[Federal Register Volume 75, Number 247 (Monday, December 27, 2010)]
[Proposed Rules]
[Pages 81145-81152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32467]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 75, No. 247 / Monday, December 27, 2010 / 
Proposed Rules

[[Page 81145]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1263

RIN 2590-AA39


Members of Federal Home Loan Banks

AGENCY: Federal Housing Finance Agency.

ACTION: Advance notice of proposed rulemaking; request for comments.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is undertaking a 
review of its regulations governing Federal Home Loan Bank (Bank) 
membership to identify provisions that may need to be updated to ensure 
that they remain consistent with the statutory provisions that require 
a nexus between Bank membership and the housing and community 
development mission of the Banks. This Advance Notice reviews the 
statutory provisions governing Bank membership and the regulatory 
provisions that implement those statutory requirements, suggests 
various ways that the regulations might be amended within this 
statutory framework, and invites comments on each of the possible 
alternatives.

DATES: Written comments must be received on or before March 28, 2011.

ADDRESSES: You may submit your comments, identified by regulatory 
information number (RIN) 2590-AA39, by any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at <a href="/cdn-cgi/l/email-protection#5b093e3c183436363e352f281b3d333d3a753c342d"><span class="__cf_email__" data-cfemail="8bd9eeecc8e4e6e6eee5fff8cbede3edeaa5ece4fd">[email protected]</span></a> to ensure timely receipt by FHFA. 
Please include ``RIN 2590-AA39'' in the subject line of the message.
    <bullet> E-mail: Comments to Alfred M. Pollard, General Counsel may 
be sent by e-mail to <a href="/cdn-cgi/l/email-protection#23714644604c4e4e464d575063454b45420d444c55"><span class="__cf_email__" data-cfemail="9bc9fefcd8f4f6f6fef5efe8dbfdf3fdfab5fcf4ed">[email protected]</span></a>. Please include ``RIN 2590-
AA39'' in the subject line of the message.
    <bullet> U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA39, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.
    <bullet> Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA39, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Assistant General 
Counsel, <a href="/cdn-cgi/l/email-protection#cca9bea5afe2beadb9a8a9a2aeb9bfa48caaa4aaade2aba3ba"><span class="__cf_email__" data-cfemail="5336213a307d21322637363d3126203b13353b35327d343c25">[email protected]</span></a>, (202) 414-6421 or Amy Bogdon, 
Associate Director, Division of Bank Regulation, <a href="/cdn-cgi/l/email-protection#41202c386f232e26252e2f01272927206f262e37"><span class="__cf_email__" data-cfemail="51303c287f333e36353e3f11373937307f363e27">[email protected]</span></a>, 
(202) 408-2546 (not toll-free numbers), Federal Housing Finance Agency, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone 
number for the Telecommunications Device for the Hearing Impaired is 
(800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of the Advanced Notice of 
Proposed Rulemaking (ANPR). Copies of all comments will be posted 
without change, including any personal information you provide, such as 
your name and address, on the FHFA Internet Web site at http://www.fhfa.gov. In addition, copies of all comments received will be 
available for examination by the public on business days between the 
hours of 10 a.m. and 3 p.m. at the Federal Housing Finance Agency, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an 
appointment to inspect comments, please call the Office of General 
Counsel at (202) 414-3751.

II. Background

A. Overview of Membership Requirements

    The 12 Banks are instrumentalities of the United States that were 
organized in 1932 under the Federal Home Loan Bank Act (Bank Act) to 
provide a reserve banking system for thrift institutions to support 
their residential mortgage lending activities.\1\ The Banks are 
financial cooperatives of which eligible financial institutions may 
become members by purchasing capital stock. Membership allows 
institutions to obtain access to secured loans, known as advances, for 
the purpose of funding residential housing finance and, in some cases, 
for funding small businesses, small farms, small agri-businesses, and 
community development activities.\2\ Bank membership has expanded since 
1932 but is still limited to the types of financial institutions listed 
in section 4(a)(1) of the Bank Act, which are: Building and loan 
associations, savings and loan associations, cooperative banks, 
homestead associations, insurance companies, savings banks, community 
development financial institutions (CDFIs) and insured depository 
institutions.\3\ Because all state-chartered depository institutions 
are now federally-insured, there are essentially three categories of 
institutions that are eligible for Bank membership: federally insured 
depository institutions, insurance companies, and CDFIs. In order for 
any of these institutions to become a member of a Bank, it must comply 
with the criteria specified in section 4(a)(1) and, in the case of 
certain insured depository institutions, those specified in section 
4(a)(2) of the Bank Act.
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    \1\ See 12 U.S.C. 1423, 1432(a).
    \2\ See 12 U.S.C. 1430(a)(2).
    \3\ The Bank Act defines ``insured depository institution'' to 
include any bank or savings association the deposits of which are 
insured by the Federal Deposit Insurance Corporation (FDIC), as well 
as any credit union the member accounts of which are insured by the 
National Credit Union Administration (NCUA). 12 U.S.C. 1422(9).
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    Section 4(a)(1) imposes three general requirements that each 
eligible institution must satisfy in order to qualify for Bank 
membership. Under that provision an applicant for membership must: (A) 
Be duly organized under the laws of any state or the United States; (B) 
be subject to inspection and regulation under banking, or similar, laws 
of a state or the United States \4\; and (C) make long-term home 
mortgage loans.\5\ An applicant that fails to satisfy any one of those 
requirements may not become a member

