38508 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

available information, it is hereby found 

that this rule, as hereinafter set forth, 

will tend to effectuate the declared 

policy of the Act. 

Pursuant to 5 U.S.C. 553, it is also 

found and determined upon good cause 

that it is impracticable, unnecessary, 

and contrary to the public interest to 

give preliminary notice prior to putting 

this rule into effect, and that good cause 

exists for not postponing the effective 

date of this rule until 30 days after 

publication in the Federal Register 

because: (1) The 2009–10 fiscal period 

begins on August 1, 2009, and the 

marketing order requires that the rate of 

assessment for each fiscal period apply 

to all assessable onions handled during 

such fiscal period; (2) this action 

decreases the assessment rate for 

assessable onions beginning with the 

2009–10 fiscal period; (3) handlers are 

aware of this action which was 

unanimously recommended by the 

Committee at a public meeting and is 

similar to other assessment rate actions 

issued in past years; and (4) this interim 

final rule provides a 60-day comment 

period, and all comments timely 

received will be considered prior to 

finalization of this rule. 

List of Subjects in 7 CFR Part 959 

Marketing agreements, Onions, 

Reporting and recordkeeping 

requirements. 

■ For the reasons set forth in the 

preamble, 7 CFR part 959 is amended as 

follows: 

PART 959—ONIONS GROWN IN 

SOUTH TEXAS 

■ 1. The authority citation for 7 CFR 

part 959 continues to read as follows: 

Authority: 7 U.S.C. 601–674. 

■ 2. Section 959.237 is revised to read 

as follows: 

§ 959.237 Assessment rate. 

On and after August 1, 2009, an 

assessment rate of $0.025 per 50-pound 

equivalent is established for South 

Texas onions. 

Dated: July 29, 2009. 

Rayne Pegg, 

Administrator, Agricultural Marketing 

Service. 

[FR Doc. E9–18540 Filed 8–3–09; 8:45 am] 

BILLING CODE 3410–02–P 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1229 

RIN 2590–AA21 

Capital Classifications and Critical 

Capital Levels for the Federal Home 

Loan Banks 

AGENCY: Federal Housing Finance 

Agency. 

ACTION: Final rule. 

SUMMARY: The Federal Housing Finance 

Regulatory Reform Act, Division A of 

the Housing and Economic Recovery 

Act of 2008 (HERA), requires the 

Director of the Federal Housing Finance 

Agency (FHFA) to establish criteria 

based on the amount and type of capital 

held by a Federal Home Loan Bank 

(Bank) for each of the following capital 

classifications: Adequately capitalized; 

Undercapitalized; Significantly 

undercapitalized; and Critically 

undercapitalized. In addition, HERA 

provides that the critical capital level 

for each Bank shall be the amount of 

capital that the Director by regulation 

shall require. HERA also sets forth 

prompt corrective action (PCA) 

authority that the Director has for the 

Banks. To implement these new 

provisions, FHFA published in the 

Federal Register on January 30, 2009 an 

interim final rule to define critical 

capital for the Banks, establish the 

criteria for each of the capital 

classifications identified in HERA and 

delineate its PCA authority over the 

Banks. FHFA requested comments on 

all aspects of the regulation. It also 

sought comment on whether it should 

establish a ‘‘well-capitalized’’ 

classification and on what criteria may 

be appropriate to define such a new 

category. After considering the 

comments received on the interim final 

rule, FHFA is adopting the interim final 

rule as a final regulation, subject to 

amendments meant to clarify certain 

provisions. 

DATES: The final regulation is effective 

August 4, 2009. 

FOR FURTHER INFORMATION CONTACT: Julie 

Paller, Senior Financial Analyst, (202) 

408–2842, and Anthony G. Cornyn, 

Senior Associate Director, (202) 408– 

2522, Division of Federal Home Loan 

Bank Regulation, Federal Housing 

Finance Agency, 1625 Eye Street, NW., 

Washington, DC 20006; or Thomas E. 

Joseph, Senior Attorney-Advisor, (202) 

414–3095, Office of General Counsel, 

Federal Housing Finance Agency, 1700 

G St., NW., Washington, DC 20552. The 

telephone number for the 

Telecommunications Device for the Deaf 

is (800) 877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Federal Housing Finance Agency and 

Recent Legislation 

Effective July 30, 2008, HERA, Public 

Law 110–289, 122 Stat. 2654 (2008), 

transferred the supervisory and 

oversight responsibilities of the Office of 

Federal Housing Enterprise Oversight 

(OFHEO) over the Federal National 

Mortgage Association (Fannie Mae), and 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac) (collectively, 

the Enterprises) and the oversight 

responsibilities of the Federal Housing 

Finance Board (Finance Board) over the 

Banks and the Office of Finance (which 

acts as the Banks’ fiscal agent) to a new 

independent executive branch agency, 

FHFA. FHFA is responsible for ensuring 

that the Enterprises and the Banks 

operate in a safe and sound manner, 

including that they maintain adequate 

capital and internal controls, that their 

activities foster liquid, efficient, 

competitive and resilient national 

housing finance markets, and that they 

carry out their public policy missions 

through authorized activities. See id. at 

§ 1102, 122 Stat. 2663–64. 

Section 1141 of HERA states that the 

Director shall adopt regulations 

specifying the critical capital level for 

each Bank no later than the expiration 

of the 180 day period from the date that 

HERA was enacted. See id. at § 1141, 

122 Stat. 2730 (adopting 12 U.S.C. 

4613(b)). In establishing this 

requirement, HERA provides that the 

Director shall take due consideration of 

the critical capital levels established for 

the Enterprises, with such modifications 

as the Director determines to be 

appropriate to reflect the difference in 

operations between the Banks and the 

Enterprises. 

