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.

Proposed Rules Federal Register

26518

Vol. 65, No. 89

Monday, May 8, 2000

1The Modernization Act is Title VI of the GrammLeach-Bliley Act, Pub. L. No. 106–102, 113 Stat.

1338 (Nov. 12, 1999).

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 917, 926, 944, 950,

952, 961 and 980

[No. 2000–16]

RIN 3069–AA97

Federal Home Loan Bank Advances,

Eligible Collateral, New Business

Activities and Related Matters

AGENCY: Federal Housing Finance

Board.

ACTION: Proposed rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is proposing to

amend its Advances Regulation and

other regulations to implement the

requirements of the Federal Home Loan

Bank System Modernization Act of 1999

by: allowing the Federal Home Loan

Banks (Banks) to accept from

community financial institution

members (CFI members) new categories

of collateral to secure advances;

expanding the purposes for which the

Banks may make long-term advances to

CFI members; and removing the limit on

the amount of a member’s advances that

may be secured by other real estaterelated collateral. The Finance Board

also is proposing related and other

technical changes to its regulations on

General Definitions, Powers and

Responsibilities of Bank Boards of

Directors and Senior Management,

Federal Home Loan Bank Associates,

Community Support Requirements,

Community Investment Cash Advance

Programs and Standby Letters of Credit,

and a new regulation on New Business

Activities.

DATES: The Finance Board will accept

comments on the proposed rule in

writing on or before June 7, 2000.

ADDRESSES: Send comments to Elaine L.

Baker, Secretary to the Board, by

electronic mail at bakere@fhfb.gov, or by

regular mail at the Federal Housing

Finance Board, 1777 F Street, NW.,

Washington, DC 20006. Comments will

be available for public inspection at this

address.

FOR FURTHER INFORMATION CONTACT:

James L. Bothwell, Director, (202) 408–

2821, Scott L. Smith, Deputy Director,

(202) 408–2991, or Julie Paller, Senior

Financial Analyst, (202) 408–2842,

Office of Policy, Research and Analysis;

or Eric E. Berg, Senior AttorneyAdvisor, (202) 408–2589, Eric M.

Radenbush, Senior Attorney-Advisor,

(202) 408–2932, or Sharon B. Like, (202)

408–2930, Office of General Counsel,

Federal Housing Finance Board, 1777 F

Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background and Overview of

Proposed Rule

A. Historical Benefits of Federal Home

Loan Bank System

The Federal Home Loan Bank System

(Bank System) comprises twelve

regional Banks that are instrumentalities

of the United States organized under the

authority of the Federal Home Loan

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

1423, 1432(a). The Banks are

cooperatives; only members of a Bank

may own the capital stock of a Bank and

only members and certain eligible

nonmember borrowers (associates) (such

as state housing finance agencies) may

obtain access to the products provided

by a Bank. See 12 U.S.C. 1426, 1430(a),

1430b. Each Bank is managed by its own

board of directors and serves the public

by enhancing the availability of

residential housing finance and

community lending credit through its

members and associates. See 12 U.S.C.

1427. Any eligible institution (typically,

an insured depository institution) may

become a member of a Bank by

satisfying certain criteria and by

purchasing a specified amount of a

Bank’s capital stock. See 12 U.S.C. 1424,

1426; 12 CFR part 925.

As government sponsored enterprises

(GSEs), the Banks are granted certain

privileges that enable them to borrow

funds in the capital markets on terms

more favorable than could be obtained

by private entities, so that the Bank

System generally can borrow funds at a

modest spread over the rates on U.S.

Treasury securities of comparable

maturity. The Banks pass along their

GSE funding advantage to their

members, and ultimately to consumers,

by providing secured loans, called

advances, and other financial products

and services at rates and terms that

would not otherwise be available to

their members.

The Banks must fully secure advances

with eligible collateral. See 12 U.S.C.

1430(a). At the time of origination or

renewal of an advance, a Bank must

obtain a security interest in collateral

eligible under one or more of the

collateral categories set forth in the

Bank Act. See 12 U.S.C. 1430(a) (as

amended).

Under section 10 of the Bank Act and

part 950 of the Finance Board’s

regulations, the Banks have broad

authority to make advances in support

of residential housing finance, which

includes community lending, defined,

in the proposed rule, as providing

financing for economic development

projects for targeted beneficiaries and,

for CFIs, purchasing or funding small

business loans, small farm loans or

small agri-business loans. See 12 U.S.C.

1430(a), (i), (j); 12 CFR parts 900, 950.

The Banks also are required to offer two

programs, the Affordable Housing

Program (AHP) and the Community

Investment Program (CIP), to provide

subsidized or at-cost advances,

respectively, in support of unmet

housing finance or targeted economic

development credit needs. See 12 U.S.C.

1430(i), (j); 12 CFR parts 951, 952. In

addition, section 10(j)(10) of the Bank

Act authorizes the Banks to establish

additional Community Investment Cash

Advance (CICA) Programs for targeted

community lending, defined as

providing financing for economic

development projects for targeted

beneficiaries. See 12 U.S.C. 1430(j)(10);

12 CFR part 952.

B. Expanded Access to Bank System

Benefits

On November 12, 1999, the President

signed into law the Federal Home Loan

Bank System Modernization Act of 1999

(Modernization Act) 1 which, among

other things, amended the Bank Act by

providing smaller lenders with greater

access to membership in the Bank

System and greater access to Bank

advances. The Modernization Act

established a category of members

consisting of FDIC-insured depository

institutions with less than $500,000,000

in average total assets (based on an

average of total assets over three years)

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26519

2The Finance Board recently adopted an Interim

Final Rule that amended the Finance Board’s

Membership Regulation to implement the

Modernization Act amendments regarding

membership in the Bank System. See 65 FR 13866

(March 15, 2000).

3The ‘‘qualified thrift lender’’ test is set forth in

section 10(m) of the Home Owners’ Loan Act, 12

U.S.C. 1467a(m), and applies directly only to

savings associations. Originally enacted in 1987, the

QTL test was intended to ensure that savings

associations remained committed to the business of

providing housing-related loans. Failure to meet the

test subjected both the savings association and its

holding company to certain statutory penalties,

including reduced access to Bank advances for the

association. In 1989, Congress revised the QTL test

and the penalties for failing to meet it, including

more severe restrictions on access to Bank advances

for savings associations, as well as for commercial

banks, that did not meet the test.

called community financial institutions,

or CFIs, 2 and authorized the Banks to

make long-term advances to CFI

members for the purposes of providing

funds for small businesses, small farms

and small agri-businesses. See

Modernization Act, sections 602,

604(a)(2), 605. The Modernization Act

also authorized the Banks to accept from

CFI members as security for advances

secured loans for small business,

agriculture, or securities representing a

whole interest in such secured loans.

See id., section 604(a)(5)(C).

For all members, the Modernization

Act removed the statutory limit on the

amount of aggregate outstanding

advances that could be secured by

‘‘other real estate-related collateral,’’

which had been capped at 30 percent of

a member’s capital. See id., section

604(a)(5)(B). Banks, therefore, are now

authorized to accept other real estaterelated collateral as security for

advances to any member as long as the

collateral has a readily ascertainable

value and the Bank is able to perfect a

security interest in that collateral. See

12 U.S.C. 1430(a)(3)(D) (as amended).

The Finance Board is proposing to

amend its regulations to implement the

new statutory authorities described

above. Because the primary duty of the

Finance Board is to ensure that the

Banks operate in a safe and sound

manner, the proposed rule includes

certain safeguards. The Finance Board

believes that, because the Banks have

had no experience with the new types

of nonmortgage-related collateral

authorized in the Modernization Act

and in this proposed rule, and have

made only limited use of ‘‘other real

estate-related’’ collateral, the Banks will

need to build capacity to evaluate the

new types of collateral and must

exercise caution even in accepting

higher volumes of ‘‘other real estaterelated’’ collateral. Banks will need to

learn how to value small business loans

and agriculture loans before accepting

such loans from CFI members as

security for advances. For these reasons,

the Finance Board is proposing to treat

these activities as new lines of business.

Thus, part 980 of the proposed rule

would require a Bank, prior to accepting

for the first time the new categories of

collateral from CFI members, or

significantly higher volumes of ‘‘other

real estate-related’’ collateral, to file a

notice with the Finance Board

containing information that

demonstrates that the Bank has the

capacity, sufficiency of experience, and

expertise to safely value, discount and

manage the risks associated with the

particular types of collateral to be

accepted. In evaluating a Bank’s notice

of new collateral activities, the Finance

Board intends to encourage conservative

discounting of new collateral until the

Bank gains experience in valuing such

collateral.

Prior to the enactment of the

Modernization Act, section 10(e) of the

Bank Act restricted access to Bank

advances to Bank members that did not

meet the qualified thrift lender (QTL)

test.3 These restrictions limited the

purposes for which non-QTL members

could obtain advances, limited Bank

System-wide advances to non-QTL

members to 30 percent of total Bank

System advances outstanding, and gave

QTL members a priority over non-QTL

members in obtaining advances. See 12

U.S.C. 1430(e)(1), (2) (1994). The Bank

Act also established a statutory

presumption, for the purpose of

determining the minimum amount of

Bank capital stock that a member must

purchase pursuant to section 6(b) of the

Bank Act, that each member has at least

30 percent of its assets in home

mortgage loans. See 12 U.S.C. 1430(e)(3)

(1994). Coupled with the section 6(b)

requirement that all members must

subscribe to Bank stock equaling at least

one percent of the member’s aggregate

unpaid loan principal, this presumption

effectively limited the dollar amount of

advances that a non-QTL member could

obtain in relation to the amount of Bank

stock it had purchased. See id.

