[Federal Register Volume 75, Number 236 (Thursday, December 9, 2010)]
[Rules and Regulations]
[Pages 76617-76624]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30519]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 950 and 980

FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1264, 1266, 1269, and 1272

RIN 2590-AA24


Use of Community Development Loans by Community Financial 
Institutions To Secure Advances; Secured Lending by Federal Home Loan 
Banks to Members and Their Affiliates; Transfer of Advances and New 
Business Activity Regulations

AGENCY: Federal Housing Finance Board, Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: Section 1211 of the Housing and Economic Recovery Act of 2008 
(HERA) amended the Federal Home Loan Bank Act (Bank Act) to expand the 
types of eligible collateral that community financial institution (CFI) 
members may pledge to secure Federal Home Loan Bank (Bank) advances to 
include secured loans for community development activities and to allow 
Banks to make long term advances to CFI members for purposes of 
financing community development activities. Section 1211 further 
provides that the Federal Housing Finance Agency (FHFA) shall define 
the term ``community development activities'' by regulation. To 
implement these provisions, FHFA is amending the advances regulation to 
allow CFI members to pledge community development loans as collateral 
for advances and is adopting a definition of ``community development'' 
as proposed. The final rule also will transfer the advances and new 
business activities rules from parts 950 and 980 of the Federal Housing 
Finance Board (FHFB) regulations, to new parts 1266 and 1272 of the 
FHFA regulations, respectively, and make other conforming amendments. 
Finally, the final rule will make a change to the advances regulation 
to incorporate a long-standing policy previously established by the 
FHFB that secured lending to a member of any Bank is an advance that 
must meet the requirements of the advances regulation. The final rule 
language has been clarified to assure that certain types of 
transactions, such as derivatives, will not be considered secured 
lending for the purposes of this provision. The new provision 
addressing secured lending does not include a prohibition on secured 
transactions with affiliates of members, as was initially proposed.

DATES: The final rule is effective on January 10, 2011.

FOR FURTHER INFORMATION CONTACT: Thomas E. Joseph, Senior Attorney 
Advisor, <a href="/cdn-cgi/l/email-protection#ec988483818d9fc286839f899c84ac8a848a8dc28b839a"><span class="__cf_email__" data-cfemail="285c404745495b0642475b4d5840684e404e49064f475e">[email protected]</span></a>, (202) 414-3095 (not a toll-free 
number); Office of General Counsel, Federal Housing Finance Agency, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552; or Julie 
Paller, Senior Financial Analyst, <a href="/cdn-cgi/l/email-protection#85eff0e9ece0abf5e4e9e9e0f7c5e3ede3e4abe2eaf3"><span class="__cf_email__" data-cfemail="2d4758414448035d4c4141485f6d4b454b4c034a425b">[email protected]</span></a>, 202-408-2842 
(not a toll-free number); Division of Federal Home Loan Bank 
Regulation, Federal Housing Finance Agency, 1625 Eye Street, NW., 
Washington, DC 20006. The telephone number for the Telecommunications 
Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. Establishment of FHFA

    Effective July 30, 2008, Division A of HERA, Public Law 110-289, 
122 Stat. 2654 (2008), created FHFA as an independent agency of the 
Federal government. HERA transferred the supervisory and oversight 
responsibilities over the Federal National Mortgage Association (Fannie 
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) 
(collectively, Enterprises), the Banks, and the Bank System's Office of 
Finance, from the Office of Federal Housing Enterprise Oversight 
(OFHEO) and the FHFB to FHFA. FHFA is responsible for ensuring that the 
Enterprises and the Banks operate in a safe and sound manner, including 
being capitalized adequately, and that they carry out their public 
policy missions, including fostering liquid, efficient, competitive, 
and resilient national housing finance markets. The Enterprises and the 
Banks continue to operate under regulations promulgated by OFHEO and 
FHFB until FHFA issues its own regulations. See section 1302 Public Law 
110-289, 122 Stat. 2795.

B. Statutory and Regulatory Background

    Each Bank is a cooperative institution that is owned by its 
members. Any eligible institution (generally a federally insured 
depository institution or state-regulated insurance company) may become 
a member of a Bank if it satisfies certain criteria and purchases a 
specified amount of the Bank's capital stock. 12 U.S.C. 1424, 1426; 12 
CFR part 1263. Only members or certain eligible housing associates 
(such as state housing finance agencies) may obtain access to secured 
loans, known as advances, or other products provided by a Bank. 12 
U.S.C. 1426(a)(4), 1430(a), 1430b.
    Prior to HERA, CFIs were defined under the Bank Act as depository 
institutions insured under the Federal Deposit Insurance Act (12 U.S.C. 
1811 et seq.) with average total assets of less than $500 million, as 
adjusted annually for inflation thereafter. 12 U.S.C. 1422(13) (2008). 
Section 1211 of HERA raised the $500 million average total assets cap 
to $1 billion. See section 1211 Public Law No. 110-289, 122 Stat. 2790 
(amending 12 U.S.C. 1422(10)). By Notice published in the Federal 
Register in February 2009, FHFA adjusted the $1 billion figure for 
inflation to $1.011 billion. 74 FR 7438 (Feb. 17, 2009). As part of 
FHFA's separate rulemaking addressing Bank membership for community 
development financial institutions, FHFA included a technical amendment 
to the definition of ``CFI'' to implement the average total asset cap 
increase to $1 billion made by HERA.\1\ See 74 FR 22848, 22857 (May 15, 
2009); 75 FR 678, 691 (Jan. 5, 2010).
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    \1\ FHFA also relocated the part 925 regulations to part 1263 of 
the FHFA's regulations. 75 FR 678.
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    Under the Bank Act, any member, including a CFI, that wishes to 
borrow from its Bank must pledge certain types of collateral to secure 
its repayment obligation on advances, and must otherwise demonstrate to 
the Bank that it is creditworthy. 12 U.S.C. 1430(a). Each Bank sets its 
own lending and collateral policies, which may vary from Bank to Bank 
and will apply to all borrowing members of that Bank. Prior to HERA, 
section 10(a)(3) of the Bank