[[Page 81146]]

of a Bank. Section 4(a)(2) imposes three additional requirements on 
applicants that are insured depository institutions that were not Bank 
members as of January 1, 1989. Such an institution may become a Bank 
member only if, in addition to meeting the general requirements of 
section 4(a)(1), the institution: (A) Has at least 10 percent of its 
total assets in residential mortgage loans; (B) is in a financial 
condition such that advances may be safely made to it; and (C) shows 
that the character of its management and its home-financing policy are 
consistent with sound and economical home financing.\6\ The statute 
exempts from the 10 percent requirement any ``community financial 
institution'' (CFI), which is defined as any depository institution the 
deposits of which are insured by the FDIC and that has less than $1 
billion in average total assets over the preceding three years.\7\ By 
regulation, the Federal Housing Finance Board (Finance Board), and its 
successor FHFA, have applied the financial condition, character of 
management, and home financing policy requirements to all applicants 
for membership. Any applicant that does not meet any of these 
requirements also cannot become a Bank member.
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    \4\ In the case of a CDFI applicant, the institution need only 
be certified as a CDFI by the United States Department of the 
Treasury, instead of being subject to inspection and regulation by a 
state or federal regulator.
    \5\ 12 U.S.C. 1424(a)(1).
    \6\ 12 U.S.C. 1424(a)(2).
    \7\ By statute, FHFA must annually adjust the $1 billion CFI 
asset limit for inflation. The inflation-adjusted CFI limit for 2010 
is $1.011 billion.
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    FHFA has adopted regulations that implement each of the above-
described statutory requirements. The regulations list six general 
eligibility requirements, which are the same as the above-cited 
statutory requirements, and further require any non-CFI depository 
institution to have at least 10 percent of its assets in residential 
mortgage loans. The regulations also require any non-depository 
institution applicants, i.e., insurance companies and CDFIs, to have 
mortgage-related assets that reflect a commitment to housing 
finance.\8\ For each of the six general eligibility requirements, as 
well as for the 10 percent requirement, the regulations include a 
separate provision that specifies how a Bank is to determine whether a 
particular applicant has satisfied the particular eligibility 
requirement. With respect to the requirements that an applicant ``make 
long-term home mortgage loans'' and that non-CFI depository institution 
applicants have 10 percent of their assets in ``residential mortgage 
loans,'' the regulations provide that compliance is to be determined 
based on the applicant's most recent regulatory financial report that 
is available as of the date that the institution applies for 
membership. See 12 CFR 1263.9, 1263.10. Thus, under the existing 
regulatory regime, compliance with those two requirements is determined 
only at that point in time. An institution is not required to remain in 
compliance with either of those requirements subsequent to becoming a 
member.
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    \8\ 12 CFR 1263.6.
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B. Mission of the Banks

    FHFA regulations define the mission of the Banks as providing to 
their members and housing associates financial products and services 
that assist such members' and housing associates' financing of housing 
and community lending.\9\ Although this definition was adopted by the 
Finance Board, it remains consistent with both the Bank Act and the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
under which FHFA is established. The latter Act confirms that point by 
including among the duties of the Director of FHFA a responsibility to 
ensure that the operations and activities of the Banks foster liquid, 
efficient, competitive, and resilient national housing finance markets 
and that they carry out their statutory mission through activities that 
are authorized under the Bank Act.\10\ Read together, these provisions 
clearly evidence a Congressional view that the Banks have a housing 
finance and community development mission and that it is the duty of 
the Director of FHFA to ensure that the Banks carry out that mission. 
In a similar fashion, the advances and membership provisions of the 
Bank Act make apparent that such a mission exists and indicate the 
scope of that mission, such as by stating that a Bank may make long-
term advances to members only for the purposes of providing funds for 
residential housing finance and, in the case of advances to CFIs, 
providing funds for small businesses, small farms, small agri-
businesses, and community development activities.\11\ In addition, the 
Banks' mission is reflected in the statutory provisions that limit the 
types of collateral that they may accept for advances to members, which 
include, in addition to cash and government securities, first mortgage 
loans on residential property and securities representing a whole 
interest in such mortgage loans, as well as other real estate related 
collateral and, in the case of any CFI, secured loans for small 
business, agriculture, or community development activities or 
securities representing a whole interest in such secured loans.\12\
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    \9\ 12 CFR 1265.2.
    \10\ 12 U.S.C. 4513(a)(1).
    \11\ See 12 U.S.C. 1430(a)(2).
    \12\ 12 U.S.C. 1430(a)(3).
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    Finally, the Bank Act's membership provisions reinforce the 
connection between eligibility for membership and the Banks' housing 
finance and community development mission by requiring all eligible 
applicants to satisfy the ``makes long-term home mortgage loans'' 
requirement, by requiring all insured depository institution applicants 
to meet the ``home financing policy'' requirement, and by requiring all 
non-CFI depository institution applicants to meet the ``10 percent'' 
requirement in order to become a member.