The Modernization Act repealed

section 10(e) of the Bank Act in its

entirety, thereby providing access to

Bank advances without regard to the

percentage of housing-related assets a

member holds. See Modernization Act,

section 604(c). In a recently adopted

Interim Final Rule, the Finance Board

removed the provisions in its

Membership and Advances Regulations

containing the additional capital stock

purchase requirements and limitations

on advances applicable to non-QTL

members. See 65 FR 13866 (March 15,

2000). The Finance Board is proposing

in this rule to remove all remaining

references to non-QTL status from its

Advances Regulation. See 12 CFR 950.1,

950.21 (1999).

C. Related Amendments

The Finance Board also is proposing

to revise its regulations to: (1) Amend

part 900 (General Definitions) to add a

new, broader definition of ‘‘community

lending’’ that would include, for CFI

members, purchasing or funding small

business loans, small farm loans and

small agri-business loans; (2) add a new

section in part 917 (Powers and

Responsibilities of Bank Boards of

Directors and Senior Management) to set

forth the responsibilities of a Bank’s

board of directors regarding member

products policies; (3) add a new part

926 (Federal Home Loan Bank

Associates) to address separately the

eligibility requirements for associates

that currently are contained in part 950;

(4) replace the term ‘‘community

lending’’ with the term ‘‘targeted

community lending’’ in part 944

(Community Support Requirements)

and part 952 (Community Investment

Cash Advance Programs) to differentiate

‘‘targeted community lending’’ referred

to in those parts from the broader

definition of ‘‘community lending’’

proposed in part 900; (5) make technical

and conforming changes to the collateral

provisions in part 961 (Standby Letters

of Credit); and (6) add a new part 980

(New Business Activities) setting forth

the standards and procedures under

which a Bank may engage in new

business activities, including the

acceptance of new types of collateral.

II. Analysis of Proposed Rule

A. Modernization Act Amendments

Establishing Newly Eligible Collateral

1. New CFI-Eligible Collateral

a. Collateral eligible as security for

advances to CFI members or their

affiliates. The Modernization Act

amended the Bank Act to allow CFI

members to pledge new types of

collateral as security for advances,

specifically, secured loans for small

business or agriculture, or securities

representing a whole interest in such

secured loans. See Modernization Act,

section 604(a)(5)(C). Proposed

§ 950.7(b)(1) implements this

amendment by authorizing the Banks to

accept from CFI members or their

affiliates as security for advances, small

business loans, small farm loans or

small agri-business loans fully secured

by collateral other than real estate, or

securities representing a whole interest

in such loans, provided that (i) the loans

26520 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

4Under the Small Business Act, the size of a

manufacturing concern is determined on the basis

of average employment, the size of a business

concern providing services is determined on the

basis of annual gross receipts over a period of not

less than 3 years, and the size of other business

concerns is determined on the basis of business

data over a period of not less than 3 years. See 15

U.S.C. 632(b)(2)(C)(1996), The Small Business

Administration implements these statutory

standards with industry specific size regulations

under 13 CFR part 121.

have a readily ascertainable liquidation

value and can be freely liquidated in

due course; and (ii) the Bank can perfect

a security interest in such collateral

(CFI-eligible collateral). Proposed

§ 950.7(b)(1) also requires that, prior to

accepting any such CFI-eligible

collateral, a Bank shall meet the new

business activity requirements of part

980 of the proposed rule, described

below. This requirement is intended to

ensure that a Bank has the capacity to

value, discount and manage the newly

eligible collateral prior to making

advances secured by such collateral.

Proposed § 950.7(b)(1) does not

explicitly refer to secured loans for

agriculture, as does the Modernization

Act. See Modernization Act, section

604(a)(5)(C). Instead, the Finance Board

has interpreted ‘‘agriculture loans’’ to

mean small farm loans and small agribusiness loans, and substituted these

terms, in the text of proposed

§ 950.7(b)(1). These terms also appear in

proposed § 950.3, which sets forth the

authorized purposes of long-term Bank

advances, so their use in proposed

§ 950.7(b)(1) is consistent with the

Finance Board’s general policy of

employing uniform terminology in its

regulations whenever possible.

Although the Finance Board could

authorize the Banks to accept all

secured agriculture loans as collateral

from CFI members, the Finance Board is

proposing, by interpreting agriculture

loans to mean small farm loans and

small agri-business loans, to allow only

secured ‘‘small’’ agriculture loans to be

included as eligible collateral. The

Finance Board believes that permitting

the Banks to accept as collateral only

‘‘small’’ agriculture loans is consistent

with both the Banks’ mission of

assisting members with community

lending and with the Modernization

Act’s emphasis on small institutions’

lending to small enterprises. See

Modernization Act, sections 602,

604(a)(3), 604(a)(5)(C).

Proposed § 950.7(b)(1) excludes loans

secured by real estate because these

types of loans are included in proposed

§ 950.7(a)(4).

In view of the greater risks inherent in

non-mortgage, CFI-eligible collateral,

the Finance Board, for safety and

soundness reasons, considered whether

limits or restrictions should be

established on the types of collateral

that could secure such loans or

securities pledged by a CFI member or

affiliate to secure an advance. For

example, small business loans secured

by accounts receivable or inventory, or

small farm loans secured by crops or

livestock, which may present greater

risks than other types of secured small

business or small farm loans, could have

been excluded from the forms of eligible

collateral. However, the Finance Board

has chosen not to impose limits or

restrictions in the proposed rule, but

instead to require the Banks to have

policies and capacity to value the

collateral, whatever it may be. The

Finance Board believes that proposed

§ 950.10(a), which requires that each

Bank determine the value of collateral

in accordance with the Bank’s member

products policy (established pursuant to

proposed § 917.4), should minimize the

Banks’ exposure to risk in accepting

CFI-eligible collateral. The Finance

Board expects such policies, if they are

properly developed and implemented,

to take the appropriate risk factors into

account in their valuation and

discounting procedures. Of course, the

policies, and the Banks’ activities in this

regard, also would be subject to

examination by the Finance Board and

to the new activities requirements of

proposed part 980, discussed below.

Accordingly, the proposed rule does not

establish limits on the types of collateral

that may secure such loans or securities

pledged by a CFI member or affiliate.

The Finance Board specifically requests

comment on whether certain types of

CFI-eligible collateral should be

prohibited as eligible collateral on the

basis of risk.

b. Types of collateral—Definitions of

‘‘small business loans,’’ ‘‘small farm

loans’’ and ‘‘small agri-business loans’’.

To facilitate the safe and sound

implementation of the Banks’ authority

to accept new types of collateral to

secure advances to CFI members, the

Finance Board is proposing to amend

§ 950.1 by defining the terms ‘‘small

business loans,’’ ‘‘small farm loans’’ and

‘‘small agri-business loans.’’ For loans

below a prescribed aggregate amount,

the proposed definitions use loan size as

a proxy for business size. For loans

above the ceiling amount, business data

specific to the borrowing enterprise

(such as annual gross receipts) would

determine whether a loan fits within the

definition.

The business size approach provides

greater accuracy, but may result in costs

that deter CFI members from fully

employing Banks as a funding source for

loans to the small businesses and small

farms in their communities. The loan

size approach is less precise, but has the

advantage of lower implementation

costs, since it involves information

already available to Federally regulated

financial institutions in the reports they

are required to file with their primary

federal regulator.

The Finance Board believes that the

proposed definitions represent an

appropriate compromise between these

two approaches that will allow CFI

members to use Bank System funding to

finance the small businesses and small

farms in their communities, as

authorized by the Modernization Act.

See Modernization Act, section

604(a)(5)(C).

(i) ‘‘Small business loans’’

Proposed § 950.1 defines ‘‘small

businesses loans’’ as either: (1) Loans

(including the aggregate of all loans to

a particular borrower) with an original

amount of not more than $1 million that

are reported on either Schedule SB of

the Thrift Financial Report filed by

savings associations as ‘‘permanent

mortgage loans secured by nonfarm,

nonresidential properties’’ or

‘‘nonmortgage, nonagricultural

commercial loans,’’ or Schedule RC–C,

Part II of the Report of Condition and

Income (Call Report) filed by insured

commercial banks and FDIC-supervised

savings banks as ‘‘loans secured by

nonfarm nonresidential properties’’ or

‘‘commercial and industrial loans to

U.S. addresses’’; or (2) loans for which

the CFI, on a case-by-case basis,

documents that the borrower meets the

eligibility standards for a small business

concern under the Small Business

Administration’s (SBA) regulations at 13

CFR part 121, or any successor

provisions.

The Finance Board considered several

possible definitions of a small business

loan. One possible definition is a loan

to a business that meets the eligibility

standards for a small business concern

under the Small Business Act and SBA

regulations.4 The Small Business Act

defines an eligible small business as one

that is independently owned and

operated and not dominant in its field

of operation. See 15 U.S.C. 632. The

Small Business Act also states that in

determining what is a small business,

the definition shall vary from industry

to industry to adequately reflect

industry differences. See id. § 632(a)(3).

The SBA developed size standards that

define the maximum size of an eligible

small business, based either on ‘‘annual

receipts’’ or number of employees. 13

CFR 121.201. SBA regulations define

‘‘annual receipts’’ as total income plus

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26521

5FFIEC is a formal interagency body empowered

to prescribe uniform principals, standards, and

report forms for the federal examination of financial

institutions by the Board of Governors of the

Federal Reserve System, the Federal Deposit

Insurance Coporation, the National Credit Union

Adminstration, the Office of the Comptroller of the

Currency, and the Office of Thrift Supervision and

to make recommendations to promote uniformity in

the supervision of financial institutions. See 12

U.S.C. 3301 et. seq.

6Section 122 of FDICIA (Pub. L. No. 102–242, 105

Stat. 2251 (12 U.S.C. 1817 note)).

the cost of goods sold. 13 CFR 121.104.