In addition, section 1142 of HERA 

requires that the Director, no later than 

180 days from its enactment, establish 

for the Banks criteria for each of the four 

following capital classifications: 

Adequately capitalized; 

Undercapitalized; Significantly 

undercapitalized; and Critically 

undercapitalized. See id. at § 1142, 122 

Stat. 2730–32. HERA specifies that the 

criteria should be based on the amount 

and types of capital held by a Bank and 

the risk-based, minimum and critical 

capital levels for the Banks, taking due 

consideration of the capital 

classifications established for the 

Enterprises, with such modifications as 

the Director determines to be 

appropriate to reflect the difference in 


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1Each Bank is generally referred to by the name 

of the city in which it is located. The twelve Banks 

are located in: Boston, New York, Pittsburgh, 

Atlanta, Cincinnati, Indianapolis, Chicago, Des 

Moines, Dallas, Topeka, San Francisco, and Seattle. 

2All the Banks but the Chicago Bank operate 

pursuant to a capital structure plan required under 

the GLB Act. The Chicago Bank, which has not yet 

implemented its capital structure plan, still 

operates in accordance with stock purchase 

requirements set forth in the Bank Act prior to its 

amendment by the GLB Act. See 12 U.S.C. 

1426(a)(6). 

operations between the Banks and the 

Enterprises. HERA also provides FHFA 

prompt corrective action (PCA) 

authority over the Banks and amends 

the Federal Housing Enterprises 

Financial Safety and Soundness Act of 

1992 (Safety and Soundness Act) so that 

specific mandatory or discretionary 

supervisory actions and restrictions 

under that statute would apply to any 

Bank determined to be 

undercapitalized, significantly 

undercapitalized or critically 

undercapitalized. See id. at §§ 1143– 

1145, 122 Stat. 2732–34. The general 

purpose for the PCA framework is to 

supplement the FHFA’s other regulatory 

and supervisory authority and provide 

for timely and, in some situations, 

mandatory intervention by the regulator. 

B. The Bank System Generally 

The twelve Banks are 

instrumentalities of the United States 

organized under the Federal Home Loan 

Bank Act (Bank Act).1 See 12 U.S.C. 

1423, 1432(a). The Banks are 

cooperatives. Only members of a Bank 

may purchase the capital stock of a 

Bank, and 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. See 12 U.S.C. 1426(a)(4), 

1430(a), 1430b. Each Bank is managed 

by its own board of directors and serves 

the public interest by enhancing the 

availability of residential mortgage and 

community lending credit through its 

member institutions. See 12 U.S.C. 

1427. 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. See 12 U.S.C. 1424; 

12 CFR part 925. The Banks also require 

members to purchase certain amounts of 

stock to become a member of the Bank 

and to undertake specific activities and 

transactions with the Bank. These stock 

purchase requirements are set forth in a 

Bank’s capital structure plan as required 

by amendments to the Bank Act made 

by the Gramm Leach Bliley Act (GLB 

Act) in 1999.2

C. Interim Final Rule 

On January 30, 2009, the FHFA 

published in the Federal Register an 

interim final rule with requests for 

comments, which added new subpart A 

of part 1229 to 12 CFR chapter XII, 

subchapter B. See 74 FR 5595. The 

comment period for the interim final 

rule originally was scheduled to close 

on April 30, 2009, but on March 26, 

2009, the FHFA published a notice 

extending the comment period for an 

additional 15 days. See 74 FR 13083. 

FHFA received 14 comments on the 

interim final rule, including comments 

from all twelve of the Banks. Two 

industry associations that represent 

many Bank members also commented. 

Comments are available at the FHFA 

Web site, http://www.fhfa.gov. 

The interim final rule implemented 

the PCA provisions set forth in sections 

1363 through 1369D of the Safety and 

Soundness Act, as these provisions had 

been amended and made applicable to 

the Banks by HERA. The interim final 

rule also incorporated certain 

restrictions on capital distributions that 

are imposed on the Banks by the Bank 

Act and it’s implementing regulations, 

and made clear that those restrictions 

will continue to apply to any Banks that 

do not meet their capital requirements 

or that incur charges against their 

capital, and that they will apply, in 

addition to the new PCA restrictions 

made applicable to the Banks by the 

Safety and Soundness Act. See e.g., 12 

U.S.C. 1426(f) and (h)(3); 12 CFR 

917.9(b). 

As required by HERA, the interim 

final rule established the critical capital 

level for the Banks. The interim final 

rule also defined the criteria for the four 

capital classification categories that 

HERA applied to the Banks. It set forth 

the process that govern the Director’s 

required quarterly determination of each 

Bank’s capital classification as well as 

the mandatory and discretionary 

restrictions and requirements that must 

or can be imposed on a Bank that the 

Director determines is less than 

adequately capitalized. 

FHFA asked for comments on all 

aspects of the interim final rule. It 

specifically requested comments on 

whether consideration of the differences 

between the Enterprises and the Banks 

with regard to the Banks’ cooperative 

ownership structure, mission of 

providing liquidity to members, 

affordable housing and community 

development mission, capital structure, 

and joint and several liability should 

result in revision to the interim final 

rule. 

FHFA also sought comment on 

whether it should adopt a fifth capital 

classification of ‘‘well-capitalized’’ as 

part of the regulation, although the 

interim final rule did not adopt such a 

category. Among the questions posed by 

FHFA with regard to a potential wellcapitalized classification were: 

(1) What criteria would be appropriate 

to define a ‘‘well-capitalized’’ category? 

(2) Whether a retained earnings or a 

market value of equity to par value of 

capital stock (MVE/PVCS) target would 

be useful or appropriate for defining a 

well-capitalized category? and 

(3) What restrictions on an adequately 

capitalized Bank would be appropriate 

to create an incentive for a Bank to 

achieve a well-capitalized rating? 

