PART 1777—PROMPT CORRECTIVE ACTION Authority: 12 U.S.C. 1452(b)(2), 1456(c), 1718(c)(2), 1723a(k), 4513(a), 4513(b), 4514, 4517, 4611-4619, 4622, 4623, 4631, 4635. Source: 67 FR 3598, Jan. 25, 2002, unless otherwise noted. § 1777.1 Authority, purpose, scope, and implementation dates. (a) Authority. (b) Authority, purpose and scope of subpart A. (c) Authority, purpose, and scope of subpart B. (d) Effective dates of capital classifications. § 1777.2 Preservation of other authority. (a) Supervisory standards. (b) Capital floor. (c) Form of supervisory action or response. § 1777.3 Definitions. For purposes of this part, the following definitions will apply: 1992 Act et seq. Affiliate Capital distribution (1) Any dividend or other distribution in cash or in kind made with respect to any shares of, or other ownership interest in, an Enterprise, except a dividend consisting only of shares of the Enterprise; and (2) Any payment made by an Enterprise to repurchase, redeem, retire, or otherwise acquire any of its shares or other ownership interests, including any extension of credit made to finance an acquisition by the Enterprise of such shares or other ownership interests, except to the extent the Enterprise makes a payment to repurchase its shares for the purpose of fulfilling an obligation of the Enterprise under an employee stock ownership plan that is qualified under section 401 of the Internal Revenue Code of 1986 (26 U.S.C. 401 et seq. Core capital Critical capital level Enterprise Minimum capital level OFHEO Risk-based capital level Total capital Subpart A—Prompt Supervisory Response § 1777.10 Developments prompting supervisory response. In the event of any of the following developments, OFHEO shall undertake one of the supervisory responses enumerated in § 1777.11, or a combination thereof: (a) OFHEO's national House Price Index (HPI) for the most recent quarter is more than two percent less than the national HPI four quarters previously, or for any Census Division or Divisions in which are located properties securing more than 25 percent of single-family mortgages owned or securing securities guaranteed by an enterprise, the HPI for the most recent quarter for such Division or Divisions is more than five percent less than the HPI for that Division or Divisions four quarters previously; (b) An Enterprise's publicly reported net income for the most recent calendar quarter is less than one-half of its average quarterly net income for any four-quarter period during the prior eight quarters; (c) An Enterprise's publicly reported net interest margin (NIM) for the most recent quarter is less than one-half of its average NIM for any four-quarter period during the prior eight quarters; (d) For single-family mortgage loans owned or securities by an Enterprise that are delinquent ninety days or more or in foreclosure, the proportion of such loans in the most recent quarter has increased more than one percentage point compared to the lowest proportion of such loans in any of the prior four quarters; or (e) Any other development, including conduct of an activity by an Enterprise, that OFHEO determines in its discretion presents a risk to the safety and soundness of the Enterprise or a possible violation of applicable law, regulation, or order. § 1777.11 Supervisory response. (a) Level I supervisory response Supervisory letter. (2) Contents of supervisory letter. (i) Provide OFHEO with any relevant information known to the Enterprise about the potentially adverse development, in such format as OFHEO directs; (ii) Respond to specific questions and concerns that OFHEO poses about the potentially adverse development; and (iii) Take appropriate action. (3) Review; further action. (4) Sequence of supervisory responses. (b) Level II supervisory response Special review. (2) Review; further action. (c) Level III supervisory response Action plan. (2) Contents of action plan. (i) In the case of any potentially adverse development arising from conditions or practices internal to the Enterprise, any relevant information known to the Enterprise about the circumstances that led to the potentially adverse development; (ii) An assessment of likely consequences that the potentially adverse development may have for the Enterprise; and (iii) The proposed course of action the Enterprise will undertake in response to the potentially adverse development, including an explanation as to why such approach is preferred to any other alternative actions by the Enterprise and how such approach will address the concerns of OFHEO. (3) Review; further action. (d) Level IV supervisory response Notice to show cause. (i) A notice of charges to the Enterprise under section 1371 of the 1992 Act (12 U.S.C. 4631) and the procedures in 12 CFR part 1780 commencing an action to order the Enterprise to cease and desist conduct, conditions, or violations specified in the notice to show cause; (ii) A temporary order to the Enterprise under section 1372 of the 1992 Act (12 U.S.C. 4632) and the procedures in 12 CFR part 1780 to cease and desist from, and take affirmative actions to prevent or remedy harm from, conduct, conditions, or violations specified in the notice to show cause; (iii) A notice of charges under section 1376 of the 1992 Act (12 U.S.C. 4636) and the procedures in 12 CFR part 1780 commencing imposition of a civil money penalty against the Enterprise; or (iv) A notice of discretionary reclassification of the Enterprise's capital classification under section 1364(b) of the 1992 Act (12 U.S.C. 4614(b)) and subpart B of this part. (2) Review; further action. § 1777.12 Other supervisory action. Notwithstanding the pendency or completion of one or more supervisory responses described in § 1777.11, OFHEO may at any time undertake additional supervisory steps and actions in the form of any informal or formal supervisory tool available