The size standards are based on

Standard Industrial Classification (SIC)

code, and generally are as follows:

Industry Size

Retail and Service ..... $3.5 to $21.5 million

Construction .............. $7.0 to $17.0 million

Agriculture ................. $0.5 to $9.0 million

Wholesale ................. No more than 100

employees

Manufacturing ........... 500 to 1,500 employees

When affiliations exist with other

companies, the primary business

activity must be determined both for the

applicant business as well as for the

entire affiliated group. 13 CFR 121.103.

The Finance Board recognizes that

member institutions are not apt to

compile the type of information

necessary to determine whether a

business borrower qualifies as a small

business under the SBA definition, and

that requiring that such information be

collected would impose additional costs

on CFI members. Thus, the Finance

Board considered other alternatives,

including a definition of a small

business based on the reporting

requirements for loans to small

businesses and small farms promulgated

by the Federal Financial Institutions

Examination Council (FFIEC).5

Section 122 of the Federal Deposit

Insurance Corporation Improvement Act

of 1991 (FDICIA) requires the Federal

banking agencies to annually collect

from insured depository institutions

such information on small business and

small farm lending as the agencies may

need to assess the availability of credit

to these sectors of the economy.6

Section 122 of FDICIA does not specify

the types of information that the

agencies must collect on small business

and small farm loans, but it does

indicate that the reporting requirement

may be implemented by collecting data

on the total number and aggregate dollar

amount of loans to small businesses and

agricultural loans to small farms.

Section 122 of FDICIA also suggests that

information on charge-offs and loan

income be collected, but FFIEC

determined that such information

would not add sufficient value to the

assessment of credit availability to

justify the cost to institutions of

reporting the information. See 57 FR

21410 (May 20, 1992).

On May 20, 1992, FFIEC published

proposed reporting requirements on

small business and small farm lending.

See id. Because the terms ‘‘small

business’’ and ‘‘small farm’’ were not

defined in FDICIA, FFIEC proposed to

use annual sales as the basis upon

which to identify small businesses and

small farms. Businesses and farms with

annual sales of less than $10 million

and $500,000, respectively, were

deemed to be ‘‘small.’’ See id.

Many of the comment letters received

from institutions indicated that the

implementation costs of the proposed

FFIEC data collection would be

excessive. See 57 FR 54235, 54237. A

comparison of the expected costs with

the expected benefits of the information

led FFIEC to consider whether other

reporting alternatives might be available

that would allow institutions to report

information of comparable value at a

lower cost to the industry. See id.

Based on these considerations, FFIEC

decided to use loan size as a proxy for

business and farm size. As a rationale

for using this approach, FFIEC, in the

Supplemental Information section of the

adopting release, indicated that it had

reviewed data reported in the 1989

National Survey of Small Business

Finances, a survey of firms with fewer

than 500 employees, and concluded that

the data indicated a strong correlation

between size of business and loan size.

In addition, several of the commentators

had recommended that loan size be

used as a proxy for business size. See id.

FFIEC decided to use the original

amount of the loan rather than the

current balance because an institution’s

loans with balances below a certain

amount would include loans of varying

original amounts to all sizes of

borrowers that have been partially

repaid.

As a rationale for the upper limit of

$1 million for small business loans,

FFIEC stated that more loans above this

loan size category would tend to be

made to larger businesses than in the

category of loans of $1 million or less.

In addition, FFIEC indicated that the

more than 9,500 institutions with less

than $100 million in assets would

generally be constrained by their

lending limits from making loans to

businesses that would be considered

‘‘large.’’ See id. at 54238.

The final FFIEC rule also requires

financial institutions to report business

loans with original amounts of $100,000

or less, more than $100,000 through

$250,000, and more than $250,000

through $1 million. See id.

The Finance Board is proposing to

define a small business loan based on

the loan size standards established by

the FFIEC agencies. Because this

information on loan size is readily

available to financial institutions, this

approach will avoid burdensome costs

to CFI members that might deter such

members from using Banks as a funding

source for loans to small businesses.

The Finance Board also recognizes that

applying only the FFIEC standard

would exclude loans that exceed $1

million to businesses that meet the

eligibility standards for a small business

concern under the SBA’s regulations. 13

CFR 121.104. To allow such loans to be

eligible to secure advances to CFI

members, the proposed definition of

‘‘small business loans’’ includes a

qualifying alternative that does not

impose a loan size restriction if the CFI

member can document on a case-by-case

basis that the borrower meets the

eligibility standards for a small business

concern under the SBA’s regulations.

The Finance Board expects that CFI

members initially will rely on the part

of the proposed definition of small

business loans that emphasizes loan

size. However, over time, CFI members

would have the opportunity to

implement procedures to establish a

borrower’s size based on the SBA’s

regulatory standards, and thereby be in

a position to rely on that part of the

definition that does not restrict loan

size. The Finance Board requests

comment on whether there may be any

other appropriate methods of

categorizing or defining small business

loans.

(ii) ‘‘Small Farm Loans’’

Proposed § 950.1 defines ‘‘small farm

loans’’ as either: (1) Loans (including

the aggregate of all loans to a particular

borrower) with an original amount of

not more than $500,000 that are

reported on either Schedule SB of the

Thrift Financial Report filed by savings

associations as ‘‘loans secured primarily

by farms,’’ or Schedule RC–C, Part II of

the Report of Condition and Income

filed by insured commercial banks and

FDIC-supervised savings banks as

‘‘loans secured by farmland (including

farm residential and other

improvements)’’; or (2) loans for which

the CFI, on a case-by-case basis,

documents that the borrowers meet the

eligibility standards for a small business

concern under the SBA’s regulations at

13 CFR part 121, or any successor

provisions.

As with the proposed definition of

‘‘small business loans,’’ the proposed

26522 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

7See 13 CFR 121.201. 8See 13 CFR 121.201.

definition of ‘‘small farm loans’’

represents a compromise between the

precision of the SBA’s regulations,

which include size parameters for farm

enterprises,7 and the practicality of

FFIEC’s standards for small farm loans.

Accordingly, the definition of ‘‘small

farm loans’’ is identical to the definition

of ‘‘small business loans,’’ except for the

items referred to on Schedule SB and

Schedule RC–C, and the upper limit of

$500,000, which corresponds to the

upper limit FFIEC applies to small farm

loans. The particular schedule items

referenced in the definition of ‘‘small

farm loans’’ are the items in the

schedules that most closely correlate to

small farm activity and lending.

As a rationale for the upper limit of

$500,000 for small farm loans, the

notice accompanying FFIEC’s final rule

stated that data from the Second Quarter

1992 Agricultural Finance Databook

prepared by the Federal Reserve Board

(Databook) indicates that less than five

percent of all non-real estate loans to

farmers in recent years are made in

amounts of $100,000 or more. See 57 FR

54238. The Databook also estimated

that, in 1991, the average size of nonreal estate loans to farmers with original

amounts of $100,000 or more was

$540,000. See id. Thus, FFIEC

determined that a $1 million loan size

cutoff for small farm loans would likely

capture an extremely high percentage of

all farm loans. FFIEC concluded that a

loan size cutoff of $500,000 would be

appropriate in order to reduce the

likelihood that loans that have been

made to large farms are reported as part

of an institution’s loans to small farms.

See id.

The FFIEC final rule also requires

financial institutions to report farm

loans with original amounts of $100,000

or less, more than $100,000 through

$250,000, and more than $250,000

through $500,000. See id. The Finance

Board requests comment on whether

there may be any other appropriate

methods of categorizing or defining

small farm loans.

(iii) ‘‘Small agri-business loans’’

Proposed § 950.1 defines ‘‘small agribusinesses loans’’ as either: (1) Loans

(including the aggregate of all loans to

a particular borrower) with an original

amount of not more than $500,000 that

are reported on either Schedule SB of

the Thrift Financial Report filed by

savings associations as ‘‘nonmortgage,

commercial loans to finance agricultural

production and other nonmortgage

commercial loans to farmers,’’ or

Schedule RC–C, Part II of the Report of

Condition and Income filed by insured

commercial banks and FDIC-supervised

savings banks as ‘‘loans to finance

agricultural production and other loans

to farmers’’; or (2) loans for which the

CFI, on a case-by-case basis, documents

that the borrowers meet the eligibility

standards for a small business concern

under the SBA’s regulations at 13 CFR

part 121, or any successor provisions.

The proposed definition of ‘‘small

agri-business loans’’ is identical to the

definition of ‘‘small farm loans’’ except

for the items referred to on Schedule SB

and Schedule RC–C, which more closely

correlate to small agri-business activity

and lending. As with the proposed

definitions of ‘‘small business loans’’

and ‘‘small farm loans’’, the proposed

definition of ‘‘small agri-business loans’’

represents a compromise between the

SBA size standards for agricultural

businesses,8 and FFIEC’s standards for

small agri-business loans, as identified

by the schedule items referenced in the

definition. The Finance Board requests

comment on whether there may be any

other appropriate methods of

categorizing or defining small agribusiness loans.

c. Change in CFI Status. Proposed

§ 950.7(b)(2) addresses how a Bank

should deal with a CFI member that has

advances outstanding secured by CFIeligible collateral that loses its CFI

status. Proposed § 950.7(b)(2) prohibits a

Bank from accepting as security for new

advances CFI-eligible collateral from a

member that no longer qualifies as a CFI

member. However, in order to prevent a

situation where a member must quickly

obtain alternative funding, proposed

§ 950.7(b)(2) provides that a Bank shall

not require a member that loses its CFI

status and has outstanding advances

secured by CFI-eligible collateral to

repay such advances prior to the stated

maturities, or to provide substitute

collateral, eligible under paragraphs

(a)(1) through (5), based solely on the

member’s change in CFI status.

Proposed § 950.7(b)(2) also authorizes

a Bank to allow such member to renew

maturing advances secured by CFIeligible collateral for up to 6 months.