The FHFA also asked whether it 

should adopt a retained earnings or 

MVE/PVCS target as part of the Banks’ 

risk-based capital regulations or as a 

requirement that would be separate and 

distinct from the risk-based capital 

regulations. 

II. Discussion of Comments and 

Changes to the Interim Final Rule 

A. Overview of Comments 

Most commenters provided 

suggestions for changes to the published 

text of the interim final rule or asked 

that clarifications be made to certain 

provisions. Specifically, the comment 

letters urged FHFA to exempt advances 

from limits on asset growth applicable 

to Banks that are not adequately 

capitalized, alter the definition of 

executive officer to narrow the scope of 

persons covered, extend the time period 

for submission of a capital restoration 

plan, and clarify the scope of certain 

mandatory restrictions on Bank 

acquisitions and on payment of 

executive compensation or bonuses that 

become applicable once a Bank is 

deemed to be undercapitalized or 

significantly undercapitalized. Each of 

the suggested changes is addressed more 

fully below. 

Commenters also responded to FHFA 

questions about different aspects of 

instituting a fifth capital classification of 

well-capitalized. Nine of the comment 

letters expressed at least mild support or 

did not affirmatively oppose adopting 

the fifth capital classification, although 

most of these commenters did not 

support any approach that would 

effectively raise current minimum 

capital standards. Five commenters 

stated that such a classification was 

unnecessary or inappropriate. To the 

extent that they specifically addressed 

the issue, commenters also believed that 


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FHFA should not impose restrictions on 

an adequately capitalized Bank if a wellcapitalized category were adopted. A 

number of commenters suggested 

specific positive regulatory incentives 

that FHFA could adopt to encourage 

Banks to achieve a well-capitalized 

rating. 

Generally, commenters believed that 

if a well-capitalized category were 

adopted, the defining criteria should 

focus on the composition of Bank 

capital (i.e., retained earnings) rather 

than the level of capital. All but one of 

the commenters specifically opposed 

using an MVE/PVCS measure as part of 

the defining criteria or as a separate 

capital requirement. The one 

commenter that did not specifically 

oppose the MVE criteria, however, 

thought that an MVE/PVCS requirement 

should be adopted only after a separate 

rulemaking in which FHFA provided a 

more thorough analysis of the matter. 

FHFA has determined that it will not 

adopt the well-capitalized category as 

part of this final regulation. Instead, it 

will consider the comments and 

suggestions in developing any proposed 

future amendments to the PCA 

regulation concerning a well-capitalized 

category, including any proposals 

related to the criteria for defining, and 

for creating an incentive structure for 

the Banks to achieve, a well-capitalized 

rating. In developing any amendments, 

FHFA also would consider any changes 

that it may propose to the Banks’ riskbased capital requirements. FHFA also 

will continue to weigh whether it would 

be appropriate to propose a separate 

target for retained earnings and/or MVE/ 

PVCS, either as a stand-alone regulation 

or as part of any risk-based capital 

proposal. 

B. Specific Suggestions for Changing the 

Interim Final Rule 

Commenters addressed a number of 

different provisions and suggested a 

number of changes to the interim final 

rule. FHFA has carefully considered 

these comments. As is discussed below, 

while FHFA has adopted some changes 

to the interim final rule in response to 

the comments, it did not feel that all the 

suggested amendments were 

appropriate in light of statutory 

requirements and policy considerations. 

Definition of Executive Officer 

(§ 1229.1). A number of commenters 

asked for specific changes to the 

definition of ‘‘Executive Officer’’ set 

forth in the regulation. This definition is 

needed to implement the provision 

limiting bonuses and compensation 

paid to executive officers of 

significantly undercapitalized Banks 

under § 1229.8(f) of the regulation. 

Commenters requested three principal 

changes be made to the definition in 

§ 1229.1 to provide more clarity as to 

which employees were executive 

officers and establish a more 

appropriate scope for the definition. 

First, they asked that the regulation 

require FHFA to inform the Banks, in 

advance, which persons in charge of a 

principal business unit, division or 

function would be considered an 

executive officer. This approach, the 

commenters argued, would be 

consistent with the treatment provided 

the Enterprises. Second, they asked, 

without providing further explanation, 

that the reference to chief operating 

officer in the regulation be changed to 

chief executive officer. Finally, 

commenters asked that the regulation 

clarify that administrative or support 

staff that answer directly to the 

president or chief operating officer of 

the Bank or the chairman or vicechairman of the Bank’s board of 

directors not be considered executive 

officers. One commenter further stated 

that the regulation should specify that 

positions or persons identified by 

functional area would be within the 

scope of the definition only if they truly 

performed the duties of an executive 

officer. 

The Safety and Soundness Act, as 

amended by HERA, refers to executive 

officers of a regulated entity in various 

provisions including the PCA provision 

and a provision providing the Director 

with oversight and approval authority 

for compensation paid to executive 

officers. It does not, however, 

specifically define the term. Given that 

the statute does not differentiate 

between the term ‘‘executive officer’’ as 

used in the PCA provision and as used 

in the provision addressing executive 

compensation and the two provisions 

deal with the question of limiting 

compensation or bonus to certain Bank 

employees, FHFA believes the 

definition used in the two regulations 

ultimately should be the same. 