C. FHFA Review of Membership Provisions

    Recently, FHFA has begun a review of its membership regulations in 
order to identify provisions that may need to be updated to ensure that 
they remain consistent with previously described statutory requirements 
and the housing finance mission underlying those requirements. One 
purpose of this review is to determine whether the existing regulatory 
standards and the manner in which they have been applied allow the 
Banks to admit to membership institutions that have insufficient 
involvement in supporting residential housing finance and, if so, 
whether it would be appropriate to revise the regulations to ensure 
that any institutions admitted to membership have and maintain a 
demonstrable involvement in residential mortgage lending and otherwise 
comply with the statutory requirements for membership. The intent of 
this ANPR is to solicit public comments on these issues as an aid to 
FHFA in determining how to amend the current membership rules to 
strengthen the ties between membership and the Bank System's primary 
public purpose by helping to ensure that the focus of the Banks' 
advances business supports the Banks' housing finance and community 
development mission.
    At this stage in the review process, FHFA has identified three 
regulatory provisions, all of which link membership to housing finance, 
that could be amended in certain respects to reinforce that connection. 
Those provisions are the ``10 percent'' requirement, the ``makes long-
term home mortgage loans'' requirement, and the ``home financing 
policy'' requirement, each of which is discussed in detail below. FHFA 
is considering whether it would be appropriate to amend those 
requirements so that they would apply to members on a

[[Page 81147]]

continuing basis, rather than only at the time of admission to 
membership, and whether it would be appropriate to establish more 
objective and quantifiable standards for the ``makes long-term home 
mortgage loans'' and ``home financing policy'' requirements. The 
following paragraphs discuss each of these regulatory provisions, their 
history, and how they might be revised to reinforce the connection 
between membership and support for residential housing finance. With 
respect to each of those issues, FHFA requests public comments on how 
well the existing regulations implement the underlying statutory 
requirements, whether there is a need to revise the regulations to 
reinforce the connection between membership and the housing finance 
mission, and the appropriateness of the alternatives being considered 
by FHFA. This notice also includes several other questions that are not 
derived from the three statutory requirements described above, but that 
have some implications for membership and the connection to housing 
finance, and FHFA requests comments on all aspects of those questions 
as well.
1. The 10 Percent Requirement
    As mentioned above, section 4(a)(2)(A) of the Bank Act and Sec.  
1263.6(b) of the FHFA regulations provide that an insured depository 
institution that was not a Bank member as of January 1, 1989, may 
become a member only if it has at least 10 percent of its total assets 
in ``residential mortgage loans.'' \13\ The existing regulations employ 
a ``presumptive compliance'' approach, under which an applicant that is 
subject to the 10 percent requirement is deemed to be in compliance 
with that requirement if, based on the applicant's most recent 
regulatory financial report, i.e., the report that the applicant files 
with its appropriate regulator, the applicant has at least 10 percent 
of its total assets in residential mortgage loans.\14\ Because the 
existing regulation requires a Bank to determine compliance with this 
requirement based solely on the applicant's most recent financial 
report, institutions that are subject to the 10 percent requirement 
need to demonstrate compliance only when applying for membership; there 
is no ongoing requirement to maintain residential mortgage loans at or 
above 10 percent of total assets. The absence of an ongoing requirement 
means that the current regulations would allow an institution that has 
been admitted to membership to reduce, or even eliminate, its 
residential mortgage loan assets subsequent to becoming a member. 
Although FHFA has no evidence that significant numbers of members that 
were subject to the 10 percent requirement when they became members 
have substantially reduced their holdings of residential mortgage loans 
after becoming members, it believes that as a matter of sound 