This is intended to provide the member

with sufficient time to wind down

advances and replace them with other

funding in an orderly fashion. It is not

uncommon for members to obtain shortterm advances that frequently renew for

additional terms. In that case, the

member could have difficulty securing

alternative funding if all or most of its

advances mature within a short period

of time. The Finance Board specifically

requests comment on whether allowing

renewals of such advances is

appropriate and, if so, whether allowing

renewals for up to 6 months would

provide sufficient time for members to

obtain alternative funding.

2. Cash or Deposits in a Bank

Current § 950.9 of the Advances

Regulation (redesignated as § 950.7 in

the proposed rule) sets forth the types

of eligible collateral that a Bank may

accept to secure advances. The

Modernization Act revised section

10(a)(3) of the Bank Act to add ‘‘cash’’

to the types of eligible collateral. See

Modernization Act, section 604(a)(5)(A).

Proposed § 950.7(a)(3) implements this

change by adding cash as eligible

collateral.

3. Other Real Estate-Related Collateral

The Modernization Act amended

section 10(a)(4) of the Bank Act by

removing the limit on the dollar amount

of advances that may be secured other

real estate-related collateral, which had

been set at 30 percent of the member’s

capital. See Modernization Act, section

604(a)(5)(B). Section 950.7(a)(4) of the

proposed rule implements this change

by removing the 30 percent limitation.

Proposed § 950.7(a)(4)(iii), however,

provides that a Bank shall not make

total advances to all members secured

by other real estate-related collateral in

an aggregate amount that would exceed

25% of the highest level of advances

previously secured by such collateral,

until the Bank has met the new business

activity requirements of proposed part

980.

The Finance Board specifically

requests comment on what the

appropriate threshold should be for

triggering the new business activity

requirement with respect to the use of

other real estate-related collateral, and

whether there should be any other

limits on the use of such collateral to

ensure that the Banks’ lending against

this type of collateral is done in a safe

and sound manner. The Finance Board

also specifically requests comment on

whether members should be required to

pledge all available collateral under

proposed §§ 950.7(a)(1) through (3) prior

to pledging other real estate-related

collateral under paragraph (4) in order

to prevent members from using only

their least liquid collateral to secure

Bank advances. While each Bank has

the discretion to include such a

requirement in its member products

policy, it may be appropriate for the

Finance Board to require that such a

provision be included in such policies,

especially in light of the Modernization

Act authorization for the Finance Board

to review, and increase, the Banks’

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26523

standards for other real estate-related

collateral. See Modernization Act,

section 604(a)(7).

Current § 950.9(a)(4)(i)(A) of the

Advances Regulation requires other real

estate-related collateral to have a readily

ascertainable value. The Finance Board

believes that the liquidation value of

collateral, and the ability to liquidate

the collateral quickly, is a more

appropriate measure of the value of

other real estate-related collateral

securing an advance, particularly given

the lifting of the 30 percent cap.

Accordingly, proposed

§ 950.7(a)(4)(i)(A) provides that other

real estate-related collateral have a

readily ascertainable liquidation value

and be able to be freely liquidated in

due course. This change also is

proposed in § 950.7(b)(1)(i).

4. Removal of Combination Business or

Farm Property From Definition of

‘‘Residential Real Property’’

Under current § 950.1, the term

‘‘residential real property’’ is defined to

include combination business or farm

property, where at least 50 percent of

the total appraised value of the

combined property is attributable to the

residential portion of the property or, in

the case of a CFI, combination business

or farm property on which is located a

permanent structure actually used as a

residence (other than for temporary or

seasonal housing), where the residence

constitutes an integral part of the

property. 12 CFR 950.1. This provision

was intended to allow mortgage loans

on such properties to qualify as eligible

collateral and be included in a

member’s total residential housing

assets for the purpose of qualifying for

membership and obtaining long-term

advances. The Modernization Act’s

removal of the statutory limit on the

amount of advances that may be secured

by other real estate-related collateral

appears to have eliminated the necessity

of allowing combination business or

farm property to be counted under the

mortgage loan category of eligible

collateral. In addition, the

Modernization Act’s removal of the

requirement that CFI members have 10

percent of their assets in residential

mortgage loans to qualify for

membership and the expansion of the

purposes for which advances may be

made to CFI members also reduce the

significance of counting such

combination properties as residential

mortgage loans. Accordingly, the

Finance Board has proposed removing

combination business or farm property

from the definition of ‘‘residential real

property’’ in § 950.1. The Finance Board

specifically requests comment on

whether there are any reasons to retain

combination business or farm property

in the definition of ‘‘residential real

property.’’

B. New Business Activity Requirement

As discussed above, the proposed

changes in types and amounts of

collateral that may be pledged to secure

advances will present new management

challenges for the Banks. In order to

ensure that entering into these and other

new types of business activities will not

create safety and soundness concerns,

the Finance Board is proposing to add

a new part 980 to its regulations.

Proposed § 980.3 requires a Bank to

provide at least 60 days prior written

notice to the Finance Board of any new

business activity that the Bank wishes to

undertake—including the acceptance of

increased volumes of other real estaterelated collateral and of new CFIeligible collateral for the first time—so

that the Finance Board may disapprove,

examine or impose restrictions on such

activities, as necessary, on a case-bycase basis. In addition to the acceptance

of new or increased volumes of

collateral, proposed § 980.1 defines a

‘‘new business activity’’ as any business

activity undertaken, transacted,

conducted or engaged in by a Bank that

has not been previously approved by the

Finance Board, including: (1) A

business activity that has not been

undertaken previously by that Bank, or

was undertaken previously under

materially different terms and

conditions; (2) a business activity that

entails risks not previously and

regularly managed by that Bank, its

members, or both, as appropriate; or (3)

a business activity that involves

operations not previously undertaken by

that Bank. The test of what constitutes

a new business activity for a particular

Bank is intended to focus attention on

worthy new activities. The prior notice

requirement would apply to any Bank

desiring to pursue a new activity, even

if another Bank has already undertaken

the same activity. With respect to

accepting either newly eligible collateral

or significantly higher volumes of other

real estate-related collateral, the written

notice required by proposed § 980.3(b)

must include: a description of the

classes or amounts of collateral

proposed to be accepted by the Bank; a

copy of the Bank’s member products

policy; a copy of the Bank’s procedures

for determining the value of the

collateral in question; and a

demonstration of the Bank’s capacity,

personnel, technology, experience and

expertise to value, discount and manage

the risks associated with the collateral

in question. This requirement is

intended to ensure that a Bank has the

capacity to value, discount and manage

the additional collateral prior to making

advances secured by such collateral.

C. Clarification of Other Collateral

Provisions in Existing Regulation

1. Securities Representing Equity

Interests in Eligible Collateral

Current § 950.9(a)(5) of the Advances

Regulation provides that a Bank may

accept as collateral any security, such as

mutual fund shares, the ownership of

which represents an undivided equity

interest in underlying assets, all of

which qualify either as: (i) eligible

collateral under paragraph (a)(1)

(mortgage loans and privately issued

mortgage-backed securities) or

paragraph (a)(2) (agency securities); or

(ii) cash or cash equivalents. As

discussed above, cash is now included

as eligible collateral under paragraph

(a)(3). Accordingly, for greater clarity, a

reference to paragraph (a)(3) is included

in proposed § 950.7(a)(5)(i) and the

reference to cash in paragraph (a)(5)(ii)

is removed.

The current Advances Regulation

does not include a definition of ‘‘cash

equivalents.’’ Proposed § 950.1 defines

‘‘cash equivalents’’ as investments that:

(1) Are readily convertible into known

amounts of cash; (2) have a remaining

maturity of 90 days or less at the

acquisition date; and (3) are held for

liquidity purposes. This definition

would codify a Finance Board

regulatory interpretation (Regulatory

Interpretation 2000–RI–1 (March 6,

2000)) that allowed a Bank to accept as

collateral under § 950.7(a)(5), shares of

mutual funds that enter into certain

limited types of repurchase agreements.

For cash management purposes, mutual

funds typically hold securities, pursuant

to repurchase agreements, that represent

short-term investments as part of their

daily cash management activities. A

mutual fund’s ability to enter into such

repurchase agreements, typically with a

maturity of less than 90 days, allows the

excess cash in the fund to be invested

without losing liquidity or incurring

price risk. Even mutual funds with

particularly restrictive investment

limitations, such as those limited to

mortgage loans, government securities,

and agency securities, typically use

repurchase agreements to maintain a

liquidity position and manage the fund.

The Financial Accounting Standards

Board (FASB) defines ‘‘cash

equivalents’’ for financial reporting

purposes as short-term, highly liquid

investments that are both: (a) readily

convertible into cash; and (b) so near

their maturity that they present

26524 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

insignificant risk of changes in value

because of changes in interest rates. See

FAS 95 Paragraphs 8–10. FASB also

states that, generally, only investments

with original maturities of three months

or less qualify under that definition. See

id.

The proposed definition of ‘‘cash

equivalents’’ is derived from the FASB

definition, but would adapt it by

requiring that investments have a

remaining maturity of 90 days or less at

the acquisition date, because this

standard is more practical to implement

than a requirement that investments be

so near their maturity that they present

insignificant risk of changes in value

because of changes in interest rates. In

addition, a requirement that the

investments be held for liquidity

purposes is being included in the

proposed definition. The Banks will be

required to determine on a case-by-case

basis whether this requirement has been

met.

Other real estate-related collateral

under current § 950.9(a)(4) was not

originally included in current

§ 950.9(a)(5)(i) because the dollar

amount of advances that could be

secured by other real estate-related

collateral was limited to 30 percent of

the member’s capital and the Finance

Board believed this limitation would

result in monitoring complexities that

would make the inclusion of other real

estate-related collateral in

§ 950.9(a)(5)(i) impractical. See 64 FR

16618 (April 6, 1999). As discussed

above, the Modernization Act amended

section 10(a)(4) of the Bank Act by

removing the 30 percent cap on other

real estate-related collateral. See

Modernization Act, section 604(a)(5)(B).

