifth, the Appendices to the old regulations, containing the risk-based capital guidelines for national banks and capital requirements for Federal savings associations, have been rescinded. New clarifications were also added regarding capitalized and operating leases, and the ability of a bank to own real estate for its own use in banking activities. The amendments codified that banks may pay normal operating expenses of OREO (such as taxes, insurance and utilities), and expenses of a business associated with the OREO property.
The complete amended regulation may be found at 84 Fed. Reg. 56369 (Oct. 22, 2019).