[[Page 76618]]

Act specified that a member may pledge the following types of 
collateral to secure an advance: (i) Fully disbursed, whole first 
mortgages on improved residential property not more than 90 days 
delinquent, or securities representing a whole interest in such 
mortgages; (ii) securities issued, insured or guaranteed by the U.S. 
Government or any agency thereof; (iii) cash or deposits of a Bank; 
(iv) other real estate related collateral acceptable to the Bank, 
provided the value of such collateral is readily ascertainable and the 
Bank can perfect its security interest in the collateral; and (v) for 
institutions that qualify as CFIs, secured loans for small business or 
agriculture, or securities representing a whole interest in such 
secured loans.\2\ See 12 U.S.C. 1430(a)(3). Section 1211 of HERA 
amended section 10(a)(3)(E) of the Bank Act to broaden the collateral 
that may be pledged by CFI members to include secured loans for 
community development activities. Section 1211 Public Law 110-289, 122 
Stat. 2790 (amending 12 U.S.C. 1430(a)(3)(E)).
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    \2\ In addition, the Banks under their Community Investment Cash 
Advance Programs (CICA) may provide advances to support economic 
development that benefit persons based on defined targeted income 
levels or targeted geographic areas. 12 CFR part 952.
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    In addition, prior to HERA, section 10(a)(2) of the Bank Act 
provided that a Bank could make a long-term advance to a member only 
for the purposes of providing funds to the member for residential 
housing finance, except that it also allowed long-term advances to CFI 
members for purposes of funding small business, small farm, and small 
agri-business lending.\3\ 12 U.S.C. 1430(a)(2). Section 1211 of HERA 
amended section 10(a)(2)(B) of the Bank Act so that a Bank also may 
make long-term advances to a CFI member to fund community development 
activities. Section 1211, Public Law 110-289, 122 Stat. 2790 (amending 
12 U.S.C. 1430(a)(2)(B)).
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    \3\ Applicable regulations define a long-term advance as one 
``with an original term to maturity of greater than five years.''
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    Section 1211 of HERA also amended section 10(a)(6) of the Bank Act 
to provide that the term ``community development activities'' shall 
have the meaning given such term by regulation by the Director of FHFA. 
Id. (amending 12 U.S.C. 1430(a)(6)). The legislative history of HERA 
does not further illuminate Congress' intent in making these 
amendments.

C. Considerations of Differences Between the Banks and the Enterprises

    Section 1201 of HERA requires the Director, when promulgating 
regulations relating to the Banks, to consider the following 
differences between the Banks and the Enterprises: cooperative 
ownership structure; mission of providing liquidity to members; 
affordable housing and community development mission; capital 
structure; and joint and several liability. See section 1201 Public Law 
110-289, 122 Stat. 2782-83 (amending 12 U.S.C. 4513). The Director also 
may consider any other differences that are deemed appropriate. In 
preparing this final regulation, FHFA considered the differences 
between the Banks and the Enterprises as they relate to the above 
factors. As part of its proposed rulemaking, FHFA also requested 
comments from the public about whether differences related to these 
factors should result in any revisions to the proposal, but received no 
comments on this point in response.

II. The Final Regulation

A. The Proposed Rule and Comments Received

    FHFA published a proposed rule in the Federal Register on February 
23, 2010 to implement the provisions in HERA allowing CFIs to pledge 
``community development loans'' as collateral for advances and the 
Banks to make long term advances to a CFI member to fund community 
development activities. 75 FR 7990 (Feb. 23, 2010). As part of its 
implementation of these provisions, FHFA proposed defining ``community 
development'' as having:

the same meaning as under the definition set forth in the Community 
Reinvestment rule for the Federal Reserve System (12 CFR part 228), 
Federal Deposit Insurance Corporation (12 CFR part 345), the Office 
of Thrift Supervision (12 CFR part 563e) or the Office of the 
Comptroller of the Currency (12 CFR part 25), whichever is the CFI 
member's primary federal regulator.

Id. at 7994.

    FHFA also proposed defining ``community development loan'' as:

A loan that has as its primary purpose community development, but 
such loans shall not include: (1) Any loan or instrument that 
qualifies as eligible security for an advance under Sec.  1266.7(a) 
of this part; or (2) Consumer loans or credit extended to one or 
more individuals for household, family or other personal 
expenditures.

Id.

    The proposed rule also would have amended the advances regulation 
to incorporate a long-standing Finance Board policy that deemed any 
form of secured lending by a Bank to a Bank System member an advance 
subject to the rules governing advances. The proposal would have 
extended this policy to cover affiliates of any members, and, as a 
consequence, would have prohibited a Bank from entering into secured 
lending transactions with member affiliates. Finally, the proposed rule 
would have transferred the advances and the new business activity 
regulation, respectively, from parts 950 and 980 of the Finance Board 
regulations to parts 1266 and 1272 of the FHFA regulations.
    FHFA received eleven comment letters on the proposed rule. Eleven 
of the twelve Banks commented, including a joint letter which was 
signed by three Banks. One letter came from an association representing 
municipal governments and one letter came from a private citizen. All 
the Bank comment letters addressed proposed Sec.  1266.2(e) of the 
rule, which would have required secured transactions with the member of 
any Bank to meet the requirements of an advance and would have 
prohibited secured transactions between a Bank and an affiliate of a 
member of any Bank. As is discussed below, these letters generally 
suggested clarification to the proposed rule language so that any 
restriction did not carry unintended consequences and limit 
transactions beyond borrowings by members. These letters also stated 
that the proposed restrictions on secured transactions with affiliates 
of members would eliminate an important and safe liquidity investment 
for the Banks and urged that the provision be substantially revised in 
this respect or not be adopted.
    Two comment letters, including the joint Bank letter, addressed the 
proposed provisions allowing ``community development loans'' to be 
pledged as collateral by CFIs. Both letters made similar comments and 
generally urged FHFA to expand the definitions of ``community 
development'' and ``community development loan'' and not tie the 
definition to criteria based on income targeting. These comments are 
also addressed more fully below. No comments were made on other aspects 
of the proposed rule. All comment letters are posted on the FHFA 
Internet Web site at http://www.fhfa.gov.