The definition of executive officer in 

§ 1229.1 is similar to the definition of 

executive officer with respect to a Bank 

that was proposed for comment as part 

of the executive compensation 

regulation on June 5, 2009. See 

Proposed Rule: Executive 

Compensation, 74 FR 26989. While 

there are some wording differences 

between the definition adopted in the 

PCA regulation and that being proposed 

in the executive compensation 

regulation (and the proposed definition 

in the executive compensation 

regulation may provide the Director 

with less discretion to remove persons 

from coverage than does the definition 

in § 1229.1), the definitions remain 

substantively the same. FHFA also 

expects that the definition in the PCA 

regulation will be amended in the future 

to conform to what is ultimately 

adopted in the executive compensation 

regulation. In the meantime, FHFA 

believes that the current definition of 

executive officer in § 1229.1 sufficiently 

identifies the persons that are subject to 

the PCA regulation restrictions and 

provides the Director with sufficient 

flexibility to add or remove specific 

persons from the list of Bank executive 

officers so that the concerns raised in 

the comments can be addressed on a 

case-by-case basis, if needed. Therefore, 

FHFA is not revising the definition of 

executive officer in the PCA regulation 

at this time. 

Advances and Limitations on Asset 

Growth (§ 1229.6(a)(4)). Most of the 

commenters requested that the 

mandatory limitation on asset growth 

applicable to an undercapitalized Bank 

and set forth in § 1229.6(a)(4) of the 

interim final rule be modified to 

exclude advances from its coverage. 

This provision prevents the average 

total assets of a Bank, that was less than 

adequately capitalized, from exceeding 

its average total assets of the previous 

quarter, unless the Director determines 

the increase is consistent with an 

approved capital restoration plan and 

meets other requirements. The 

commenters argued that in light of the 

safety and low-risk profile of advances, 

the self-capitalizing nature of the 

product and the centrality of advances 

to the Bank’s mission, limits should not 

be put on advance growth even if the 

Bank were less than adequately 

capitalized. 

The regulatory language in the interim 

final rule, however, closely follows the 

statutory provision that was added to 

section 1365(a)(4) of the Safety and 

Soundness Act by section 1143 of 

HERA. The statutory language appears 

straightforward and contains no 

exception for advances or other mission 

assets of either the Banks or the 

Enterprises. Instead, the statute allows 

the Director to waive the limit on asset 

growth when certain conditions are met. 

These conditions are carried over to the 

regulation and include that the growth 

be consistent with the capital 

restoration plan and that the ratio of the 

Bank’s tangible equity to total assets is 

increasing at a rate that will allow the 

Bank to become adequately capitalized 

in a reasonable period of time. Thus, it 

is not clear that the language of the 

statute provides flexibility to implement 

this suggested change. 

Moreover, § 1229.6(a)(4) imposes a 

limit on total assets and not on 


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3All of the stock outstanding, including excess 

stock, however, would already have been counted 

as part of the Bank’s capital. Thus, in these cases 

the new advances would increase the Bank’s assets 

without necessarily increasing its capital from the 

level which was already determined to be 

insufficient to meet regulatory requirements. 

4Such an interpretation also would appear to 

bring the meaning of this provision close to that of 

a similar PCA restriction imposed on insured 

depository institutions by § 38(e)(4) of the Federal 

Deposit Insurance Act (FDI Act)(12 U.S.C. 

§ 1831o(e)(4)). The FDI Act provision restricts an 

undercapitalized institution’s acquisition of any 

interest in any company or in another insured 

depository institution and limits the right to 

establish or acquire any additional branch offices. 

5This comment suggests that some Banks may 

believe that they have to complete any 

contemplated amendments to their GLB Act capital 

structure plan prior to the submission of the capital 

restoration plan. This is not the case, however. 

Under § 1229.11 of the final rule, a Bank would 

need to identify in its capital restoration plan any 

changes to its stock purchase requirements that it 

intends to make but it does not necessarily need to 

have those changes in place at the time it submits 

its capital restoration plan for approval. 

advances, specifically, so that an 

undercapitalized Bank would not face a 

barrier to continued advances growth as 

long as it reduces its investment 

portfolio or other asset holdings. In 

addition, despite commenters’ claims, 

nothing assures that new advances will 

be self- capitalizing, since a number of 

the Banks’ capital structure plans 

provide them discretion to set the 

advances stock purchase requirement 

below the level of their minimum 

capital requirements. Further, Bank 

members often do not have to buy 

additional stock to take down new 

advances, as they may have excess stock 

that can be applied to meeting the stock 

purchase requirement, or otherwise may 

not have to buy additional stock, to 

cover the new advances.3 Thus, a Bank 

that did not meet its capital 

requirements, unless it took some other 

action (e.g., reduce other assets), could 

become more highly leveraged if it were 

allowed unconditionally to expand 

advances. Arguably, the restrictions in 

the PCA provisions are designed to 

make sure the Bank has a plan of action 

that has been reviewed by FHFA to 

prevent this outcome from occurring. 

Given these considerations FHFA has 

decided not to adopt the changes to 

§ 1229.6(a)(4) suggested by commenters. 

Clarify Prohibition on Acquisition of 

Assets (§ 1229.6(a)(5)). A number of 

commenters asked that FHFA clarify the 

scope of the restriction in § 1229.6(a)(5) 

that prohibits a Bank that is not 

adequately capitalized from acquiring 

directly or indirectly, any interest in any 

entity. They asked especially for FHFA 

to confirm that this restriction would 

not prevent the Banks from undertaking 

authorized activities in the ordinary 

course of business, such as making 

otherwise authorized investments in 

financial instruments. One commenter 

also noted that existing regulations 

would likely already require a Bank to 

receive FHFA approval before making 

an acquisition in another entity. After 

considering these comments, FHFA 

agrees that the language used in the 

provision is vague, especially in light of 

other restrictions placed on Bank 

activities, and that some clarification 

would be useful. 