to OFHEO under the 1992 Act, including, but not limited to, issuing guidance or directives under section 1313 (12 U.S.C. 4513), requiring reports under section 1314 (12 U.S.C. 4514), conducting other examinations under section 1317 (12 U.S.C. 4517), issuing discretionary reclassification under section 1364 (12 U.S.C. 4614), initiating discretionary action under section 1366(b) (12 U.S.C. 4616(b)), appointing a conservator under section 1369(a) (12 U.S.C. 4619(a)), or initiating administrative enforcement action under sections 1371, 1372, and 1376 (12 U.S.C. 4631, 4632 and 4636). In addition, OFHEO may take any such steps or actions with respect to an Enterprise that fails to make a submission or comply with a directive as required by § 1777.11, or to address an Enterprise's failure to implement an appropriate action in response to a supervisory letter or under an action plan under § 1777.11. Subpart B—Capital Classifications and Orders Under Section 1366 of the 1992 Act § 1777.20 Capital classifications. (a) Capital classifications after the effective date of section 1365 of the 1992 Act. (1) Adequately capitalized. (i) As of the date specified in the notice of proposed capital classification, holds total capital equaling or exceeding the risk-based capital level; and (ii) As of the date specified in the notice of proposed capital classification, holds core capital equaling or exceeding the minimum capital level. (2) Undercapitalized. (i) As of the date specified in the notice of proposed capital classification, holds total capital less than the risk-based capital level; and (ii) As of the date specified in the notice of proposed capital classification, holds core capital equaling or exceeding the minimum capital level. (3) Significantly undercapitalized. (i) As of the date specified in the notice of proposed capital classification, holds core capital less than the minimum capital level; and (ii) As of the date specified in the notice of proposed capital classification, holds core capital equaling or exceeding the critical capital level. (4) Critically undercapitalized. (5) Discretionary reclassification—determination to reclassify. (i) Undercapitalized if the Enterprise is otherwise classified as adequately capitalized; (ii) Significantly undercapitalized if the Enterprise is otherwise classified as undercapitalized; or (iii) Critically undercapitalized if the Enterprise is otherwise classified as significantly undercapitalized. (b) Duration of reclassification; successive reclassifications. (2) If the action, inaction, or condition upon which a reclassification was based under paragraph (a)(5) or (c)(5) of this section has not ceased or been eliminated and remedied to OFHEO's satisfaction within such reasonable time as is determined by OFHEO to be appropriate, OFHEO may consider such failure to be the basis for additional reclassification under such paragraph (a)(5) or (c)(5) of this section into a lower capital classification. (c) Capital classifications before the effective date of section 1365 of the 1992 Act. (1) Adequately capitalized. (2) Undercapitalized. (i) As of the date specified in the notice of proposed capital classification, holds core capital equaling or exceeding the minimum capital level; and (ii) Is reclassified as undercapitalized by OFHEO under paragraph (c)(5) of this section. (3) Significantly undercapitalized. (i) As of the date specified in the notice of proposed capital classification, held core capital less than the minimum capital level; and (ii) As of the date specified in the notice of proposed capital classification, held core capital equaling or exceeding the critical capital level. (4) Critically undercapitalized. (5) Discretionary reclassification. (i) Undercapitalized if the Enterprise is otherwise classified as adequately capitalized: (ii) Significantly undercapitalized if the Enterprise is otherwise classified as undercapitalized; or (iii) Critically undercapitalized if the Enterprise is otherwise classified as significantly undercapitalized. (d) Prior approvals. § 1777.21 Notice of capital category, and adjustments. (a) Notice of capital classification. (1) Notice of proposed capital classification. (ii) Notices proposing to classify or reclassify an Enterprise as undercapitalized or significantly undercapitalized may be combined with a notice that OFHEO may further reclassify the Enterprise under § 1777.23(c), without additional notice. (iii) Notices proposing to classify or reclassify an Enterprise as significantly undercapitalized or critically undercapitalized may be combined with a notice under § 1777.24 that OFHEO intends to issue an order under section 1366 of the 1992 Act (12 U.S.C. 4616). (iv) Notices proposing to classify an Enterprise as undercapitalized or significantly undercapitalized may be combined with a notice proposing to simultaneously reclassify the Enterprise under § 1777.20(a)(5) or § 1777.20(c)(5). (2) Response by the Enterprise. (i) The Enterprise may, within thirty calendar days from receipt of a notice of proposed capital classification, submit a response to OFHEO, unless OFHEO determines the condition of the Enterprise requires a shorter period or the Enterprise consents to a shorter period. (ii) The Enterprise's response period may be extended for up to an additional thirty calendar days if OFHEO determines there is good cause for such extension. (iii) The Enterprise's failure to submit a response during the response period (as extended or shortened, if applicable) shall waive any right of the Enterprise to comment on or object to the proposed capital classification. (3) Classification determination and written notice of capital classification. (4) Timing. (b) Developments warranting possible change to capital classification Notice to OFHEO. (2) OFHEO, in its discretion, will determine whether to issue a new notice