B. Final Rule Provisions

Definitions--Sec.  1266.1
    FHFA proposed adding definitions for ``community development'' and 
``community development loan'' to the advances regulation to help 
implement

[[Page 76619]]

the HERA provision allowing CFI members to pledge community development 
loans to secure advances. In the proposed rule, ``community 
development'' was defined with reference to the definition for this 
term adopted by CFI members' primary federal regulators under Community 
Reinvestment Act (CRA) regulations.\4\ In turn, FHFA proposed to define 
``community development loan'' as a loan that has community development 
as its primary purpose. Because FHFA did not intend the proposed 
definition to call into question the validity of any collateral allowed 
under the advances regulation to be pledged by all members, the 
proposed definition of ``community development loan'' excluded 
categories of eligible collateral identified in Sec.  950.7(a) of the 
advances rule \5\ from its scope. FHFA specifically requested comments 
on whether, and how, these proposed definitions might be altered to 
better help CFI members fund community development activities while 
continuing to assure that advances be secured only by high quality 
collateral. 75 FR at 7992.
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    \4\ See 12 CFR 25.12, 228.12, 345.12, and 563e.12. Under this 
definition, ``community development'' would have encompassed 
affordable housing, community services targeted to low- and 
moderate- income individuals, economic development activities 
through financing of businesses and farms that meet size eligibility 
standards of the Small Business Administration's Development Company 
or Small Business Investment Company Programs or have gross annual 
revenues of $1 million or less, and activities that revitalize or 
stabilize low- or moderate-income geographies, designated disaster 
areas, or certain designated, distressed, or underserved non-
metropolitan middle-income geographies.
    \5\ As part of the transfer of the advances regulation to part 
1266, this provision will be redesignated as Sec.  1266.7(a). This 
provision identifies collateral that can be pledged by all Bank 
members to secure advances.
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    FHFA received two comments on these definitions. Both comments 
urged FHFA to adopt a broader definition for ``community development'' 
that would not include the income targeting criteria inherent in the 
proposed definition. They argued (albeit for different reasons) that 
the proposed definition of ``community lending'' was contrary to 
Congressional intent in adopting section 1211 and that a broader 
definition would better meet Congress' reasons for including this 
provision in HERA. Instead of the proposed definition, the commenters 
suggested developing a definition based on the one used for ``economic 
development projects'' in FHFA's current Community Investment Cash 
Advance Programs (CICA) regulations.\6\ One commenter proposed a 
specific definition for ``community development'' that included 
criteria that would limit the definition to projects or activities that 
were the recipient of any form of federal, state or local government 
support. The commenter believed such criteria would help identify the 
activity or project as one viewed by federal, state or local 
governments as important for the community in question.
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    \6\ See 12 CFR 952.1.
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    FHFA has considered these comments, but generally does not find 
them persuasive. As noted when FHFA proposed its definition of 
``community development,'' the legislative history of HERA does not 
clearly illuminate Congressional intent in allowing secured loans for 
community development to be pledged as collateral by CFI members to 
support advances. Instead, section 1211(b) of HERA provided FHFA with 
broad flexibility to define the term ``community development 
activities.'' More importantly, although HERA did not specify income 
targeting criteria in the provision concerning ``community 
development,'' the concept of community development lending is not new 
in banking law and is a well-developed concept as evidenced by the 
Community Reinvestment Act, and the regulations adopted by federal 
banking regulators to implement that statute. As it noted in proposing 
this definition, FHFA is relying on this long-standing regulatory 
history in defining the term. Moreover, by linking the definition of 
``community development'' to the Community Reinvestment Act rules of 
the banking regulators, FHFA will ensure that future changes and 
developments in this area will be captured in FHFA's definition of 
``community development''.
    FHFA believes that this approach will help CFI members to use 
advances to provide financing for their communities' development needs, 
as those needs are embodied by those members' CRA obligations. 75 FR at 
7992. FHFA, therefore, is adopting the definition of ``community 
development'' as proposed.
    FHFA also is adopting the definition of ``community development 
loan'' generally as proposed. In this respect, a community development 
loan is a loan that has community development as its primary purpose. 
The final rule, as adopted, also clarifies that the term ``community 
development loan'' includes a participation interest in a community 
development loan.
    FHFA recognizes that many loans that are extended to support 
community development already will be acceptable collateral for 
advances under existing Bank Act provisions and FHFA regulations. As a 
consequence, the definition excludes from the meaning of ``community 
development loan,'' any loan that qualifies as acceptable collateral 
under other provisions of the Bank Act and FHFA regulations. As 
explained when FHFA initially proposed this definition, FHFA does not 
intend to call into question the validity of any security pledged (or 
to be pledged) under the existing categories of eligible collateral. 
Thus, the definition of ``community development loan'' excludes from 
its scope, categories of eligible collateral now identified in Sec.  
950.7(a) of the advances rule,\7\ which can be pledged by any member to 
secure an advance, as well as small agri-business loan, small business 
loan, or small farm loan, which currently are forms of acceptable 
collateral for CFI members.\8\ The definition of ``community 
development loan'' also specifically excludes consumer loans or credit 
extended to one or more individuals for household, family, or other 
personal expenditures. This exclusion does not change the status of any 
loan that qualifies as eligible collateral for advances under existing 
categories of collateral in the Bank Act or current regulations. For 
example, the new language does not affect the status of home equity 
loans as other real estate-related collateral eligible to secure 
advances.
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    \7\ As part of the proposed transfer of the advances regulation 
to part 1266, this provision would be redesignated as Sec.  
1266.7(a).
    \8\ When proposing the definition of ``community development 
loan,'' FHFA noted that because small agri-business, small business 
and small farm loans can be pledged only by CFI members, there was 
no need to exclude them from the definition of community development 
loan, despite likely overlap in these existing categories of 
collateral and community development loans. See 75 FR at 7992. Upon 
reconsideration, such overlap may nonetheless cause some confusion, 
especially when determining whether the new business activity 
requirements applied to a loan that may fall both within the 
definition of community development loan and the definition of one 
of the other categories of CFI member only collateral. Moreover, 
because small agri-business, small business, and small farm loans 
are defined as loans that are within legal lending limits of the CFI 
member and reported on specific regulatory financial reports of that 
member, these loans are easy to identify, and it will be 
straightforward to determine whether loans fall into one of the 
existing categories of eligible CFI collateral or whether the loans 
may qualify only as a ``community development loan'' to be pledged 
as collateral for an advance.
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    Commenters also urged that FHFA include municipal bonds within the 
definition of community development loans so that municipal bonds could 
be accepted as collateral from CFIs to secure advances. They noted that 
FHFA regulations already allow members to use municipal bonds as 
collateral to secure letters of credit where the letter of credit helps 
facilitate residential