The regulatory language that is the 

subject to these comments closely 

follows the language that was added to 

section 1365(a)(5) of the Safety and 

Soundness Act by section 1143 of 

HERA. The restriction on the 

acquisition of an interest in an entity is 

one of a series of restrictions imposed 

on regulated entities that are not 

adequately capitalized, which includes 

limits on asset growth, new business 

activities and capital distributions. The 

Director is allowed under the statute 

and the regulation to waive this 

restriction if the Bank has an approved 

capital restoration plan, the Bank is 

implementing that plan, the acquisition 

of the interest is consistent with the 

plan and with the Bank’s safe and sound 

operations, and will further its 

compliance with its capital 

requirements. 

There appears to be little or no 

legislative history as to what Congress 

intended by this restriction. Given that 

the statute separately limits the ability 

of a Bank that is less than adequately 

capitalized to expand its activity 

through asset growth or undertaking 

new business activities, it would be 

reasonable that this particular 

restriction is meant to limit a Bank’s 

expansion through acquisition of other 

operating businesses or lines of business 

in which the Bank already may be 

involved. FHFA therefore has decided 

to clarify the meaning of § 1229.6(a)(5) 

by revising the restriction to apply to 

the acquisition of any equity interest in 

another operating entity.4 The revised 

language also makes clear that the 

restriction is not meant to prevent a 

Bank from enforcing any security 

interest granted to it or otherwise taking 

possession of collateral in the normal 

course of business. 

FHFA recognizes that under current 

regulations the Banks would have few if 

any opportunities to take equity 

positions in other operating entities 

without first receiving FHFA’s approval. 

Nevertheless, it is important to carry 

over into the regulation all the statutory 

restrictions even if such restrictions may 

have limited practical effect at this time. 

The revised language should clarify, 

however, FHFA’s intent that the 

restriction on the acquisition of interests 

in any entity was not meant to restrict 

a Bank’s investment in authorized 

investments such as mortgage backed 

securities or acquired member assets or 

otherwise restrict the Bank’s ability to 

accept pledges of security as part of its 

business. 

Submission of Capital Restoration 

Plan (§ 1229.11(b)). Most of the 

commenters supported extending the 

period in which a Bank has to submit 

a capital restoration plan from the 10 

calendar-days required under 

§ 1229.11(b) of the interim final rule. 

The commenters recognized that the 10 

day period was based on requirements 

currently applicable to the Enterprises 

but believed the difference in capital 

structures between the Banks and the 

Enterprises justified a longer period for 

the Banks to prepare and submit their 

capital restoration plans. In this respect, 

a number of the commenters stated that 

the Banks would need to amend their 

GLB Act capital structure plans and take 

other actions that would not be 

applicable to the Enterprises to 

implement the capital restoration plan.5

After consideration of these comments, 

FHFA has decided there is merit to the 

suggestions and is extending the period 

of time for submitting a capital 

restoration plan by a Bank to 15 

business-days after a Bank receives 

written notification that such a plan is 

required. 

The Safety and Soundness Act, as 

amended by HERA, allows up to 45 

days after the date of notification for a 

regulated entity to submit a capital 

restoration plan. While the majority of 

the commenters suggested a 30 

calendar-day period for submission of 

the plan, FHFA believes that 30 

calendar-days is too long a period given 

that a Bank needs to begin taking action 

immediately to restore capital when a 

capital deficiency is identified. 

Moreover, having an approved capital 

restoration plan in place is a necessary 

pre-condition imposed by the statute for 

the Director’s granting an exception to 

many of the restrictions that are 

imposed on the activities of an 

undercapitalized or a significantly 

undercapitalized Bank. Given that the 

Banks, in their comments, to other 

regulation provisions have suggested 

that some of these restrictions may be 

problematic, FHFA does not want to 

draw out the period for submission and 

approval of a capital restoration plan 

more than necessary. Moreover, Banks 

will be aware of the likelihood that they 

will be classified as less than adequately 

capitalized before the Director issues a 


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6For example, under the regulations, Banks first 

will receive a preliminary notification that the 

Director proposes to classify them at a level other 

than adequately capitalized, prior to the final 

classification. In addition, Banks are required to 

notify the Director if their capital decreases to the 

extent that they would expect to be reclassified at 

a level lower than their previous preliminary or 

final classification, so that Banks should monitor 

and be aware of negative changes in their capital 

levels at all times. 

7The provision related to executive officer 

compensation and bonuses is similar to restrictions 

on compensation in the FDI Act which become 

applicable to senior executive officers of an insured 

financial institution that becomes significantly 

undercapitalized. See 12 U.S.C. 1831o(f)(4). When 

federal banking regulators adopted rules 

implementing this provision of the FDI Act, those 

rules did not provide an exception for employment 

agreements entered into prior to its effective date. 

See 57 FR 44866 (Sept. 29, 1992). 

8The issue of whether the statutory language is 

itself constitutionally flawed, as suggested by the 

commenters, is difficult to address since the 

comments fail to provide any specific arguments or 

theory on this point. The constitutional argument 

that usually arises in these types of cases is that the 

parties have some fundamental right or protected 

interest recognized by law so that the loss of that 

right is subject to due process protection under the 

Fifth Amendment. In this respect, the Supreme 

Court has noted that the ‘‘fundamental requirement 

of due process is the opportunity to be heard ‘at a 

meaningful time and in a meaningful manner.’’’ 

Matthews v. Eldridge, 424 U.S. 319, 333 (1976) 

(citations omitted). The Court has identified three 

factors that should be balanced in deciding the 

dictates of due process generally. See id. at 335. 

These are: (i) The private interest that will be 

affected by the official action; (ii) The risk of an 

erroneous deprivation of such interest through the 

procedures used and the value, if any, of additional 

or substitute procedure; and (iii) The government’s 

interests, including the function at issue and the 

fiscal and administrative burdens of additional or 

substitute procedures. See id. (citations omitted). 