regulatory policy the membership regulations should not be structured 
in such a way as to permit or encourage that result. FHFA believes that 
amending the regulations to make compliance with the 10 percent 
requirement an ongoing requirement would eliminate the possibility of 
institutions substantially reducing their holdings of residential 
mortgage assets after becoming Bank members and would not pose an undue 
burden on a significant number of members.
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    \13\ 12 U.S.C. 1424(a)(2)(A); 12 CFR 1263.6(b), 1263.10. The 
term ``residential mortgage loans'' includes: (1) Home mortgage 
loans; (2) funded residential construction loans; (3) loans secured 
by manufactured housing; (4) loans secured by junior liens on one-
to-four family property or multifamily property; (5) certain 
mortgage pass-through securities; (6) certain mortgage debt 
securities; (7) home mortgage loans secured by a leasehold interest; 
and (8) loans that finance properties or activities that would 
satisfy the requirements for the Community Investment Program or a 
community investment cash advance program. 12 CFR 1263.1.
    \14\ 12 CFR 1263.10.
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    Nothing in the Bank Act would preclude FHFA from applying the 10 
percent requirement on an ongoing basis, although doing so would 
constitute a change in the policy established by the Finance Board. If 
FHFA were to apply the 10 percent requirement on an ongoing basis, it 
also would need to include new regulatory provisions that address how 
the Banks are to measure the ongoing compliance. Issues include whether 
compliance should be tested at specified points in time, such as 
annually or quarterly, and whether compliance should be based upon the 
actual amount of residential mortgage loans held as of those dates or 
the average amounts of residential mortgage loans held over a specified 
period, such as three years.
    In addition to making the 10 percent requirement ongoing, FHFA has 
considered whether it would be appropriate to extend the requirement to 
other categories of applicants that are not currently subject to this 
requirement, or to retain the current approach, under which certain 
institutions are subject to an alternative requirement that they have 
mortgage-related assets that reflect a commitment to housing finance. 
At present, the 10 percent requirement applies only to insured 
depository institution applicants that are not CFIs: FDIC-insured banks 
and savings associations with average assets in excess of the 
$1,011,000,000 CFI asset cap, and all credit union applicants. The 
universe of additional institutions that could potentially be made 
subject to the 10 percent requirement would include all of those 
institutions not currently subject to the requirement: insurance 
companies, CDFIs, and CFIs. FHFA is not considering extending the 10 
percent requirement to CFIs because that result appears to be precluded 
by the Bank Act, which states that CFIs may become members without 
regard to the percentage of their total assets that is represented by 
residential mortgage loans.\15\ Arguably, section 4(a)(2) of the Bank 
Act implicitly precludes the extension of the 10 percent requirement to 
insurance companies and CDFIs because that requirement is listed among 
those that apply to insured depository institutions. Notwithstanding 
that fact, the Finance Board considered applying the 10 percent 
requirement to insurance companies (and believed it had the authority 
to do so) in 1993, when it adopted the original version of the 
membership regulations.\16\ In that case, the Finance Board cited its 
general regulatory and rulemaking authorities as its basis for doing 
so. The Finance Board also noted that the other requirements of section 
4(a)(2), the financial condition, character of management, and home 
financing policy requirements, had applied to all applicants since the 
enactment of the Bank Act.\17\ Ultimately, the Finance Board declined 
to apply the 10 percent requirement to insurance company applicants and 
adopted the alternative requirement, now embodied in Sec.  1263.6(c) of 
the regulations, that all applicants that are not insured depository 
institutions, such as insurance companies and CDFIs, have mortgage-
related assets that reflect a commitment to housing finance. In 
adopting this alternative requirement, the Finance Board recognized 
that, although depository institutions and insurance companies are 
engaged in different lines of business, an insurance company applicant 
may have a significant absolute dollar volume of residential