[[Page 76620]]

housing finance or community lending. 12 CFR 1269.2(c)(2).
    Section 1266.7(b)(1) as amended by this rulemaking, however, 
already allows the Banks to accept from CFI members, as collateral for 
advances, any security to the extent that the security represents a 
whole interest in a secured, small agri-business, small business, small 
farm or community development loan. This restriction limiting the type 
of securities that can be pledged under the special CFI collateral 
provision is statutory, and the wording of Sec.  1266.7(b)(1) closely 
follows that of the Bank Act. See 12 U.S.C. 1430(a)(3)(E). Extending 
the definition of community development loans to include all municipal 
securities would go beyond what is authorized in the Bank Act and would 
not be consistent with the statutory limitation.\9\ FHFA, therefore, is 
not altering the final definition of community development loan as 
requested. CFI members, of course, can still pledge as collateral for 
advances any municipal bond to the extent allowed by Sec.  
1266.7(b)(1), as that provision is being amended by this rulemaking.
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    \9\ The comparison made by commenters to the provision in the 
letter of credit regulation is somewhat misplaced. Prior to adopting 
the letter of credit regulation, the Finance Board determined that, 
as a matter of law, the Bank Act did not require that letters of 
credit be collateralized. It did, however, conclude that such a 
requirement was advisable as a matter of safe and sound banking 
practice and provided for the acceptance of certain types of 
collateral for letters of credit that the Banks, by law, were not 
permitted to accept to secure advances. See Final Rule: Standby 
Letters of Credit, 63 FR 65693 (Nov. 30, 1998); and Office of 
General Counsel Opinion, 1998-GC-14 (Oct. 28, 1998). The HERA 
amendments that will be implemented by this rule, however, limit 
eligible advance collateral for a CFI member to secured community 
development loans or securities representing a whole interest in 
such secured loans.
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    To implement the HERA provisions which allow CFIs to rely on long-
term advances to fund ``community development loans,'' FHFA proposed 
amending the definition of ``residential housing finance assets'' to 
incorporate ``community development loans'' into the definition. See 75 
FR at 7993. To avoid confusion, FHFA also proposed removing the 
reference to ``community lending'' from the ``residential housing 
finance assets'' definition and incorporating each element of 
``community lending,'' as defined in Sec.  900.2,\10\ into the 
definition. Thus, the proposed definition specifically referred to 
``loans or investments providing financing for economic development 
projects for targeted beneficiaries'' and for CFI members, to the 
extent not already included, ``small business loans, small farm loans, 
small agri-business loans, or community development loans.'' Other than 
adding ``community development loans,'' the proposed changes were 
editorial in nature and did not alter the scope of the definition for 
``residential housing finance assets.'' No comments were received on 
these changes and the definition of ``residential housing finance 
assets'' is being adopted as proposed.
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    \10\ The definition of ``residential housing finance assets'' in 
Sec.  950.1 of the Finance Board's advances regulations incorrectly 
states that ``community lending'' is defined in Sec.  900.1 rather 
than in Sec.  900.2.
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    FHFA also proposed adding to newly designated Sec.  1266.1 
definitions for ``Bank Act,'' ``advances,'' ``Bank,'' and ``targeted 
beneficiaries.'' These definitions were contained in Sec.  900.1 or 
Sec.  900.2 of the FHFB rules, and FHFA proposed to carry them over to 
newly designated part 1266 without substantive change.\11\ No comments 
were received on these definitions and FHFA is adopting them as 
proposed.
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    \11\ The definitions in part 900 of the FHFB rules apply only to 
regulations contained in chapter 9 of Title 12 of the Code of 
Federal Regulations. Thus, definitions in part 900 are no longer 
applicable to the advances and the new business activities 
regulations once they are transferred to new parts 1266 and 1272.
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Secured Lending--Sec.  1266.2(e)
    FHFA proposed amending newly designated Sec.  1266.2 of the 
advances regulation to incorporate a long-standing position that any 
secured lending by a Bank to members is deemed an advance subject to 
all requirements related to advances. This position was first taken by 
the FHFB in 1995 by resolution; this resolution has not been rescinded 
and is still in effect. Fin. Brd. Res. No. 95-13 (Aug. 9, 1995). FHFA 
proposed incorporating this position into the regulation to prevent 
Banks from using forms of secured lending to members, such as reverse 
repurchase transactions, to avoid specific requirements and obligations 
associated with making advances to members, including stock purchase 
requirements. To assure that the proposed provision could not be 
circumvented by a Bank extending secured credit to an affiliate of a 
member, the proposed provision also prohibited secured lending to any 
non-member, affiliate of a member, given that such non-member 
affiliates would not be eligible to receive an advance under the 
regulations.
    Almost all the comment letters addressed proposed Sec.  1266.2(e). 
Most of these commenters noted that the broad wording in the proposed 
amendment could prevent derivative transactions or similar transactions 
in which counterparties would be required to post collateral. 
Commenters suggested that the rule language should refer to secured 
transactions for ``money borrowed'' to distinguish reverse repurchase 
agreements and similar transaction from other types of transactions 
that may create credit exposures. FHFA agrees that the proposed 
provision is overly broad. It was not FHFA's intent to prevent the 
Banks from entering into derivative transactions or prohibit the Banks 
from requiring members that may be a derivative counterparty from 
posting collateral. Nor was it FHFA's intent to prevent Banks from 
accepting collateral to secure other types of member obligations to the 
Bank such as those arising under the members' credit enhancement 
obligations for mortgages sold to Banks under their AMA programs. See 
12 CFR 955.3(b)(2).
    FHFA is therefore adopting as part of the final rule language 
similar to that proposed in commenters' letters. The rule now refers to 
``all secured transactions, regardless of the form of the transaction, 
for money borrowed from a Bank by a member of any Bank,'' so that 
reverse repurchase type lending transactions will be covered, but not 
other member transactions or obligations that may create a credit 
exposure to a Bank but do not arise from the Bank lending cash funds to 
the member. As with the proposed rule, the final rule continues to 
cover these types of transactions if undertaken between a Bank and a 
member of any Bank, and does not apply only to transactions between a 
Bank and one of its own members.
    Commenters also pointed out that most acceptable reverse repurchase 
agreement counterparties would be affiliates of a Bank System member, 
since most major financial institutions in the United States have at 
least one affiliate that is a member of some Bank. They also noted that 
reverse repurchase agreements were an important short term liquid 
investment for the Banks, especially in times of economic stress when 
unsecured money-market investments may be a less desirable option on a 
risk-adjusted basis. These commenters therefore urged that the rule 
exclude from the prohibition on secured transactions with affiliates of 
members: (i) Primary dealers in government securities and (ii) other 
counterparties meeting the credit and other risk management 
requirements established by a Bank. One commenter stated that the rule 
should exclude broker-dealer affiliates of members from the prohibition 
of the rule. A number of commenters also pointed out that the provision 
prohibiting a Bank from