Since this impediment has been

eliminated, proposed § 970.7(a)(5)(i)

includes a reference to other real estaterelated collateral under proposed

§ 950.7(a)(4).

2. Bank Restrictions on Eligible

Collateral

Section 9 of the Bank Act provides

that the Banks have discretion to deny,

or to approve with conditions, a request

for an advance, and section 10(a)(1)

confers on the Banks the authority to

determine whether collateral is

sufficient to fully secure an advance.

See 12 U.S.C. 1429, 1430(a)(1). Current

§ 950.9(b) of the Advances Regulation

grants a Bank the discretion to further

restrict the types of eligible collateral it

will accept as security for advances

based on the creditworthiness or

operations of the borrower, the quality

of the collateral, or other reasonable

criteria. 12 CFR 950.9(b). The Finance

Board believes that the discretionary

authority conferred on the Banks by

current § 950.9(b) is unnecessary in light

of the Banks’ statutory authority, and

because the factors listed in current

§ 950.9(b) are ordinarily considered in

valuing collateral. Accordingly, the

Finance Board proposes to remove

current § 950.9(b).

3. Pledge of Advances Collateral by

Affiliates

The Bank Act does not directly

address the acceptance of eligible

collateral from an affiliate, apart from

section 10(e) of the Bank Act, which

gives a priority to any security interest

granted by a member or its affiliates,

subject to certain exceptions. See 12

U.S.C. 1430(e). Implicit in Congress’

inclusion of collateral pledged by an

affiliate in the so-called ‘‘superlien

provision’’ is the authority for the Banks

to accept collateral from members’

affiliates. Accordingly, the Finance

Board has determined that Congress has

authorized the Banks to accept collateral

not only from a wholly-owned

subsidiary, but from any affiliate of a

member, and is proposing to state that

expressly in proposed § 950.7(f).

Proposed § 950.7(f)(1) requires that

the pledge of collateral by an affiliate of

a member used to secure advances to

the member shall either directly secure

the member’s obligation to repay the

advances, or secure a surety or other

agreement under which the affiliate has

assumed, along with the member, a

primary co-obligation to repay the

advances made to the member. Because

the Bank Act requires that each advance

be fully secured, see 12 U.S.C. 1430(a),

a guaranty by an affiliate of a member’s

obligation, backed by the eligible assets

held by the affiliate, would not meet the

requirements of the Bank Act or the

proposed rule, as the collateral would

then be securing the affiliate’s

secondary obligation and not the

advance itself. As provided by proposed

§ 950.7(f)(1), however, where the

affiliate enters into a surety arrangement

under which it assumes a primary joint

and several co-obligation to repay the

advance made to the member, and fully

secures this primary surety obligation

with eligible collateral, such collateral

would be considered as securing the

advance itself, as required by the

statute.

Proposed § 950.7(f)(2) requires the

Bank to obtain from an affiliate, and

maintain, a legally enforceable security

interest pursuant to which the Bank’s

legal rights and privileges with respect

to the collateral are functionally

equivalent in all material respects to

those that the Bank would possess if the

member were to pledge the same

collateral directly. The Bank would be

required to have on file adequate

documentation demonstrating this

functional equivalence. The Finance

Board anticipates that Banks that decide

to accept collateral from affiliates of

members will need to make this

determination on a case-by-case basis,

after careful legal review and analysis,

taking into consideration the structure

of the transaction and the law of the

state that governs the transaction.

These proposed regulatory additions

represent a modification of an earlier

proposal on third-party collateral that

was published for comment by the

Finance Board, but that was

subsequently withdrawn. In December

1998, the Finance Board published a

proposed rule to amend the Advances

Regulation (at that time designated as 12

CFR part 935), that, among other things,

would have permitted the Banks to

accept pledges of eligible collateral from

a member’s ‘‘qualifying investment

subsidiary’’ (QIS) if the Bank were able

to obtain and maintain a security

interest in the collateral pursuant to

which its rights and privileges were

functionally equivalent to those that the

Bank would possess if the member were

to pledge the collateral directly. Under

the December 1998 proposed rule, the

term ‘‘qualifying investment subsidiary’’

would have included business entities

that: (1) Are wholly owned by a

member; (2) are operated solely as

passive investment vehicles on behalf of

that member; and (3) hold only cash

equivalents and assets that are eligible

collateral under §§ 935.9(a)(1) and (2) of

the Advances Regulation. See 63 FR

67625 (Dec. 8, 1998).

In proposing the December 1998

amendments, the Finance Board

intended to codify into regulation a

series of Finance Board regulatory

interpretations regarding the acceptance

of eligible collateral held by a real estate

investment trust and state security

corporation subsidiaries. However, in

response to the proposed rule, a large

number of commenters questioned the

Finance Board’s proposal to address

only pledges of collateral from a narrow

class of wholly-owned subsidiaries,

while ignoring collateral arrangements

with other types of affiliates that may be

permissible under the Bank Act. In light

of these comments, the Finance Board

removed the QIS provisions from the

text of the final rule pending further

analysis of the issue. See 64 FR 16618

(April 6, 1999).

In conjunction with new § 950.7(f),

the proposed rule would amend § 950.1

by defining an ‘‘affiliate’’ as any

business entity that controls, is

controlled by, or is under common

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26525

control with, a member. The proposed

definition of ‘‘affiliate’’ is intended to

limit the scope of eligible third-party

collateral to assets over which the

member exercises control or shares

control.

4. Bank Advances Policy

The proposed rule removes existing

§ 950.3 of the Finance Board’s Advances

Regulation. That section requires each

Bank’s board of directors to adopt and

review a policy on advances and

outlines some basic criteria for the

content of the advances policy. The

Finance Board is proposing to move the

requirement for the Bank’s board of

directors to adopt and periodically readopt an advances or credit policy to

new § 917.4, ‘‘Bank Member Products

Policy.’’ The Finance Board believes it

would make for a more logical

presentation in its regulations to have

all of the requirements for Bank policies

contained in one regulatory part (part

917), rather than to have such

requirements scattered throughout its

regulations. The proposed requirements

for Bank member products policies are

discussed in section F. 2., below.

5. Removal of Non-QTL Definitions

Proposed § 950.1 deletes the following

qualified thrift lender (QTL)-related

definitions from the Advances

Regulation: definitions of the terms

‘‘Actual thrift investment percentage’’ or

‘‘ATIP’’; ‘‘Non-Qualified Thrift Lender

Member’’; ‘‘Qualified Thrift Lender’’ or

‘‘QTL’’; and ‘‘Qualified Thrift Lender

test’’ or ‘‘QTL test.’’ 12 CFR 950.1. These

terms are being removed to conform the

Advances Regulation to the

Modernization Act, which repealed all

non-QTL advances provisions in the

Bank Act. See Modernization Act,

section 604(c).

D. Modernization Act Amendment to

Long-term Advances Purpose Provision

for CFI Members

Section 10(a) of the Bank Act formerly

provided that all long-term advances

shall be made only for the purpose of

providing funds for residential housing

finance. See 12 U.S.C. 1430(a) (1994).

This purpose is set forth in current

§ 950.14(a), and is implemented by use

of a proxy test set forth in current

§ 950.14(b). 12 CFR 950.14(a), (b).

Specifically, current § 950.14(b)(1)

provides that, before funding a longterm advance (i.e., an advance with a

maturity greater than five years), a Bank

shall determine that the principal

amount of all long-term advances

currently held by the member does not

exceed the total book value of the

member’s ‘‘residential housing finance

assets.’’ 12 CFR 950.1, 950.14(b)(1).

‘‘Residential housing finance assets’’ are

defined in current § 950.1 to mean any

of the following: (1) Loans secured by

residential real property; (2) mortgagebacked securities; (3) participations in

loans secured by residential real

property; (4) loans or investments

financed by advances made pursuant to

a CICA program; (5) loans secured by

manufactured housing, regardless of

whether such housing qualifies as

residential real property; or (6) any

loans or investments which the Finance

Board, in its discretion, otherwise

determines to be residential housing

finance assets. 12 CFR 950.1. Current

§ 950.14(b)(1) requires a Bank to

determine the total book value of the

member’s residential housing finance

assets using the most recent Thrift

Financial Report, Report of Condition

and Income, or financial statement

made available by the member. 12 CFR

950.14(b)(1). This proxy test was

determined by the Finance Board to be

an operationally feasible compliance

monitoring mechanism for residential

housing finance assets to implement the

statutory requirement that long-term

advances be only for residential housing

finance purposes. See 57 FR 45338 (Oct.

1, 1992).

The Modernization Act amended

section 10(a) of the Bank Act to provide

that a Bank may make long-term

advances not only for the purpose of

providing funds for residential housing

finance, but also for the purpose of

providing funds to any CFI for small

businesses, small farms and small agribusinesses. See Modernization Act,

section 604(a)(3). Accordingly, the

proposed rule amends current § 950.14

by adding this new purpose in

redesignated § 950.3. Proposed

§ 950.3(a) provides that a Bank shall

make long-term advances only for the

purpose of enabling any member to

purchase or fund new or existing

residential housing finance assets,

which include, for CFI members, small

business loans, small farm loans and

small agri-business loans.

Instead of the statutory terms ‘‘small

businesses,’’ ‘‘small farms’’ and ‘‘small

agri-businesses,’’ proposed § 950.3

utilizes the terms ‘‘small business

loans,’’ ‘‘small farm loans’’ and ‘‘small

agri-business loans,’’ which the Finance

Board is proposing to define for

purposes of identifying the new types of

collateral that Banks are authorized to

accept from CFI members. See

Modernization Act, section 604(a)(5)(C).