[[Page 81148]]

mortgage assets, given the large asset size of many insurance 
companies.\18\
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    \15\ 12 U.S.C. 1424(a)(4).
    \16\ See 58 FR 43522, 43532 (1993).
    \17\ In addition, the Finance Board justified the universal 
application of these other section 4(a)(2) requirements by reference 
to its duty to ensure the safety and soundness of the Bank System. 
See 58 FR 43522, 43532 (1993).
    \18\ 58 FR 43522, 43532-33 (1993). At the time this requirement 
was first promulgated, the Finance Board itself reviewed and 
approved Bank membership applications. In 1996, this provision was 
revised to devolve the decision-making authority to the Banks. See 
61 FR 42531, 42545 (1996).
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    In light of the above, FHFA requests comment on the following three 
questions relating to the 10 percent requirement:
    Question One: Should FHFA revise Sec.  1263.10 of its regulations 
so that an insured depository institution that is subject to the 10 
percent residential mortgage loans requirement when it is admitted for 
membership must also comply with that requirement for the duration of 
the time that it remains a member?
    Question Two: Should FHFA amend Sec. Sec.  1263.6(b) and 1263.10 of 
its regulations to subject insurance company and CDFI applicants to the 
10 percent residential mortgage loans requirement?
    Question Three: If FHFA does not subject insurance company and CDFI 
applicants to the 10 percent requirement, should FHFA amend Sec.  
1263.6(c) of its regulations, which currently requires all such 
applicants to have mortgage related assets that reflect a commitment to 
housing finance, to establish levels of mortgage-related assets that 
may be deemed to constitute a sufficient commitment to housing finance?
2. The ``Makes Long-Term Home Mortgage Loans'' Requirement
    Section 4(a)(1)(C) of the Bank Act applies to all applicants for 
Bank membership and provides that an institution may become a member 
only if it makes such home mortgage loans as the Director determines to 
be long-term loans. Section 1263.9 of the membership regulations 
implements that provision through a ``presumptive compliance'' 
approach, under which an applicant is deemed to have satisfied the 
statutory requirement if its most recent regulatory financial report 
demonstrates that it originates or purchases long-term home mortgage 
loans. Because the regulation requires a Bank to look solely to an 
applicant's most recent financial report, the Banks do not assess 
compliance with this provision at any subsequent date; there is no 
ongoing requirement that an institution that has been admitted to 
membership must continue to make long-term home mortgage loans after it 
has become a member. Thus, as is the case with respect to the 10 
percent requirement, the absence of an ongoing requirement means that 
it is possible that an institution could reduce or cease making long-
term home mortgage loans after becoming a member. As discussed 
previously, FHFA believes that as a matter of sound regulatory policy 
its membership regulations should not encourage such a result, and 
questions whether the existing provision is the most appropriate means 
of implementing the statutory ``makes long-term home mortgage loans'' 
requirement. Amending the membership regulations to make compliance 
with the ``makes long-term home mortgage loans'' requirement an ongoing 
requirement would eliminate that possibility, and should not pose an 
undue burden for Bank members.
    FHFA believes that amending the regulations in that manner would be 
permissible under the Bank Act, although it would represent a departure 
from the point-in-time policy established by the Finance Board. Also, 
if this provision were to be made an ongoing requirement, FHFA also 
would need to develop a new test through which the Banks could measure 
their members' ongoing compliance with this requirement. Unlike the 10 
percent requirement, the statutory language includes no quantifiable 
benchmarks for compliance with the ``makes long-term home mortgage 
loans'' requirement, and the only standard required by the regulations 
is that an applicant's financial reports must show that it originates 
or purchases such loans. In theory, an applicant could satisfy this 
requirement by having made a single long-term mortgage loan in the 
reporting period immediately preceding its application for Bank 
membership. Although the current regulations do not require members to 
comply with this provision on an ongoing basis, a previous regulator of 
the Bank System interpreted this provision of the Bank Act as requiring 
that applicants be engaged in the business of making long-term home 
mortgage loans as an ongoing activity, and not just as an isolated 
instance. See Opinion of the General Counsel of the Federal Home Loan 
Bank Board, at 2 (Nov. 7, 1978).
    If FHFA were to amend the regulations to establish quantifiable 
benchmarks for this requirement, it necessarily would have to determine 
the content of those benchmarks. For example, FHFA could develop 
benchmarks based on a specified percentage of an institution's assets 
or on a minimum dollar volume of the institution's long-term home 
mortgage loan originations or loan purchases. If FHFA were to establish 
a benchmark based on a percentage of assets that an institution must 
have in long-term home mortgage loans, the percentage would likely need 
to be smaller than the percentage of assets that members must have 
under the 10 percent requirement, discussed above, because of the 
differences between the terms ``residential mortgage loans'' and 
``long-term home mortgage loans.'' The operative term for determining 
compliance with the 10 percent requirement is ``residential mortgage 
loans,'' which is considerably more expansive than the term ``long-term 
home mortgage loans.'' ``Residential mortgage loans'' is defined to 
include eight different categories of loans, one of which is ``home 
mortgage loans.'' \19\ ``Home mortgage loans'' is considerably more 
narrow and is defined by statute and by regulation to mean a loan (or 
an interest in a loan) that is secured by a first lien on one-to-four 
family property or multifamily property.\20\
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    \19\ See 12 CFR 1263.1.
    \20\ 12 U.S.C. 1422(4), (5); 12 CFR 1263.1. The term ``home 
mortgage loan'' includes primarily the following: (1) First mortgage 
loans secured by one-to-four family property, multifamily property, 
or combination business or farm property where at least 50 percent 
of the total appraised value is attributable to the residential 
portion of the property; and (2) mortgage pass-through securities 
that represent an undivided ownership interest in the above types of 
loans or in securities that represent an undivided ownership 
interest in such loans. The regulations also define ``long-term'' to 
mean a term to maturity of five years or greater.
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    If FHFA were to establish a standard with quantifiable benchmarks, 
it would also need to decide whether those benchmarks should apply 
equally to all applicants or members, or whether it should establish 
separate requirements for the different classes of institutions 
eligible for membership--insured depository institutions, insurance 
companies, and CDFIs--in recognition of the fact that each type of 
institution has a different primary business model and, thus, a 
different level of involvement in supporting residential mortgage 
finance. A single standard for all institutions would be easier for the 
Banks to apply. On the other hand, establishing separate standards that 
are tailored to the different classes of institutions that are eligible 
for membership would recognize the practical reality that each type of 
eligible institution, by the nature of its business, has a different 
level of involvement in mortgage lending.
    If FHFA were to establish separate standards for the three 
categories of institutions that are eligible for membership, it likely 
would have to consider and resolve certain ancillary issues related to 
the different types of institutions. For example, if FHFA were