[[Page 76621]]

making a secured extension of credit to ``an affiliate of any member'' 
could technically prevent the Bank from making advances to members that 
were affiliates of other members and urged that the language 
prohibiting secured lending to affiliates of members be refined in this 
respect.
    After consideration of the comments, FHFA has determined not to 
adopt, as part of the final rule, the proposed prohibition on reverse 
repurchase agreements and similar secured lending transactions with 
affiliates of members. While FHFA had an indication that certain Banks 
were considering entering into reverse repurchase agreements, each Bank 
with members of the other Bank, to help these members avoid additional 
stock purchases, FHFA has no indication that these transactions were 
being considered with affiliates of members as a way to avoid stock 
purchase requirements. FHFA decided that it should not prevent Banks 
from entering into important liquidity investments at this time on the 
possibility that Banks may use reverse repurchase agreements with 
affiliates of members as a way to effectively make secured extensions 
of credit to members without requiring member stock purchases. If FHFA 
becomes aware that the Banks are entering into reverse repurchase 
agreements with member affiliates, not for purposes of making liquidity 
investments, but as a means of facilitating member avoidance of 
additional stock purchase requirements, it may reconsider this 
position.
Long Term Advances--Sec.  1266.3
    FHFA proposed to redesignate Sec.  950.3 of the Finance Board's 
advances regulation as Sec.  1266.3, and to make certain conforming 
changes to the provision. No comments were received on these changes, 
and FHFA is adopting Sec.  1266.3 as proposed. See 75 FR at 7993. 
Section 1266.3 implements section 10(a)(2) of the Bank Act, as amended 
by HERA, and provides that a Bank shall make long-term advances only 
for the purpose of enabling a member to purchase or fund new or 
existing residential housing finance assets, a term defined in Sec.  
1266.1 to include, for CFI members, small business loans, small farm 
loans, small agri-business loans, and community development loans. 
Thus, the only change being made in Sec.  1266.3 is to remove, as 
redundant, references to small business loans, small farm loans, and 
small agri-business loans that were contained in former Sec.  950.3.
Community Development Loans as Collateral--Sec.  1266.7(b)(1)
    FHFA proposed to implement the HERA provision allowing CFI members 
to pledge loans for community development activities as collateral for 
advances by adding ``community development loans'' to the list of CFI-
specific collateral set forth in the redesignated Sec.  1266.7(b)(1). 
No other changes were proposed to this provision. No comments were 
received on this provision and it is being adopted as proposed.
    A Bank's acceptance of ``community development loans'' will need to 
meet the same requirements as its acceptance of other types of CFI 
collateral. Thus, community development loans pledged by CFI members to 
secure advances will need to be fully secured by collateral other than 
real estate. In addition, any eligible community development loan will 
have to have a readily ascertainable value, be able to be reliably 
discounted to account for liquidation or other risk, and be able to be 
liquidated in due course, and the Bank would have to be able to perfect 
a security interest in such loan. A Bank's acceptance of specific types 
of ``community development loans'' to secure an advance will also be 
subject to its first meeting the requirements of the new business 
activities rule, which will be redesignated as 12 CFR part 1272 by this 
rulemaking, and any other applicable FHFA regulations, guidance or 
policies. As already noted, the amendments being adopted here also will 
allow a Bank to accept, as collateral for advances, a security 
representing a whole interest in secured community development loans, 
subject to the Bank's first fulfilling any obligations under the new 
business activities rule.
Clarification of Provision--Sec.  1266.11
    FHFA is also adopting language in newly designated Sec.  1266.11 to 
make clear that the provision only applies to the one Bank that has not 
yet implemented the capital structure plan required under the Gramm-
Leach-Bliley Act (GLB Act). The requirements in newly designated Sec.  
1266.11 were all adopted prior to the passage of the GLB Act in 
November 1999 and have not been amended since the passage of the GLB 
Act. See 64 FR 16788 (Apr. 6, 1999) and 58 FR 29456 (May 20, 1993). The 
provision addresses stock purchase and redemption requirements. The GLB 
Act changed these requirements for a Bank, once the Bank implemented 
its capital plan and converted to the capital structure required under 
the GLB Act. See 12 U.S.C. Sec. Sec.  1426(a)(6) and (c). Banks that 
have converted to the GLB Act structure are required to set forth in 
their capital plans the requirements governing member stock purchases 
and member rights with regard to the redemption and repurchase of Bank 
stock, consistent with the regulations in 12 CFR parts 931 and 933. To 
avoid any confusion as to the application of Sec.  1266.11, FHFA is 
amending this provision to clarify that it only applies to a Bank that 
has not converted to the GLB Act capital structure.
New Business Activities Regulation--Part 1272
    As proposed, FHFA is transferring the new business activities rule 
from part 980 of the FHFB regulations to part 1272 of FHFA regulations, 
making only technical and conforming changes to the rule. See 75 FR at 
7993-94.
Housing Associates and Letter of Credit Regulation--Parts 1264 and 1269
    FHFA is also making conforming changes to part 1264 and part 1269 
to change any cross references to former part 950 to correspond to the 
correct, newly designated sections in part 1266.