The Finance Board believes that a single

set of terms that would apply to both

CFI-eligible collateral and the new

purposes for which Banks may make

advances to CFI members will reduce

confusion and otherwise provide an

efficient means of implementing the

new authorities conferred on the Banks

in regard to their CFI members. Further,

the Modernization Act provides that the

terms ‘‘small business,’’ ‘‘small farm’’

and ‘‘small agri-business’’ shall have the

meanings given to those terms by

regulation of the Finance Board. See

Modernization Act, section 604(a)(7).

Accordingly, the Finance Board is

interpreting the statutory phrase

‘‘providing funds to any community

financial institution for small

businesses, small farms, and small agribusinesses’’ to mean making advances

to CFI members for small business

loans, small farm loans and small agribusiness loans. Proposed § 950.3(b)(1)

maintains the proxy test in its current

form. However, proposed revisions to

certain definitions will have the effect of

including small business loans, small

farm loans and small agri-business loans

in the denominator of the proxy test for

CFI members.

Specifically, the proposed rule would

amend § 900.1 by adding a new

definition of ‘‘community lending,’’

which would apply, wherever it

appears, in all of the Finance Board’s

regulations. The term ‘‘community

lending’’ currently is defined in § 952.3

of the CICA Regulation as ‘‘providing

financing for economic development

projects for targeted beneficiaries.’’ 12

CFR 952.3. The definition of

‘‘community lending’’ proposed for

§ 900.1 would add to that definition,

‘‘and, for community financial

institutions, purchasing or funding

small business loans, small farm loans

or small agri-business loans, as defined

in § 950.1 of this chapter.’’ This addition

to the definition implements changes

made by the Modernization Act and

supports the Finance Board’s belief that

CFI lending to small businesses, small

farms and small agri-businesses is

community lending. For purposes of the

CICA and Community Support

Regulations, the current definition of

‘‘community lending,’’ redesignated in

this proposed rule as ‘‘targeted

community lending,’’ would continue to

apply.

Concurrently, the Finance Board is

proposing to amend the definition of

‘‘residential housing finance assets’’ to

change the element that currently reads

‘‘Loans or investments financed by

advances made pursuant to a CICA

program’’ to ‘‘Loans or investments

qualifying under the definition of

community lending in § 900.1 of this

chapter.’’

Thus, by operation of the revised

definitions of ‘‘residential housing

26526 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

9The Finance Board adopted part 917, ‘‘Powers

and Responsibilities of Bank Boards of Directors

and Senior Management,’’ as a final rule at its

March 22, 2000 Board of Directors meeting.

finance assets’’ and ‘‘community

lending,’’ the proxy test calculation of

the total book value of residential

housing assets will include, for CFI

members, small business loans, small

farm loans and small agri-business

loans. This result implements section

604(a)(5)(C) of the Modernization Act,

which authorizes a Bank to make longterm advances to CFIs for the purpose

of providing financing for small

businesses, small farms and small agribusinesses. See Modernization Act,

section 604(a)(5)(C).

Current § 950.14(b)(1) allows a Bank

to determine the total book value of

residential housing financial assets

using the most recent Thrift Financial

Report, Report of Condition and Income,

or financial statement made available by

the member. 12 CFR 950.14(b)(1).

Proposed § 950.3(b)(1) adds to this list

‘‘other reliable documentation’’ made

available by the member. This revision

is intended to give the Banks more

flexibility in the form of documentation

they use in administering the proxy test,

as long as the data supplied by the

member is reliable.

E. Clarification of Other Advances

Provisions in Current Regulation

1. Pricing

The Finance Board is taking this

opportunity to clarify a provision of the

Advances Regulation dealing with the

pricing of advances. Current

§ 950.6(b)(1) requires each Bank to price

its advances to members taking into

account two factors: (1) The marginal

cost to the Bank of raising matching

maturity funds in the marketplace; and

(2) the administrative and operating

costs associated with making such

advances to members. 12 CFR

950.6(b)(1). A separate provision,

current § 950.8(b)(1), provides that each

Bank shall establish and charge a

prepayment fee pursuant to a specified

formula which sufficiently compensates

the Bank for providing a prepayment

option on an advance, and which acts

to make the Bank financially indifferent

to the borrower’s decision to repay the

advance prior to its maturity date. 12

CFR 950.8(b)(1). These provisions do

not clearly indicate whether Banks must

consider the costs of associated options

and the administrative costs of funding

advances with such options in pricing

an advance. Further, because current

§ 950.6(b)(1) merely requires the Bank

‘‘to take into account’’ the marginal cost

to the Bank of raising matching maturity

funds in the marketplace, and the

administrative and operating costs

associated with making such advances

to members, the current rule allows a

Bank to price an advance below its

marginal cost of funds, a practice the

Finance Board could find to be an

unsafe and unsound practice in some

circumstances and one the Finance

Board wishes to discourage.

Therefore, redesignated § 950.5(b)(1)

of the proposed rule prohibits a Bank

from pricing an advance below the

Bank’s marginal cost of funds, which is

to include the cost of any embedded

options, plus the administrative and

operating costs associated with making

the advance when funding an advance

with similar maturity and options

characteristics.

Proposed § 950.5(b)(3)(i) provides that

the aforementioned prohibition would

not apply to a Bank’s CICA programs.

This is intended to provide the Banks

with maximum flexibility in designing

and offering AHP and other CICA

programs. Proposed § 950.5(b)(3)(ii)

provides that the proposed prohibition

also would not apply to any other

advances that are volume limited and

specifically approved by a Bank’s board

of directors. This exception is intended

to allow a Bank to price targeted

advances at below the cost of funds for

some special purpose that does not meet

all of the criteria for CICA advances. It

is intended that the special purpose

involve some social benefit, such as

providing relief from a natural disaster.

The proposed exception would also

allow a Bank to conduct market testing

of alternative pricing strategies for

advances.

2. Convertible Advances Disclosure

Current § 950.6(d)(1) of the Advances

Regulation provides that a Bank that

offers a putable advance to a member

shall disclose in writing to such member

the type and nature of the risks

associated with putable advance

funding, and that such disclosure

should include detail sufficient to

describe such risks. 12 CFR 950.6(d)(1).

A convertible advance is similar to a

putable advance in that it carries risks

associated with a triggering event,

usually a shift in a designated interest

rate index. Accordingly, redesignated

§ 950.5(d)(1) of the proposed rule makes

the current disclosure requirements for

putable advances applicable to

convertible advances as well. Current

§ 950.6(d)(2) is not proposed to be

revised because replacement funding is

not an issue for convertible advances, as

convertible advances involve only a

change in the stated interest rate, not the

repayment of funds. The Finance Board

requests comment on whether there are

other appropriate requirements for

putable or convertible advances.

F. Other Technical Changes

1. Federal Home Loan Bank

Associates—Part 926

Eligibility requirements for associates

(nonmember borrowers), including

application procedures and

requirements for advances to associates,

currently are contained in the Advances

Regulation. See 12 CFR 950.22, 950.23.

For the sake of greater organizational

clarity, the proposed rule sets forth the

associate eligibility requirements and

advances requirements in separate

regulations, by moving the associate

eligibility requirements to a new part

926 under subpart B. No substantive

changes are being proposed for subpart

B.

As part of a continuing effort to revise

and achieve consistency in regulatory

nomenclature regarding nonmember

borrowers, the proposed rule would

amend the text, where appropriate, to

refer to nonmember borrowers who are

eligible under 10b of the Bank Act, 12

U.S.C. 1430b, to obtain advances from

the Banks, as associates. The definition

of ‘‘associate’’ was recently added to 12

CFR 900.1, which contains definitions

of terms that apply to all parts of the

Finance Board’s regulations.

Accordingly, the proposed rule would

change the title of subpart B to

‘‘Advances to Associates.’’ Since the

term ‘‘associates’’ is defined in § 900.1,

the Finance Board is not proposing that

it be defined in any of the individual

parts addressed by this rulemaking.

2. Bank Member Products Policy—

Section 917.4

In its recently adopted final rule,

Powers and Responsibilities of Bank

Boards of Directors and Senior

Management, the Finance Board

consolidated all of the requirements for

the Bank’s board of directors’

operational policies into one regulatory

part, part 917, rather than have such

requirements scattered throughout its

regulations.9 Proposed § 917.4 would

add to that part a new requirement for

adoption by a Bank’s board of directors

of a member products policy that would

combine the requirements for an

advances policy from current § 950.3(a),

with the requirements for a standby

letter of credit policy from current

§ 961.5(a), into one policy. The

proposed member products policy also

would address other products that the

Banks may offer, such as acquired

member assets.

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26527

10Section 940.2 was adopted as a final rule by the

Finance Board at its March 22, 2000 Board of

Directors meeting as part of the rulemaking for part

917, ‘‘Powers and Responsibilities of Federal Home

Loan Bank Boards of Directors and Senior

Management.’’

Under proposed § 917.4(b), a Bank’s

member products policy would be

required to address the following items:

the credit underwriting criteria to be

applied to advances (including

renewals) and standby letters of credit;

collateralization (including levels,

valuation and discounts) for advances

and standby letters of credit; advancesrelated fees (including any schedules or

formulas pertaining to such fees);

standards and criteria for pricing

member products (including differential

pricing of advances pursuant to

§ 950.4(b)(2)); criteria regarding the

pricing of standby letters of credit

(including any special pricing

provisions for standby letters of credit

that facilitate the financing of projects

that are eligible for any CICA programs

under part 952); the maintenance of

appropriate systems, procedures and

internal controls; and the maintenance

of appropriate operational and

personnel capacity.