of proposed capital classification under paragraph (a) of this section, based on OFHEO's review of the notice under paragraph (b)(1) of this section from the Enterprise and any other information deemed relevant by OFHEO. § 1777.22 Limitation on capital distributions. (a) Capital distributions in general. (b) Capital distributions by an Enterprise that is not adequately capitalized Prohibited distributions. (2) Restricted distributions. (i) Will enhance the ability of the Enterprise to meet the risk-based capital level and the minimum capital level promptly; (ii) Will contribute to the long-term financial safety and soundness of the Enterprise; or (iii) Is otherwise in the public interest. § 1777.23 Capital restoration plans. (a) Schedule for filing plans In general. (2) Successive capital classifications. (b) Contents of capital restoration plan. (i) Specify the level of capital the Enterprise will achieve and maintain; (ii) Describe the actions that the Enterprise will take to become classified as adequately capitalized; (iii) Establish a schedule for completing the actions set forth in the plan; (iv) Specify the types and levels of activities (including existing and new programs) in which the Enterprise will engage during the term of the plan; (v) Describe the actions that the Enterprise will take to comply with any mandatory or discretionary requirements to be imposed under Subtitle B of the 1992 Act (12 U.S.C. 4611 through 4623) or subpart B of this part; (vi) To the extent the Enterprise is required to submit or revise a capital restoration plan as the result of a reclassification of the Enterprise under § 1777.20(a)(5) or § 1777.20(c)(5), describe the steps the Enterprise will take to cease or eliminate and remedy the action, inaction, or conditions that caused the reclassification; and (vii) Provide any other information or discuss any other issues as instructed by OFHEO. (2) The plan shall include a declaration by the chief executive officer, treasurer, or other officer designated by the Board of Directors of the Enterprise to make such declaration, that the material contained in the plan is true and correct to the best of such officer's knowledge and belief. (c) Failure to submit Failure to submit; submission of unacceptable plan. (i) As significantly undercapitalized if it is otherwise classified as undercapitalized; or (ii) As critically undercapitalized if it is otherwise classified as significantly undercapitalized. (2) Duration of reclassification. (3) Successive reclassifications. (d) Order approving or disapproving plan. (e) Resubmission. (f) Amendment. (g) Termination Termination under the terms of the plan. (2) Termination orders. (h) Implementation (i) If OFHEO determines, in its discretion, that an Enterprise has failed to make, in good faith, reasonable efforts necessary to comply with the capital restoration plan and fulfill the schedule thereunder, OFHEO may reclassify the Enterprise: (A) As significantly undercapitalized if it is otherwise classified as undercapitalized; or (B) As critically undercapitalized if it is otherwise classified as significantly undercapitalized. (ii) Duration of reclassification. (iii) Successive reclassifications. (2) Administrative enforcement action. § 1777.24 Notice of intent to issue an order. (a) Orders under section 1366 of the 1992 Act (12 U.S.C. 4616). (1) Limit any increase in, or reduce, any obligations of the Enterprise, including off-balance sheet obligations; (2) Limit or eliminate growth of the Enterprise's assets or reduce the amount of the Enterprise's assets; (3) Acquire new capital, in such form and amount as determined by OFHEO; or (4) Terminate, reduce, or modify any activity of the Enterprise that OFHEO determines creates excessive risk to the Enterprise. (b) Notice of intent to issue an order. (c) Contents of notice. (1) A statement of the Enterprise's capital classification and its minimum capital level or critical capital level, and its risk-based capital level; (2) A description of the restrictions, prohibitions, or affirmative actions that OFHEO proposes to impose or require; and (3) The proposed date when such restrictions or prohibitions would become effective or the proposed date for the commencement and/or completion of the affirmative actions. § 1777.25 Response to notice. (a) Content of response. (1) Any relevant information, mitigating circumstances, documentation, or other information the Enterprise wishes OFHEO to consider in support of the Enterprise's position regarding the proposed order; and (2) Any recommended modification to the proposed order, and justification thereof. (b) Time to respond. (c) Waiver and consent. § 1777.26 Final notice of order. (a) Determination and notice. (b) Termination or modification. (c) Enforcement of order Judicial enforcement. (2) Administrative enforcement. § 1777.27 Exhaustion and review. (a) Judicial review Review of certain actions. (2) Other review barred. (b) Exhaustion of administrative remedies. (c) No stay pending review. § 1777.28 Appointment of conservator for a significantly undercapitalized or critically undercapitalized Enterprise. (a) Significantly undercapitalized Enterprise. (1) The amount of core capital of the Enterprise is less than the minimum capital level; and (2) The alternative remedies available to OFHEO under the 1992 Act are not satisfactory. (b) Critically undercapitalized Enterprise Appointment upon classification. (2) Exception. (i) The appointment of a conservator would have serious adverse effects on economic conditions of national financial markets or on the financial stability of the housing finance market; and (ii) The public interest would be better served by taking some other enforcement action authorized under this title. (c) Judicial review. (d) Termination Upon reaching the minimum capital level. (2) In OFHEO's discretion.