The fact that the Banks can seek the Director’s 

review of the restriction and provide information as 

to why the restrictions should not be applied in a 

particular instance provides an opportunity to be 

heard that should address the commenters 

concerns. 

final notification, so a Bank could begin 

work on its capital restoration plan prior 

to receiving the final notification.6

Thus, FHFA believes that 15 businessdays should generally be sufficient for a 

Bank to prepare its capital restoration 

plan. 

Executive Officers Bonuses and 

Compensation (§§ 1229.8(e) and (f)). A 

number of the commenters asked FHA 

to clarify ‘‘whether, in light of 

contractual and constitutional 

concerns,’’ employment agreements 

entered into prior to the effective date 

of the regulation are subject to the 

mandatory limits in §§ 1229.8(e) and (f) 

on bonuses and compensation paid to 

an executive officer of a significantly 

undercapitalized Bank. The comments 

do not further describe what these 

concerns are or provide any arguments 

addressing the constitutional issues. 

The cited provisions prohibit a Bank 

that is significantly undercapitalized 

either from paying a bonus to any 

executive officer without the prior 

written approval of the Director or from 

compensating an executive officer at a 

rate exceeding the average rate of 

compensation of that officer during the 

12 months preceding the calendar 

month in which the Bank became 

significantly undercapitalized, without 

the prior written approval of the 

Director. 

The regulatory language in 

§§ 1229.8(e) and (f) closely corresponds 

to the language in section 1366(c) the 

Safety and Soundness Act as the 

provision was amended by section 1144 

of HERA. The statute does not provide 

an exception for employment 

agreements entered into before a certain 

date or outstanding as of HERA’s 

effective date. More importantly, this 

restriction is triggered only if a Bank 

becomes significantly 

undercapitalized—a future event that is 

unrelated to the date in which an 

executive officer signed his or her 

employment agreement. As a general 

matter, the point of the provision seems 

to be to preserve resources expended on 

compensation and prevent executives 

from benefiting from increased 

compensation when their behavior, 

decisions or leadership resulted in (or 

failed to prevent) a Bank’s becoming 

significantly undercapitalized. Thus, 

looking to the date of when employment 

began seems irrelevant to the purpose of 

the provision, which appears to be to 

address a future capital deficiency and 

discourage behavior that may cause 

such capital problems.7

The regulation also allows the 

Director to authorize a Bank to pay 

compensation and/or bonuses in excess 

of the limits established by the 

provisions. This means that under the 

regulation, a Bank has the right to make 

a case once its receives notice of its 

preliminary classification, or thereafter, 

that the Director should approve higher 

compensation or bonuses for executive 

officers, and allows a Bank to present all 

relevant information as to why the 

compensation and bonus restrictions are 

not appropriate in a particular case.8

Thus, FHFA sees no reason to provide 

a blanket exemption from this 

restriction in the regulation itself, and 

believes that such a revision would 

contradict both the plain language of the 

statute and would undermine the policy 

concerns that this provision addresses. 

Other comments. One commenter 

asked FHFA to incorporate into its 

regulations previous Finance Board 

guidance that Other Comprehensive 

Income (OCI) is not included in 

calculations of permanent and total 

capital. The referenced guidance was 

provided by the Finance Board when it 

was proposing amendments to its 

capital regulation based on an 

Advanced Notice of Proposed 

Rulemaking (ANPR), as well as 

responding to some of the comments 

received as part of that ANPR. See 

Proposed Rules: Capital Requirements 

for the Federal Home Loan Banks, 66 FR 

41462, 41471–72 (Aug. 8, 2001). 

Specifically, the Finance Board’s 

guidance responded to comments that 

the definitions of permanent and total 

capital be clarified to exclude certain 

elements of OCI. The Finance Board 

noted, however, that there was no need 

to change the definitions and clarified 

that OCI was not included in retained 

earnings as used in the calculation of 

total and permanent capital. Id. Given 

that this guidance was provided as part 

of the rulemaking for the capital 

regulation and addressed definitions in 

that provision, FHFA is not going to 

alter those regulations at this time as 

part of its adoption of the final PCA 

regulation. It will, however, affirm the 

Finance Board’s prior interpretation that 

OCI is not an element of the Bank’s 

regulatory capital. 

C. Other Changes in the Final 

Regulation 

In addition to making the changes 

described above in response to the 

comments submitted on the interim 

final rule, FHFA is also making certain 

clarifying changes to the regulation. 

First, FHFA is adding new paragraphs 

(g) and (h) to § 1229.8 to clarify its view 

as to what mandatory or discretionary 

restrictions or obligations that apply to 

an undercapitalized Bank continue to 

apply to a Bank found to be significantly 

undercapitalized. 

FHFA is also revising § 1229.10(d) to 

make clear that restrictions and 

obligations previously imposed on a 

significantly undercapitalized Bank 

continue to apply to a critically 

undercapitalized Bank for which FHFA 

has not yet been named conservator or 

receiver. As originally adopted, this 

provision only referred to ‘‘restrictions’’ 

on a significantly undercapitalized Bank 

but FHFA recognizes that a Bank may 

also be obligated to take positive actions 

under the PCA provisions. 

Finally, FHFA modified § 1229.11(a) 

to clarify the type of information it 

intends a Bank to submit in its capital 

restoration plan. These changes make 

clear that the Bank should describe, if 

appropriate, any actions that it would 

take to address any long term or 

structural problems that led to its 

becoming less than adequately 

capitalized and that the Bank should 

provide in it’s capital restoration plan 


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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38513 

projections indicating how each 

component of total and permanent 

capital (including retained earnings) 

and the major components of income, 

assets and liabilities are expected to 

change over the term of the plan. FHFA 

believes that this information is the type 

of information it would generally 

request under § 1229.11(a)(5) and is 

necessary for it to judge the adequacy of 

the plan and to monitor the plan 

effectively over time. Thus, § 1229.11(a) 

is being updated to make clear that this 

information should be submitted as part 

of a capital restoration plan. 