A Bank’s member products policy

also must provide that, for any draw

made by a beneficiary under a standby

letter of credit, the member will be

charged a processing fee calculated in

accordance with § 975.6(b).

Under proposed § 917.4(a)(2), each

Bank’s board of directors would be

required to review the Bank’s member

products policy annually, amend the

policy as appropriate, and re-adopt the

policy, including interim amendments,

not less often than every three years.

References to the ‘‘advances policy’’

in other sections of the Finance Board’s

current regulations are proposed to be

changed to references to the ‘‘member

products policy.’’

3. Bank Credit Mission—Removal of

Section 950.2

In the Finance Board’s recently

adopted final rule on parts 900, 917 and

940, the Finance Board revised part 940

to add a new definition of the mission

of the Banks.10 Accordingly, the

proposed rule removes existing § 950.2

of the Finance Board’s Advances

Regulation, which states the primary

credit mission of the Banks and how the

Banks must fulfill such mission, as no

longer necessary.

4. Community Support Requirements

and Community Investments Cash

Advance Programs—Parts 944 and 952

As discussed previously, the

proposed rule would amend part 944

and § 952.3 by re-designating the term

‘‘community lending’’ as ‘‘targeted

community lending,’’ with no

substantive change to the corresponding

definition. This revision is intended to

differentiate CICA community lending,

which is targeted, from the broader term

‘‘community lending’’ that the Finance

Board proposes to add to § 900.1. The

broader definition of ‘‘community

lending’’ in § 900.1 would include, for

CFIs, purchasing or funding small

business loans, small farm loans and

small agri-business loans, as defined in

§ 950.1 of this chapter.

5. Standby Letters of Credit—Part 961

The proposed rule would amend part

961 to update cross-references to reflect

the reorganization of Finance Board

regulations, change references from

nonmember mortgagees to associates

and make other technical and

conforming changes.

III. Paperwork Reduction Act

This proposed rule does not contain

any collections of information pursuant

to the Paperwork Reduction Act of 1995.

See 33 U.S.C. 3501 et seq. Therefore, the

Finance Board has not submitted any

information to the Office of

Management and Budget for review.

IV. Regulatory Flexibility Act

The proposed rule applies only to the

Banks, which do not come within the

meaning of ‘‘small entities,’’ as defined

in the Regulatory Flexibility Act (RFA).

See 5 U.S.C. 601(6). Therefore, in

accordance with section 605(b) of the

RFA, see id. at 605(b), the Finance

Board hereby certifies that this proposed

rule, if promulgated as a final rule, will

not have a significant economic impact

on a substantial number of small

entities.

List of Subjects in 12 CFR Parts 900,

917, 926, 944, 950, 952, 961 and 980

Community development, Credit,

Federal home loan banks, Housing,

Reporting and recordkeeping

requirements.

Accordingly, the Finance Board

hereby proposes to amend title 12,

chapter IX, parts 900, 917, 926, 944,

950, 952, 961 and 980, Code of Federal

Regulations, as follows:

PART 900—GENERAL DEFINITIONS

1. The authority citation for part 900

is revised to read as follows:

Authority: 12 U.S.C. 1422, 1422b(a)(1).

2. Amend § 900.1 by adding, in

alphabetical order, definitions of

‘‘community financial institution’’,

‘‘community financial institution asset

cap’’, and ‘‘community lending’’, to read

as follows:

§ 900.1 Definitions applying to all

regulations.

* * * * *

Community financial institution or

CFI means an institution—

(1) The deposits of which are insured

under the Federal Deposit Insurance

Act; and

(2) That has, as of the date of the

transaction at issue, less than the

community financial institution asset

cap in total assets, based on an average

of total assets over the three years

preceding that date.

Community financial institution asset

cap means, for 2000, $500 million.

Beginning in 2001 and for subsequent

years, the cap shall be adjusted annually

by the Finance Board to reflect any

percentage increase in the preceding

year’s Consumer Price Index (CPI) for all

urban consumers, as published by the

U.S. Department of Labor. Each year, as

soon as practicable after the publication

of the previous year’s CPI, the Finance

Board shall publish notice by Federal

Register, distribution of a

memorandum, or otherwise, of the CPIadjusted cap.

Community lending means providing

financing for economic development

projects for targeted beneficiaries, and,

for community financial institutions,

purchasing or funding small business

loans, small farm loans or small agribusiness loans, as defined in § 950.1 of

this chapter.

* * * * *

PART 917—POWERS AND

RESPONSIBILITIES OF BANK

BOARDS OF DIRECTORS AND

SENIOR MANAGEMENT

3. The authority citation for part 917

continues to read as follows:

Authority: 12 U.S.C. 1422a(a)(3),

1422b(a)(1), 1427, 1432(a), 1436(a), 1440.

4. Add § 917.4 to read as follows:

§ 917.4 Bank member products policy.

(a) Adoption and review of member

products policy. (1) Adoption.

Beginning 90 days after the effective

date of this section, each Bank’s board

of directors shall have in effect at all

times a policy that addresses the Bank’s

management of products offered by the

Bank to members and associates,

including but not limited to advances,

letters of credit and acquired member

assets, consistent with the requirements

of the Act, paragraph (b) of this section,

and all applicable Finance Board

regulations and policies.

26528 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

(2) Review and compliance. Each

Bank’s board of directors shall:

(i) Review the Bank’s member

products policy annually;

(ii) Amend the member products

policy as appropriate; and

(iii) Re-adopt the member products

policy, including interim amendments,

not less often than every three years.

(b) Member products policy

requirements. In addition to meeting

any other requirements set forth in this

chapter, each Bank’s member products

policy shall:

(1) Address credit underwriting

criteria to be applied in evaluating

applications for advances, standby

letters of credit, and renewals;

(2) Address appropriate levels of

collateralization, valuation of collateral

and discounts applied to collateral

values for advances and standby letters

of credit;

(3) Address advances-related fees to

be charged by each Bank, including any

schedules or formulas pertaining to

such fees;

(4) Address standards and criteria for

pricing member products, including

differential pricing of advances

pursuant to § 950.4(b)(2) of this chapter,

and criteria regarding the pricing of

standby letters of credit, including any

special pricing provisions for standby

letters of credit that facilitate the

financing of projects that are eligible for

any of the Banks’ CICA programs under

part 952 of this chapter;

(5) Provide that, for any draw made by

a beneficiary under a standby letter of

credit, the member will be charged a

processing fee calculated in accordance

with the requirements of § 975.6(b) of

this chapter;

(6) Address the maintenance of

appropriate systems, procedures and

internal controls; and

(7) Address the maintenance of

appropriate operational and personnel

capacity.

5. Revise the heading of subchapter D

to read as follows:

SUBCHAPTER D—FEDERAL HOME LOAN

BANK MEMBERS AND ASSOCIATES

6. In subchapter D, add a new part

926 to read as follows:

PART 926—FEDERAL HOME LOAN

BANK ASSOCIATES

Sec.

926.1 Definitions.

926.2 Bank authority to make advances to

associates.

926.3 Associate eligibility requirements.

926.4 Satisfaction of eligibility

requirements.

926.5 Associate application process.

926.6 Appeals.

Authority: 12 U.S.C. 1422b(a), 1430b.

§ 926.1 Definitions.

As used in this part:

Advance has the meaning set forth in

§ 950.1 of this chapter.

Governmental agency means the

governor, legislature, and any other

component of a federal, state, local,

tribal, or Alaskan native village

government with authority to act for or

on behalf of that government.

HUD means the Department of

Housing and Urban Development.

State housing finance agency or SHFA

means:

(1) A public agency, authority, or

publicly sponsored corporation that

serves as an instrumentality of any state

or political subdivision of any state, and

functions as a source of residential

mortgage loan financing in that state; or

(2) A legally established agency,

authority, corporation, or organization

that serves as an instrumentality of any

Indian tribe, band, group, nation,

community, or Alaskan Native village

recognized by the United States or any

state, and functions as a source of

residential mortgage loan financing for

the Indian or Alaskan Native

community.

§ 926.2 Bank authority to make advances

to associates.

Subject to the provisions of the Act

and part 950 of this chapter, a Bank may

make advances to an entity that is not

a member of the Bank if the Bank has

certified the entity as an associate under

the provisions of this part.

§ 926.3 Associate eligibility requirements.

(a) General. A Bank may certify as an

associate any applicant that meets the

following requirements, as determined

using the criteria set forth in § 926.4:

(1) The applicant is approved under

title II of the National Housing Act (12

U.S.C. 1707, et seq.);

(2) The applicant is a chartered

institution having succession;

(3) The applicant is subject to the

inspection and supervision of some

governmental agency;

(4) The principal activity of the

applicant in the mortgage field consists

of lending its own funds; and

(5) The financial condition of the

applicant is such that advances may be

safely made to it.

(b) State housing finance agencies. In

addition to meeting the requirements in

paragraph (a) of this section, any

applicant seeking access to advances as

a SHFA pursuant to § 950.17(b)(2) of

this chapter shall provide evidence

satisfactory to the Bank, such as a copy

of, or a citation to, the statutes and/or

regulations describing the applicant’s

structure and responsibilities, that the

applicant is a state housing finance

agency as defined in § 926.1.

§ 926.4 Satisfaction of eligibility

requirements.

(a) HUD approval requirement. An

applicant shall be deemed to meet the

requirement in section 10b(a) of the Act

and § 926.3(a)(1) that it be approved

under title II of the National Housing

Act if it submits a current HUD Yearly

Verification Report or other

documentation issued by HUD stating

that the Federal Housing Administration

of HUD has approved the applicant as

a mortgagee.