III. Paperwork Reduction Act

    The information collection contained in the current Bank housing 
associates and advances regulations, entitled ``Advances to Housing 
Associates,'' has been assigned control number 2590-0001 by the Office 
of Management and Budget (OMB). The amendments to those regulations 
made by this final rule do not substantively or materially modify the 
approved information collection. Further, the changes to the new 
business activity regulation do not contain any collections of 
information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.). Therefore, FHFA has not submitted any information to the 
OMB for review.

IV. Regulatory Flexibility Act

    The final rule applies only to the Banks, which do not come within 
the meaning of small entities as defined in the Regulatory Flexibility 
Act (RFA). See 5 U.S.C. 601(6). Therefore in accordance with section 
605(b) of the RFA, FHFA certifies that this final rule will not have 
significant economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Parts 950, 980, 1264, 1266, 1269 and 
1272

    Community development, Credit, Federal home loan banks, Housing, 
Reporting and recordkeeping requirements.

[[Page 76622]]


0
For the reasons stated in the preamble, the Federal Housing Finance 
Agency is amending chapters IX and XII of title 12 of the Code of 
Federal Regulations as follows:

CHAPTER IX--FEDERAL HOUSING FINANCE BOARD

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

PART 950--[REDESIGNATED AS PART 1266]

0
1. Redesignate 12 CFR part 950 as 12 CFR part 1266.

PART 980--[REDESIGNATED AS PART 1272]

0
2. Redesignate 12 CFR part 980 as 12 CFR part 1272.

PART 1264--FEDERAL HOME LOAN BANK HOUSING ASSOCIATES

0
3. The authority citation for part 1264 continues to read as follows:

    Authority: 12 U.S.C. 1430b, 4511, 4513, and 4526.

Sec.  1264.3  Housing associate eligibility requirements.

0
4. Amend Sec.  1264.3(b) by removing the reference to ``Sec.  
950.17(b)(2) of this title'' and adding in its place ``Sec.  
1266.17(b)(2) of this chapter''.

PART 1266--ADVANCES

0
5. The authority citation for newly redesignated part 1266 is revised 
to read as follows:

    Authority: 12 U.S.C. 1426, 1429, 1430, 1430b, 1431, 4511(b), 
4513, 4526(a).


0
6. Amend the newly redesignated part 1266 as indicated in the table 
below:

----------------------------------------------------------------------------------------------------------------
                                          By removing the
               Amend:                      reference to:                   And adding in its place:
----------------------------------------------------------------------------------------------------------------
Sec.   1266.1, Definition of CFI      Sec.   925.1, each      Sec.   1263.1.
 member.                               place that it appears.
Sec.   1266.1, Definition of State    Sec.   926.1..........  Sec.   1264.1.
 housing finance agency.
Sec.   1266.4(g)(2)(i)..............  Sec.   950.2(b)(2)....  Sec.   1266.2(b)(2).
Sec.   1266.4(g)(2)(ii).............  Sec.   950.2(a).......  Sec.   1266.2(a).
Sec.   1266.5(b)(2)(ii).............  Sec.   917.4 of this    Sec.   917.4 of this title.
                                       chapter.
Sec.   1266.6(a)....................  Sec.   917.4 of this    Sec.   917.4 of this title.
                                       chapter.
Sec.   1266.9(a)(1).................  Sec.   950.2(c).......  Sec.   1266.2(c).
Sec.   1266.10(a)...................  Sec.   917.4 of this    Sec.   917.4 of this title.
                                       chapter.
Sec.   1266.16......................  Sec.  Sec.   950.14     Sec.  Sec.   1266.14 and 1266.17.
                                       and 950.17.
Sec.   1266.17(a)...................  part 925..............  part 1263.
Sec.   1266.17(b)(2)(i) introductory  Sec.   926.3(b).......  Sec.   1264.3(b).
 text.
Sec.   1266.17(b)(2)(i)(A)..........  Sec.   950.7(a)(1) or   Sec.   1266.7(a)(1) or (2).
                                       (2).
Sec.   1266.17(b)(2)(i)(B)..........  Sec.   950.7(a)(3)....  Sec.   1266.7(a)(3).
Sec.   1266.17(b)(2)(i)(B)..........  Sec.   926.3(b).......  Sec.   1264.3(b).
Sec.   1266.17(b)(2)(i)(C)..........  Sec.   950.7(a)(4)....  Sec.   1266.7(a)(4).
Sec.   1266.17(c)(2)(i).............  Sec.   950.3(b), each   Sec.   1266.3(b).
                                       time it appears.
Sec.   1266.17(c)(2)(ii)............  Sec.   950.5(b)(2)....  Sec.   1266.5(b)(2).
Sec.   1266.17(e)(2)................  part 926..............  part 1264.
Sec.   1266.17(e)(3)................  part 926..............  part 1264.
----------------------------------------------------------------------------------------------------------------