III. Paperwork Reduction Act 

The regulation does 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 Office of 

Management and Budget for review. 

IV. Regulatory Flexibility Act 

The regulation 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, 5 U.S.C. 605(b), FHFA, hereby, 

certifies that the regulation will not 

have a significant economic impact on 

a substantial number of small entities. 

V. Effective Date 

The Administrative Procedure Act 

provides that the required publication of 

a substantive regulation shall be made 

not less than 30 days before its effective 

date except for: A substantive regulation 

that grants or recognizes an exemption 

or relieves a restriction; An 

interpretative regulation or statement of 

policy; or As otherwise provided by the 

agency for good cause found and 

published with the regulation. See 5 

U.S.C. 553(d). In publishing the interim 

final rule, FHFA found that it had good 

cause for the regulation to become 

effective immediately. See 74 FR at 

5604. These reasons are still true with 

regard to the final rule and the changes 

made to it. In addition, the changes 

made to the interim final rule clarify the 

scope of the provisions of the regulation 

or ease requirements that had been 

established in the interim final rule, as 

in the case of the longer period for 

submitting a capital restoration plan, 

rather than add new requirements. 

Thus, FHFA finds that there is good 

cause for the regulation to become 

effective on August 4, 2009. 

List of Subjects in 12 CFR Part 1229 

Capital, Federal home loan banks, 

Government-sponsored enterprises, 

Reporting and recordkeeping 

requirements. 

■ For the reasons stated in the preamble, 

the Interim Final Rule at subpart A of 

part 1229 of Title 12 CFR chapter XII, 

subchapter B, which was published at 

74 FR 5595 on January 30, 2009, is being 

adopted by FHFA as a final regulation 

with the following changes: 

PART 1229—CAPITAL 

CLASSIFICATIONS AND PROMPT 

CORRECTIVE ACTION 

■ 1. The authority citation for subpart A 

continues to read as follows: 

Authority: 12 U.S.C. 1426, 4513, 4526, 

4613–4618, 4622, 4623. 

■ 2. Amend § 1229.6 by revising 

paragraph (a)(5) to read as follows: 

§ 1229.6 Mandatory actions applicable to 

undercapitalized Banks. 

(a) * * * 

(5) Not acquire, directly or indirectly, 

an equity interest in any operating 

entity (other than as necessary to 

enforce a security interest granted to the 

Bank) nor engage in any new business 

activity unless: 

(i) The Director has approved the 

Bank’s capital restoration plan, the Bank 

is implementing the capital restoration 

plan and the Director determines that 

proposed acquisition or activity will 

further achievement of the goals set 

forth in that plan; or 

(ii) The Director determines that the 

proposed acquisition or activity will be 

consistent with the safe and sound 

operation of the Bank and will further 

the Bank’s compliance with its riskbased and minimum capital 

requirements in a reasonable period of 

time. 

* * * * * 

■ 3. Amend § 1229.8 by removing the 

word ‘‘and’’ at the end of paragraph (e), 

removing the period at the end of 

paragraph (f) and adding a semi-colon in 

its place, and adding new paragraphs (g) 

and (h) to read as follows: 

§ 1229.8 Mandatory actions applicable to 

significantly undercapitalized Banks. 

* * * * * 

(g) Comply with § 1229.6(a)(4) and 

(a)(5) of this subpart; and 

(h) Comply with any on-going 

restrictions or obligations that were 

imposed on the Bank by the Director 

under § 1229.7 of this subpart. 

■ 4. Amend § 1229.10 by revising 

paragraph (d) to read as follows: 

§ 1229.10 Actions applicable to critically 

undercapitalized Banks. 

* * * * * 

(d) Other applicable actions. Until 

such time as FHFA is appointed as 

conservator or receiver for a critically 

undercapitalized Bank, a critically 

undercapitalized Bank shall be subject 

to all mandatory restrictions or 

obligations applicable to a significantly 

undercapitalized Bank under § 1229.8 of 

this subpart and will remain subject to 

any on-going restrictions or obligations 

that the Director imposed on the Bank 

under § 1229.7 or § 1229.9 of this 

subpart, or any restrictions or 

obligations that are applicable to the 

Bank under the terms of an approved 

capital restoration plan. 

■ 5. Amend § 1229.11 by revising 

paragraphs (a) and (b) to read as follows: 

§ 1229.11 Capital restoration plans. 

(a) Contents. Each capital restoration 

plan submitted by a Bank shall set forth 

a plan to restore its permanent and total 

capital to levels sufficient to fulfill its 

risk-based and minimum capital 

requirements within a reasonable period 

of time. Such plan must be feasible 

given general market conditions and the 

conditions of the Bank and, at a 

minimum, shall: 

(1) Describe the actions the Bank will 

take, including any changes that the 

Bank will make to member stock 

purchase requirements, to assure that it 

will become adequately capitalized 

within the meaning of § 1229.3(a) of this 

subpart and, if appropriate, to resolve 

any structural or long term causes for 

the capital deficiency; 

(2) Specify the level of permanent and 

total capital the Bank will achieve and 

maintain and provide quarterly 

projections indicating how each 

component of total and permanent 

capital and the major components of 

income, assets and liabilities are 

expected to change over the term of the 

plan; 

(3) Specify the types and levels of 

activities in which the Bank will engage 

during the term of the plan, including 

any new business activities that it 

intends to begin during such term; 

(4) Describe any other actions the 

Bank intends to take to comply with any 

other requirements imposed on it under 

this subpart A of part 1229; 

(5) Provide a schedule which sets 

forth dates for meeting specific goals 

and benchmarks and taking other 

actions described in the proposed 

capital restoration plan, including 

setting forth a schedule for it to restore 

its permanent and total capital to levels 

necessary for meeting its risk-based and 

minimum capital requirements; and 


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38514 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

(6) Address such other items that the 

Director shall provide in writing in 

advance of such submission. 