[[Page 81149]]

to develop a percentage-based standard for insurance companies, it 
would need to consider whether the percentage should be calculated 
based on the insurance company's ``total assets'' or on its ``invested 
assets,'' the latter of which would typically exclude certain assets, 
such as premiums receivable and separate accounts. For the reasons 
mentioned above with regard to the 10 percent requirement, FHFA might 
determine that it would be preferable to apply a volume-based standard 
to insurance companies, or perhaps a combination of the volume-based 
and percentage-based approaches. In a similar fashion, if FHFA were to 
establish a separate, quantifiable standard for insurance companies, it 
might also consider whether it would be appropriate to establish 
different standards for different types of insurance companies, 
recognizing that insurers engaged in underwriting different lines of 
insurance are apt to hold different types of investments and may 
include mortgage assets to differing degrees. For example, life 
insurance companies historically have held longer-term assets, 
including mortgage loans, because their liabilities on their policies 
tend to be of longer duration, while property and casualty insurers 
traditionally have had investment portfolios with more short-term 
assets and fewer bonds and mortgage loans, because their policy 
liabilities tend to be of shorter duration.
    In light of the above discussion, FHFA requests comment on the 
following five questions relating to the ``makes long-term home 
mortgage loans'' requirement:
    Question Four: Should FHFA revise Sec.  1263.9 of its regulations 
to require that an institution that is admitted to membership must 
comply with the ``makes long-term home mortgage loans'' requirement 
both at the time that it is admitted for membership and for the 
duration of the time that it remains a member?
    Question Five: Should FHFA replace the existing standard, which 
requires only that an institution demonstrate that it originates or 
purchases home mortgage loans, with one or more quantifiable standards, 
such as by requiring applicants and members to have a specified portion 
of their assets invested in long-term home mortgage loans or by meeting 
a minimum dollar volume of originations and purchases of such loans?
    Question Six: If FHFA were to adopt a standard based on a minimum 
percentage of long-term home mortgage loans, what would be an 
appropriate level of long-term home mortgage loans or mortgage-backed 
securities to be held by depository institutions, insurance companies, 
or CDFIs, respectively?
    Question Seven: If FHFA were to replace the existing regulatory 
requirement with a quantifiable standard, should FHFA apply one 
standard to all eligible institutions and members, or separate 
standards for the three distinct categories of institutions that are 
eligible for membership?
    Question Eight: If FHFA were to establish separate quantifiable 
standards for the separate categories of eligible institutions, should 
it also establish separate sub-categories for different types of 
institutions within each category, such as for life insurance companies 
and property and casualty insurance companies?
3. The Home Financing Policy Requirement
    Section 4(a)(2)(C) of the Bank Act provides that an insured 
depository institution that was not a Bank member as of January 1, 
1989, may become a member only if the character of its management and 
its home financing policy are consistent with sound and economical home 
financing.\21\ Although the Bank Act does not require other applicants 
to comply with the home financing policy requirement, the FHFA 
regulations have retained the provisions adopted by the Finance Board 
that require all applicants for membership to demonstrate their 
compliance with this provision.\22\ Neither the Bank Act nor the 
membership regulations defines the term ``home financing policy'' or 
requires that a home financing policy be in the form of a written 
document. Section 1263.13 of the membership regulations implements the 
home financing policy requirement through a ``presumptive compliance'' 
approach, under which an applicant that is subject to the Community 
Reinvestment Act (CRA) is deemed to be in compliance with the 
requirement if it has received a CRA rating of ``Satisfactory'' or 
better on its most recent CRA performance evaluation. An applicant that 
is not subject to the CRA is required to file, as part of its 
application for membership, a written justification acceptable to the 
Bank of how and why its home financing policy is consistent with the 
Bank System's housing finance mission. An applicant that does not have 
a satisfactory CRA rating is presumed not to have complied with the 
home financing policy requirement, although it may attempt to rebut 
that presumption.\23\ As is the case with respect to the 10 percent 
requirement and the ``makes long-term home mortgage loans'' 
requirement, the Banks assess compliance with the home financing policy 
requirement only at the time that they consider an institution's 
application for membership.\24\
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    \21\ 12 U.S.C. 1424(a)(2)(C).
    \22\ 12 CFR 1263.6(a)(6), 1263.13.
    \23\ An applicant can rebut the presumption of noncompliance by 
providing either a confirmation from its appropriate regulator of 
its recent satisfactory CRA rating, or a written analysis acceptable 
to the Bank demonstrating that its CRA rating is unrelated to home 
financing, and providing substantial evidence of how and why its 
home financing credit policy and lending practices meet the credit 
needs of its community. 12 CFR 1263.17(f)(2).
    \24\ The use of an applicant's CRA rating at a single point in 
time for purposes of the membership regulations differs from the use 
of a member's CRA rating in assessing its compliance with the 
community support regulation under 12 CFR 1290.3, which is an 
ongoing requirement.
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    As discussed previously, FHFA believes that the assessment of 
compliance with certain of the eligibility requirements on a one-time 
basis may not be the most appropriate means of implementing those 
provisions. Moreover, in the context of the home financing policy 
requirement, the absence of any qualitative standards as to the form or 
content of what constitutes an acceptable home financing policy 
compounds the problem of determining whether applicants comply with 
this provision. Accordingly, FHFA is considering whether it would be 
appropriate to amend its regulations relating to the home financing 
policy requirement by establishing more specific standards and by 
making compliance an ongoing requirement for all members. Amending the 
regulations in that manner would be permissible under the Bank Act, 
although doing so would represent a departure from the point-in-time 
policy established by the Finance Board and would require FHFA to 
develop new tests through which the Banks could assess their members' 
ongoing compliance with this requirement.
    If FHFA were to develop a new standard for assessing compliance 
with the home financing policy requirement, an initial question would 
be the form of the new standard, i.e., whether it should be written, or 
whether some members could demonstrate compliance by other means. 
Requiring all applicants to have a written home financing policy that 
explains in narrative fashion the manner and degree to which the 
institution's existing activities and investments support home 
financing might make it easier to assess compliance with the home 
financing policy requirement, although a revised rule likely would need 
to establish some minimum

[[Page 81150]]