0
7. In newly redesignated part 1266, revise all references to ``Finance 
Board'' to read ``FHFA'' and revise all references to ``the Act'' to 
read ``the Bank Act''.

0
8. In newly redesignated Sec.  1266.1, add in correct alphabetical 
order definitions for ``Advance'', ``Bank'', ``Bank Act'', ``Community 
development'', ``Community development loan'', ``FHFA'', and ``Targeted 
beneficiaries'', and revise the definition of ``Residential housing 
finance assets'' to read as follows:


Sec.  1266.1  Definitions.

* * * * *
    Advance means a loan from a Bank that is:
    (1) Provided pursuant to a written agreement;
    (2) Supported by a note or other written evidence of the borrower's 
obligation; and
    (3) Fully secured by collateral in accordance with the Bank Act and 
this part.
* * * * *
    Bank, written in title case, means a Federal Home Loan Bank 
established under section 12 of the Bank Act, as amended (12 U.S.C. 
1432).
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
* * * * *
    Community development has the same meaning as under the definition 
set forth in the Community Reinvestment rule for the Federal Reserve 
System (12 CFR part 228), Federal Deposit Insurance Corporation (12 CFR 
part 345), the Office of Thrift Supervision (12 CFR part 563e) or the 
Office of the Comptroller of the Currency (12 CFR part 25), whichever 
is the CFI member's primary Federal regulator.
    Community development loan means a loan, or a participation 
interest in such loan, that has as its primary purpose community 
development, but such loans shall not include:
    (1) Any loan or instrument that qualifies as eligible security for 
an advance under Sec.  1266.7(a) of this part;
    (2) Any loan that qualifies as a small agri-business loan, small 
business loan or small farm loan, under definitions set forth in this 
section; or
    (3) Consumer loans or credit extended to one or more individuals 
for household, family or other personal expenditures.
* * * * *
    FHFA means the Federal Housing Finance Agency.
* * * * *
    Residential housing finance assets means any of the following:
    (1) Loans secured by residential real property;
    (2) Mortgage-backed securities;
    (3) Participations in loans secured by residential real property;
    (4) Loans or investments providing financing for economic 
development projects for targeted beneficiaries;
    (5) Loans secured by manufactured housing, regardless of whether 
such housing qualifies as residential real property;
    (6) Any loans or investments which FHFA, in its discretion, 
otherwise determines to be residential housing finance assets; and
    (7) For CFI members, and to the extent not already included in 
categories (1)

[[Page 76623]]

through (6), small business loans, small farm loans, small agri-
business loans, or community development loans.
* * * * *
    Targeted beneficiaries has the meaning set forth in Sec.  952.1 of 
this title.


0
9. Amend newly redesignated Sec.  1266.2 by adding new paragraph (e) to 
read as follows:


Sec.  1266.2  Authorization and application for advances; obligation to 
repay advances.

* * * * *
    (e) Status of secured lending. All secured transactions, regardless 
of the form of the transaction, for money borrowed from a Bank by a 
member of any Bank shall be considered an advance subject to the 
requirements of this part.


0
10. Revise newly redesignated Sec.  1266.3 to read as follows:


Sec.  1266.3  Purpose of long-term advances; Proxy test.

    (a) A Bank shall make long-term advances only for the purpose of 
enabling any member to purchase or fund new or existing residential 
housing finance assets.
    (b)(1) Prior to approving an application for a long-term advance, a 
Bank shall determine that the principal amount of all long-term 
advances currently held by the member does not exceed the total book 
value of residential housing finance assets held by such member. The 
Bank shall determine the total book value of such residential housing 
finance assets, using the most recent Thrift Financial Report, Report 
of Condition and Income, financial statement or other reliable 
documentation made available by the member.
    (2) Applications for CICA advances are exempt from the requirements 
of paragraph (b)(1) of this section.

0
11. Amend newly redesignated Sec.  1266.7 by revising paragraph (b)(1) 
to read as follows:


Sec.  1266.7  Collateral.

* * * * *
    (b) * * *
    (1) General. Subject to the requirements set forth in part 1272 of 
this chapter, a Bank is authorized to accept from CFI members or their 
affiliates as security for advances small business loans, small farm 
loans, small agri-business loans, or community development loans, in 
each case fully secured by collateral other than real estate, or 
securities representing a whole interest in such secured loans, 
provided that:
    (i) Such collateral has a readily ascertainable value, can be 
reliably discounted to account for liquidation and other risks, and can 
be liquidated in due course; and
    (ii) The Bank can perfect a security interest in such collateral.
* * * * *

0
12. Revise newly redesignated Sec.  1266.11 to read as follows:


Sec.  1266.11  Capital stock requirements; redemption of excess stock.