(b) Deadline for submission. A Bank 

must submit a proposed capital 

restoration plan no later than 15 

business-days after it receives written 

notification that such a plan is required 

either because the notice specifically 

states that the Director has required the 

submission of a plan or the notice 

indicates that the Bank’s capital 

classification or reclassification is to a 

category for which a capital restoration 

plan is a mandatory action required of 

the Bank. The Director may extend this 

deadline if the Director determines that 

such extension is necessary. Any such 

extension shall be in writing and 

provide a specific date by which the 

Bank must submit its proposed capital 

restoration plan. 

* * * * * 

Dated: July 29, 2009. 

James B. Lockhart, III, 

Director, Federal Housing Finance Agency. 

[FR Doc. E9–18581 Filed 8–3–09; 8:45 am] 

BILLING CODE P 

FEDERAL HOUSING FINANCE 

AGENCY 

12 CFR Part 1291 

RIN 2590–AA04 

Affordable Housing Program 

Amendments: Federal Home Loan 

Bank Mortgage Refinancing Authority 

AGENCY: Federal Housing Finance 

Agency. 

ACTION: Interim final rule with request 

for comments. 

SUMMARY: Section 1218 of the Housing 

and Economic Recovery Act of 2008 

(HERA) requires the Federal Housing 

Finance Agency (FHFA) to permit the 

Federal Home Loan Banks (Banks) until 

July 30, 2010, to use Affordable Housing 

Program (AHP) homeownership setaside funds to refinance low- or 

moderate-income households’ mortgage 

loans. On October 17, 2008, FHFA 

amended its AHP regulation to 

authorize the Banks to provide AHP 

direct subsidies under their 

homeownership set-aside programs to 

low- or moderate-income households 

who qualify for refinancing assistance 

under the Hope for Homeowners 

Program established by the Federal 

Housing Administration (FHA) under 

Title IV of HERA. Based on the 

comments received on the amendments 

and continuing adverse conditions of 

the mortgage market, FHFA has 

determined that in order for the AHP 

set-aside refinancing program to be 

implemented successfully for the 

benefit of the intended households, the 

scope of the program authority should 

be broadened and the Banks should 

have greater flexibility in implementing 

the program. Accordingly, FHFA is 

issuing and seeking comment on an 

interim final rule that authorizes the 

Banks to provide AHP subsidy through 

their members to assist in the 

refinancing of eligible households’ 

mortgages under eligible Federal, State 

and local programs for targeted 

refinancing in addition to the Hope for 

Homeowners Program. These programs 

would include the Administration’s 

Making Home Affordable Refinancing 

program. The interim final rule permits 

the Banks to provide AHP direct 

subsidy to members and to use the 

subsidy for principal reduction and for 

loan closing costs, and requires that 

households obtain counseling for 

qualification for refinancing and 

foreclosure mitigation. 

In addition, the interim final rule 

enhances the ability of the Banks to 

respond to the mortgage crisis by 

providing greater flexibility to accelerate 

their future annual statutory AHP 

contributions for use in their AHP 

homeownership set-aside programs in 

the current year. The interim final rule 

also permits the Banks to adopt multiple 

housing needs under their Second 

District Priority scoring criterion under 

the AHP competitive application 

program. 

DATES: The interim final rule is effective 

on August 4, 2009. FHFA will accept 

written comments on the interim final 

rule on or before October 5, 2009. 

ADDRESSES: Submit comments, 

identified by regulatory information 

number (RIN) 2590–AA04, by any of the 

following methods: 

• Mail/Hand Delivery: Federal 

Housing Finance Agency, Fourth Floor, 

1700 G Street, NW., Washington, DC 

20552, Attention: Public Comments/RIN 

2590–AA04. 

• E-mail: regcomments@fhfa.gov. 

Please include ‘‘RIN 2590–AA04’’ in the 

subject line of the message. 

• 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 

regcomments@fhfa.gov to ensure timely 

receipt by the agency. Include the 

following information in the subject line 

of your submission ‘‘Affordable Housing 

Program Amendments: Federal Home 

Loan Bank Mortgage Refinancing 

Authority; RIN 2590–AA04.’’ 

We will post all public comments we 

receive without change, including any 

personal information you provide, such 

as your name and address, on the FHFA 

Web site at http://www.fhfa.gov. 

FOR FURTHER INFORMATION CONTACT: 

Nelson Hernandez, Senior Associate 

Director, Housing Mission and Goals, 

202–408–2819, 

Nelson.Hernandez@fhfa.gov; Charles E. 

McLean, Jr., Acting Manager, Housing 

Mission and Goals, 202–408–2537, 

Charles.McLean@fhfa.gov; or Melissa L. 

Allen, Senior Policy Analyst, 202–408– 

2524, Melissa.Allen@fhfa.gov, Federal 

Housing Finance Agency, 1625 Eye 

Street, NW., Washington, DC 20006; or 

Sharon B. Like, Associate General 

Counsel, 202–414–8950, 

Sharon.Like@fhfa.gov, Federal Housing 

Finance Agency, 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 interim final rule, and will revise 

the rule as appropriate after taking all 

comments into consideration. Copies of 

all comments will be posted 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 202–414–6924. 

II. Background 

A. HERA 

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), 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 Federal 

Housing Finance Board (FHFB) to 

FHFA. HERA provides for the 

abolishment of OFHEO and FHFB one 

year after the date of enactment. FHFA 

is responsible for ensuring that the 


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