benchmarks in order to ensure that the provision is applied uniformly 
throughout the Bank System. Because certain applicants will have a 
business model that focuses primarily on mortgage lending, it also 
would be possible to fashion an alternative home financing policy 
standard for those institutions that would deem them to have an 
acceptable home financing policy if they have a specified level of 
mortgage loan originations or mortgage related assets or otherwise 
demonstrate that mortgage lending is their principal line of business.
    Apart from the form of a new home financing policy standard, FHFA 
also would need to develop the content of the standard. At present, the 
regulations do not address the content of an acceptable home financing 
policy, but instead use an applicant's CRA rating as a proxy for an 
acceptable policy. As mentioned above, one possible approach, which 
could be in lieu of or in addition to the CRA rating, would be to 
require an applicant or member to maintain a specified level of 
mortgage related assets or mortgage loan originations in order to be 
deemed to have an acceptable home financing policy. If FHFA were to 
adopt that approach, it would have to be consistent with the 10 percent 
requirement and the ``makes long-term home mortgage loans'' 
requirement, and it is possible that compliance with the home financing 
policy requirement could be presumed by compliance with ongoing 
quantifiable standards for the other two requirements. If FHFA were to 
develop quantifiable standards for the home financing policy 
requirement, it also might consider whether the specifics of a ``home 
financing policy'' could vary based on the type of institution 
involved. Such an approach could be warranted based on the different 
levels of involvement in mortgage lending that might be typical among 
the different types of institutions that are eligible for Bank 
membership. For example, the home financing activities of a traditional 
savings and loan association (the core business of which is mortgage 
lending) are apt to be significantly greater than those of an insurance 
company or CDFI (the primary business of which is underwriting 
insurance and promoting community development, respectively). Given 
that the statutory requirement for a home financing policy is that it 
must be ``consistent with sound and economical home financing,'' a 
regulatory standard that recognizes the possibility of distinctions 
among the different types of institutions that are eligible for 
membership would appear to be consistent with the Bank Act.
    In light of the above discussion, FHFA requests comment on the 
following four questions relating to the ``home financing policy'' 
requirement:
    Question Nine: Should FHFA revise Sec.  1263.13 of its regulations 
to require that an institution that is admitted to membership must 
comply with the ``home financing policy'' requirement both at the time 
that it is admitted for membership and for the duration of the time 
that it remains a member?
    Question Ten: Should FHFA define the term ``home financing policy'' 
and, if so, how should that term be defined? Should it be defined to 
include only a written policy that describes in narrative fashion the 
manner and extent to which an applicant's past and current activities 
and investments support home financing, or should it also be defined to 
include certain business practices, such as having specified levels of 
mortgage related assets above which an acceptable housing finance 
policy could be presumed?
    Question Eleven: Should the regulations allow the specifics of a 
home financing policy to vary based on the type of institution? Should 
FHFA recognize that originating mortgage loans and investing in 
mortgage loans and mortgage related securities may constitute the core 
business of certain types of eligible institutions, such as thrift 
institutions, while those same activities may constitute only an 
incidental portion of the business of other eligible institutions, such 
as insurance companies?
    Question Twelve: Should FHFA continue to use an institution's CRA 
rating as a proxy for compliance with the home financing policy 
requirement or should FHFA develop an alternative approach to assessing 
compliance with this requirement? One such alternative could be to 
develop a quantifiable standard, such as one based on a minimum level 
of housing related assets, which could be used either alone or in 
conjunction with the CRA rating, for determining whether an institution 
has an acceptable home financing policy.
4. Other Provisions
    In addition to the foregoing, FHFA is also considering whether 
certain other provisions of its membership regulations should be 
revised to address concerns relating to other aspects of the membership 
regulations. Those issues relate to ``shell'' or ``captive'' insurance 
companies, consequences for failing to comply with the new 
requirements, and the structure of the current membership regulation, 
and are discussed below.
5. Captive or Shell Insurance Companies
    When the Bank Act was enacted in 1932, it included insurance 
companies among the types of institutions that were permitted to become 
Bank members because at that time life insurance companies were active 
residential mortgage lenders.\25\ Although insurance companies have 
been eligible for Bank membership since the inception of the Bank 
System, until recently comparatively few insurance companies have 
become members, and, as of December 31, 2009, insurance companies 
represented only 209 of the 8,057 members of the Bank System. Those 
companies that have become members would have satisfied the statutory 
and regulatory requirements relating to home financing, as discussed 
above, as well as the requirements that they be ``subject to inspection 
and regulation'' under federal or state law and that their financial 
condition be such that advances could be safely made to the insurance 
company member. There have been some instances in which Banks have 
admitted to membership, or inquired about admitting to membership, 
institutions that are chartered as an insurance company but are 
inactive--``shell'' insurance companies--or do not underwrite insurance 
for third parties--``captive'' insurance companies. Such institutions 
raise at least two concerns relating to their eligibility to become 
Bank members, which are whether they are in fact subject to the degree 
of supervision and examination contemplated by section 4(a)(1)(B) of 
the Bank Act, and whether they have a bona fide involvement in 
supporting housing finance. A ``shell'' insurance company is apt to be 
inactive, i.e., not engaged in underwriting any types of insurance. A 
company that is not underwriting insurance also may not be actively 
supervised or examined by its state insurance commissioner, and thus 
may not file periodic financial reports with the state regulator. 
Moreover, an inactive insurance company without any insurance 
liabilities on its books is unlikely to maintain an investment 
portfolio, and in particular, investments in mortgage loans or 
mortgage-backed securities that provide the housing finance nexus 
contemplated by Congress. The absence of ongoing supervision and 
examination by the

[[Page 81151]]

state regulator and the absence of periodic financial reports calls 
into question the ability of a shell insurance company to satisfy the 
statutory requirement that it is ``subject to inspection and 
regulation'' by a state or federal regulator, and raises additional 
questions about whether a Bank could accurately assess the financial 
condition of such a company in order to determine whether the Bank 
could safely make advances to the insurance company. In a similar 
fashion, the absence of any underwriting of insurance, in the case of a 
shell company, and the limited nature of the self-insurance activities, 
in the case of a captive insurance company, call into question whether 
such institutions have any bona fide involvement in the lending or 
investment activities that support residential mortgage markets and 
that are typical of other insurance companies that underwrite insurance 
for third parties and maintain an investment portfolio, which may 
include mortgage related investments that correspond to the types of 
risks that the companies underwrite. Membership for shell insurance 
companies or captive insurance companies also raises other supervisory 
concerns, such as whether the insurance company member is simply acting 
as a conduit to provide advances to its parent company that which is 
ineligible for membership and thus cannot legally obtain advances in 
its own right. To address those concerns, FHFA is considering whether 
it should amend its regulations to preclude the possibility that shell 
or captive insurance companies, which may not be adequately supervised 
or may not be actively engaged in any meaningful housing finance 
activities, could be admitted to membership. Accordingly, FHFA requests 
comments on the following question:
---------------------------------------------------------------------------

    \25\ See The Anatomy of a Residential Mortgage Crisis: A Look 
Back to the 1930s, Kenneth A. Snowden (June 2009) (insurance company 
share of the residential mortgage market).
---------------------------------------------------------------------------