    (a) Capital stock requirement for advances. For a Bank that has not 
converted to the capital structure authorized by the Gramm-Leach-Bliley 
Act, the aggregate amount of outstanding advance made by the Bank to a 
member shall not exceed 20 times the amount paid in by such member for 
capital stock in the Bank.
    (b) Unilateral Redemption of excess stock. A Bank that has not 
converted to the capital structure authorized by the Gramm-Leach-Bliley 
Act:
    (1) May, after providing 15 calendar days advance written notice to 
a member, require the redemption of that amount of the member's Bank 
capital stock that exceeds the applicable capital stock requirements in 
paragraph (a) of this section, provided that the member continues to 
comply with the minimum stock purchase requirement set forth in Sec.  
1263.20(a) of this chapter; and
    (2) May not impose on, or accept from, a member a fee in lieu of 
redeeming a member's excess stock.

PART 1269--STANDBY LETTERS OF CREDIT

0
13. The authority citation for part 1269 continues to read as follows:

    Authority:  12 U.S.C. 1429, 1430, 1430b, 1431, 4511, 4513 and 
4526.


0
14. Amend part 1269 as indicated in the table below:

----------------------------------------------------------------------------------------------------------------
                                          By removing the
               Amend:                      reference to:                   And adding in its place:
----------------------------------------------------------------------------------------------------------------
Sec.   1269.1, Definition of          Sec.   950.1 of this    Sec.   1266.1 of this chapter.
 community lending.                    title.
Sec.   1269.1, Definition of          Sec.   950.1..........  Sec.   1266.1.
 Residential housing finance.
Sec.   1269.1, Definition of SHFA     Sec.   1269.1.........  Sec.   1264.1.
 associate.
Sec.   1269.2(c)....................  Sec.   950.7 of this    Sec.   1266.7 of this chapter.
                                       title.
Sec.   1269.3(a) introductory text..  Sec.  Sec.              Sec.   1266.17(b)(1)(i) or (ii) of this chapter.
                                       950.17(b)(1)(i) or
                                       (ii) of this title.
Sec.   1269.3(b)....................  Sec.                    Sec.   1266.17(b)(2)(i)(A),(B) or (C) of this
                                       950.17(b)(2)(i)(A),(B   chapter.
                                       ) or (C) of this
                                       title.
Sec.   1269.4(a)(1).................  Sec.                    Sec.   1266.17(b)(2)(i)(B).
                                       950.17(b)(2)(i)(B).
Sec.   1269.4(a)(1).................  Sec.   950.17(d)......  Sec.   1266.17(d).
Sec.   1269.4(c)....................  part 950..............  part 1266.
Sec.   1269.5(b)(1).................  Sec.   960.3..........  Sec.   1269.3.
Sec.   1269.5(b)(2).................  Sec.  Sec.   950.7(d),  Sec.  Sec.   1266.7(d), 1266.7(e), 1266.8, 1266.9
                                       950.7(e), 950.8,        and 1266.10 of this chapter.
                                       950.9 and 950.10 of
                                       this title.
----------------------------------------------------------------------------------------------------------------

PART 1272--NEW BUSINESS ACTIVITIES

0
15. The authority citation for newly redesignated part 1272 is revised 
to read as follows:

    Authority:  12 U.S.C. 1431(a), 1432(a), 4511(b), 4513, 4526(a).


0
16. Amend the references in the newly redesignated part 1272 as 
indicated in the table below:

----------------------------------------------------------------------------------------------------------------
                                          By removing the
               Amend:                      reference to:                   And adding in its place:
----------------------------------------------------------------------------------------------------------------
Sec.   1272.1, Definition of new      Sec.   950.7(a)(4)....  Sec.   1266.7(a)(4).
 business activity.
Sec.   1272.1, Definition of new      Sec.   950.7(b).......  Sec.   1266.7(b).
 business activity.

[[Page 76624]]

 
Sec.   1272.3 introductory text.....  Sec.   980.4(b).......  Sec.   1272.4(b).
Sec.   1272.3(b) introductory text..  Sec.   950.7..........  Sec.   1266.7.
Sec.   1272.3(b)(2).................  Sec.   917.4 of this    Sec.   917.4 of this title.
                                       chapter.
Sec.   1272.3(b)(3).................  Sec.   950.10.........  Sec.   1266.10.
Sec.   1272.4(a)....................  Sec.   980.3..........  Sec.   1272.3.
Sec.   1272.4(a)....................  Sec.   980.5(a)(1)      Sec.   1272.5(a)(1) through (4).
                                       through (4).
Sec.   1272.4(b)....................  Sec.   950.7(a)(4)....  Sec.   1266.7(a)(4).
Sec.   1272.4(b)....................  Sec.   980.3..........  Sec.   1272.3.
Sec.   1272.4(c)....................  Sec.   980.6..........  Sec.   1272.6.
Sec.   1272.5(a) introductory text..  Sec.   980.3..........  Sec.   1272.3.
Sec.   1272.5(a)(4).................  Sec.   980.7..........  Sec.   1272.7.
Sec.   1272.5(a)(5).................  Sec.   980.7..........  Sec.   1272.7.
Sec.   1272.5(b)....................  Sec.   980.6..........  Sec.   1272.6.
----------------------------------------------------------------------------------------------------------------


0
17. Amend newly redesignated part 1272 by revising all references to 
``Finance Board'' to read ``FHFA''.

0
18. Amend newly redesignated Sec.  1272.1 by adding in correct 
alphabetical order definitions for ``Bank,'' ``Bank Act'' and ``FHFA'' 
to read as follows:


Sec.  1272.1  Definitions.

* * * * *
    Bank, written in title case, means a Federal Home Loan Bank 
established under section 12 of the Bank Act, as amended (12 U.S.C. 
1432).
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
    FHFA means the Federal Housing Finance Agency.
* * * * *

0
19. In newly redesignated Sec.  1272.5, amend paragraphs (a)(5) and (b) 
by revising the words ``Finance Board's'' to read ``FHFA's''.

    Dated: November 30, 2010.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2010-30519 Filed 12-8-10; 8:45 am]
BILLING CODE 8070-01-P


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