    Question Thirteen: Should FHFA amend its membership regulations to 
require that insurance company applicants be actively engaged in 
underwriting insurance for third parties and be actively examined and 
supervised by their appropriate state insurance regulator, and that 
insurance company members remain so engaged and so examined and 
supervised as a condition to remaining Bank members?
    6. Sanctions for Noncompliance. If FHFA were to amend its 
regulations to make the ``10 percent,'' ``makes long-term home mortgage 
loans,'' or ``home financing policy'' requirements ongoing, it believes 
that it should also incorporate a transition period to allow members 
that are not in compliance with the new requirements a period of time 
within which to come into compliance if they wish to remain members. 
With respect to the 10 percent requirement, initial research indicates 
that, of the approximately 1,500 members that were subject to that 
requirement when they became members, only 32 institutions would fail 
to comply with that requirement if it were applied to them as of 
December 31, 2009. Of those 32 institutions, 11 had residential 
mortgage loans of more than nine percent of their total assets and 12 
had residential mortgage loans of between seven and nine percent of 
their total assets, which suggests that they should be able to comply 
with an ongoing ``10 percent requirement'' following a reasonable 
transition period. Only nine current members had residential mortgage 
loans of less than five percent of their total assets, with four of 
those members having ratios of less than one percent. This suggests 
that even with a transition period some of those institutions may not 
be able to comply with an ongoing 10 percent requirement. In a similar 
fashion, if the eligibility requirements are to become ongoing, it is 
also possible that some members that would initially comply with the 
new requirements may later fall out of compliance with those 
requirements. Both of those possibilities raise the question of how 
FHFA and the Banks should deal with institutions that either cannot 
comply with the new requirements or that subsequently fall out of 
compliance.
    Each of the regulatory provisions that FHFA is contemplating making 
an ongoing requirement is an eligibility requirement for membership, 
which suggests that failure to comply with any of them should make the 
institution ineligible for membership and thus could require the Bank 
to terminate its membership. Section 6(d)(2)(A)(i) of the Bank Act 
provides that the board of directors of a Bank may terminate the 
membership of any institution if the institution fails to comply with 
any provision of the Bank Act or FHFA regulations. 12 U.S.C. 
1426(d)(2)(A)(i). The use of the language ``may terminate'' in that 
provision, however, indicates that the provision is not mandatory and 
would allow FHFA and the Bank to impose sanctions other than 
termination of membership, at least initially. For example, FHFA could 
allow the Banks to give a noncompliant member a specified period of 
time within which to cure the noncompliance before terminating its 
membership. During that time the Bank could be prohibited from entering 
into new transactions with the member, but would not be required to 
take any other adverse actions against the member.
    Accordingly, in order to help it determine how best to deal with 
the possibility of noncompliance with any new requirements, FHFA 
requests comment on the following questions relating to sanctions for 
failure to comply with any revised membership requirements:
    Question Fourteen: Should FHFA amend the membership regulations to 
address the possibility that a member might not comply with, or might 
later fall out of compliance with, one or more of the new ongoing 
membership requirements after a transition period has expired, and if 
so, should FHFA require the Banks to terminate that institution's 
membership, either with or without a grace period, or should FHFA 
consider lesser sanctions, such as prohibiting further access to Bank 
services during a specified grace period, before requiring the Banks to 
terminate the membership of the noncompliant members?
    7. Regulatory Structure. The current membership regulations embody 
a ``presumptive compliance'' approach, under which an eligible 
institution that satisfies the regulatory standards is presumed to 
comply with the corresponding statutory requirements, and an 
institution that fails to satisfy any of the regulatory standards may 
nonetheless attempt to rebut the presumption of noncompliance by 
submitting certain specified additional information to the Bank.\26\ 
The regulatory standards relating to the ``makes long-term home 
mortgage loans'' and the ``10 percent'' requirements are not 
rebuttable, although the standards relating to the ``home financing 
policy,'' ``inspection and regulation,'' ``character of management,'' 
and ``financial condition'' requirements are rebuttable. As part of its 
review of the membership regulations FHFA has also considered whether 
it should retain the ``presumptive compliance'' and ``rebuttal'' 
approaches of the current regulations, along with the existing 
regulatory standards, many of which are phrased in somewhat general 
terms, or whether it should adopt more objective and quantifiable 
regulatory standards that would be more of a ``bright line'' approach 
for evaluating eligibility for membership. In order to help it 
determine the appropriate approach for the regulatory standards, FHFA 
requests comment on the following question:
---------------------------------------------------------------------------

    \26\ See 12 CFR 1263.17 (rebuttal provisions).
---------------------------------------------------------------------------

    Question Fifteen: Should FHFA retain the existing structure of its 
membership regulations, under which the regulations

[[Page 81152]]

establish certain standards of ``presumptive compliance'' and allow an 
opportunity for institutions that do not meet those standards to rebut 
the presumption of noncompliance, or should FHFA devise an alternative 
structure, such as one that incorporates ``bright line'' tests for each 
of the various eligibility requirements and does not create 
presumptions that an institution would be permitted to rebut? \27\
---------------------------------------------------------------------------

    \27\ In January 2010, FHFA revised its membership regulations to 
implement statutory amendments authorizing CDFIs to become Bank 
members. As part of those revisions, FHFA allowed CDFI applicants 
that could not demonstrate compliance with certain of the specific 
standards relating to financial condition to provide alternative 
information demonstrating that they are in sound financial 
condition. By raising the larger issue of the appropriate regulatory 
structure for the membership regulations FHFA does not intend to 
change its policy, as evidenced by the recent revisions, that CDFI 
applicants are to be given latitude in demonstrating the soundness 
of their financial condition.
---------------------------------------------------------------------------

    Question Sixteen: Should FHFA play a role in resolving close 
membership issues, or leave them to the discretion of the Banks?

III. Request for Comments

    FHFA invites comments on all of the issue discussed above, and will 
consider all comments in developing a proposed rule to amend its 
membership regulations.

    Dated: December 20, 2010.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2010-32467 Filed 12-23-10; 8:45 am]
BILLING CODE 8070-01-P


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