(b) Charter requirement. An applicant

shall be deemed to meet the

requirement in section 10b(a) of the Act

and § 926.3(a)(2) that it be a chartered

institution having succession if it

provides evidence satisfactory to the

Bank, such as a copy of, or a citation to,

the statutes and/or regulations under

which the applicant was created, that:

(1) The applicant is a government

agency; or

(2) The applicant is chartered under

state, federal, local, tribal, or Alaskan

Native village law as a corporation or

other entity that has rights,

characteristics, and powers under

applicable law similar to those granted

a corporation.

(c) Inspection and supervision

requirement. (1) An applicant shall be

deemed to meet the inspection and

supervision requirement in section

10b(a) of the Act and § 926.3(a)(3) if it

provides evidence satisfactory to the

Bank, such as a copy of, or a citation to,

relevant statutes and/or regulations,

that, pursuant to statute or regulation,

the applicant is subject to the inspection

and supervision of a federal, state, local,

tribal, or Alaskan native village

governmental agency.

(2) An applicant shall be deemed to

meet the inspection requirement if there

is a statutory or regulatory requirement

that the applicant be audited or

examined periodically by a

governmental agency or by an external

auditor.

(3) An applicant shall be deemed to

meet the supervision requirement if the

governmental agency has statutory or

regulatory authority to remove an

applicant’s officers or directors for cause

or otherwise exercise enforcement or

administrative control over actions of

the applicant.

(d) Mortgage activity requirement. An

applicant shall be deemed to meet the

mortgage activity requirement in section

10b(a) of the Act and § 926.3(a)(4) if it

provides documentary evidence

satisfactory to the Bank, such as a

financial statement or other financial

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26529

documents that include the applicant’s

mortgage loan assets and their funding

liabilities, that it lends its own funds as

its principal activity in the mortgage

field. For purposes of this paragraph,

lending funds includes, but is not

limited to, the purchase of whole

mortgage loans. In the case of a federal,

state, local, tribal, or Alaskan Native

village government agency,

appropriated funds shall be considered

an applicant’s own funds. An applicant

shall be deemed to satisfy this

requirement notwithstanding that the

majority of its operations are unrelated

to mortgage lending if its mortgage

activity conforms to this requirement.

An applicant that acts principally as a

broker for others making mortgage

loans, or whose principal activity is to

make mortgage loans for the account of

others, does not meet this requirement.

(e) Financial condition requirement.

An applicant shall be deemed to meet

the financial condition requirement in

§ 926.3(a)(5) if the Bank determines that

advances may be safely made to the

applicant. The applicant shall submit to

the Bank copies of its most recent

regulatory audit or examination report,

or external audit report, and any other

documentary evidence, such as

financial or other information, that the

Bank may require to make the

determination.

(The Office of Management and Budget has

approved the information collection

contained in this section and assigned

control number 3069–0005 with an

expiration date of November 30, 2002.)

§ 926.5 Associate application process.

(a) Authority. The Banks are

authorized to approve or deny all

applications for certification as an

associate, subject to the requirements of

the Act and this part. A Bank may

delegate the authority to approve

applications for certification as an

associate only to a committee of the

Bank’s board of directors, the Bank

president, or a senior officer who

reports directly to the Bank president

other than an officer with responsibility

for business development.

(b) Application requirements. An

applicant for certification as an

associate shall submit an application

that satisfies the requirements of the Act

and this part to the Bank of the district

in which the applicant’s principal place

of business, as determined in

accordance with part 925 of this

chapter, is located.

(c) Bank decision process. (1) Action

on applications. A Bank shall approve

or deny an application for certification

as an associate within 60 calendar days

of the date the Bank deems the

application to be complete. A Bank shall

deem an application complete, and so

notify the applicant in writing, when it

has obtained all of the information

required by this part and any other

information it deems necessary to

process the application. If a Bank

determines during the review process

that additional information is necessary

to process the application, the Bank may

deem the application incomplete and

stop the 60-day time period by

providing written notice to the

applicant. When the Bank receives the

additional information, it shall again

deem the application complete, so

notify the applicant in writing, and

resume the 60-day time period where it

stopped.

(2) Decision on applications. The

Bank or a duly delegated committee of

the Bank’s board of directors, the Bank

president, or a senior officer who

reports directly to the Bank president

other than an officer with responsibility

for business development shall approve,

or the board of directors of a Bank shall

deny, each application for certification

as an associate by a written decision

resolution stating the grounds for the

decision. Within three business days of

a Bank’s decision on an application, the

Bank shall provide the applicant and

the Finance Board with a copy of the

Bank’s decision resolution.

(3) File. The Bank shall maintain a

certification file for each applicant for at

least three years after the date the Bank

decides whether to approve or deny

certification or the date the Finance

Board resolves any appeal, whichever is

later. At a minimum, the certification

file shall include all documents

submitted by the applicant or otherwise

obtained or generated by the Bank

concerning the applicant, all documents

the Bank relied upon in making its

determination regarding certification,

including copies of statutes and

regulations, and the decision resolution.

(The Office of Management and Budget has

approved the information collection

contained in this section and assigned

control number 3069–0005 with an

expiration date of November 30, 2002.)

§ 926.6 Appeals.

(a) General. Within 90 calendar days

of the date of a Bank’s decision to deny

an application for certification as an

associate, the applicant may submit a

written appeal to the Finance Board that

includes the Bank’s decision resolution

and a statement of the basis for the

appeal with sufficient facts,

information, analysis, and explanation

to support the applicant’s position.

Appeals shall be sent to the Federal

Housing Finance Board, 1777 F Street,

NW., Washington, DC 20006, with a

copy to the Bank.

(b) Record for appeal. Upon receiving

a copy of an appeal, the Bank whose

action has been appealed shall provide

to the Finance Board a complete copy of

the applicant’s certification file

maintained by the Bank under

§ 926.5(c)(3). Until the Finance Board

resolves the appeal, the Bank shall

promptly provide to the Finance Board

any relevant new materials it receives.

The Finance Board may request

additional information or further

supporting arguments from the

applicant, the Bank, or any other party

that the Finance Board deems

appropriate.

(c) Deciding appeals. Within 90

calendar days of the date an applicant

files an appeal with the Finance Board,

the Finance Board shall consider the

record for appeal described in paragraph

(b) of this section and resolve the appeal

based on the requirements of the Act

and this part.

(The Office of Management and Budget has

approved the information collection

contained in this section and assigned

control number 3069–0005 with an

expiration date of November 30, 2002.)

PART 944—COMMUNITY SUPPORT

REQUIREMENTS

7. The authority citation for part 944

continues to read as follows:

Authority: 12 U.S.C. 1422a(a)(3)(B),

1422b(a)(1), 1429, and 1430.

8. Amend part 944 by removing the

term ‘‘community lending’’ wherever it

appears, and, in its place, adding the

term ‘‘targeted community lending’’.

§ 944.6 [Amended]

9. Amend § 944.6(b)(2) by removing

the term ‘‘nonmember borrowers’’ and,

in its place, adding the term

‘‘associates’’.

PART 950—ADVANCES

10. The authority citation for part 950

continues to read as follows:

Authority: 12 U.S.C. 1422a(a)(3),

1422b(a)(1), 1426, 1429, 1430, 1430b and

1431.

11. The table of contents for part 950

is revised to read as follows:

Subpart A—Advances to Members

Sec.

950.1 Definitions.

950.2 Authorization and application for

advances; obligation to repay advances.

950.3 Purpose of long-term advances; proxy

text.

950.4 Limitations on access to advances.

950.5 Terms and conditions for advances.

950.6 Fees.

26530 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

950.7 Collateral.

950.8 Banks as secured creditors.

950.9 Pledged collateral; verification.

950.10 Collateral valuation; appraisals.

950.11 Capital stock requirements;

unilateral redemption of excess stock.

950.12 Intradistrict transfer of advances.

950.13 Special advances to savings

associations.

950.14 Advances to the Savings Association

Insurance Fund.

950.15 Liquidation of advances upon

termination of membership.

Subpart B—Advances to Associates

950.16 Scope.

950.17 Advances to associates.

12. Amend § 950.1 by:

a. Adding, in alphabetical order, a

definition of ‘‘affiliate’’;

b. Adding, in alphabetical order, a

definition of ‘‘cash equivalents’’;

c. Removing the definitions of

‘‘Actual thrift investment percentage’’ or

‘‘ATIP’’, ‘‘combination business or farm

property’’, ‘‘Non-Qualified Thrift Lender

member’’, ‘‘Qualified Thrift Lender’’ or

‘‘QTL’’, and ‘‘Qualified Thrift Lender

test’’ or ‘‘QTL test’’;

d. Amending the definition of

‘‘Community Investment Cash

Advance’’ or ‘‘CICA’’ by removing the

term ‘‘community lending’’, and, in its

place, adding the term ‘‘targeted

community lending’’;

e. Revising paragraph (4) of the

definition of ‘‘residential housing

finance assets’’;

f. Amending the definition of

‘‘residential real property’’ by removing

paragraph (1)(v); and

g. Adding, in alphabetical order,

definitions of ‘‘small agri-business

loans’’, ‘‘small business loans’’, and

‘‘small farm loans’’, to read as follows:

§ 950.1 Definitions.

* * * * *

Affiliate means any business entity

that controls, is controlled by, or is

under common control with, a member.

* * * * *

Cash equivalents means investments

that—

(1) Are readily convertible into known

amounts of cash;

(2) Have a remaining maturity of 90

days or less at the acquisition date; and

(3) Are held for liquidity purposes.

* * * * *

Residential housing finance assets

means any of the following:

* * * * *

(4) Loans or investments qualifying

under the definition of ‘‘community

lending’’ in § 900.1 of this chapter;

* * * * *

Small agri-business loans means

loans:

(1) With an original amount

(including the aggregate of all loans to

a particular borrower) of not more than

$ 500,000 that are reported on either:

Schedule SB of the Thrift Financial

Report filed by savings associations as

‘‘nonmortgage, commercial loans to

finance agricultural production and

other nonmortgage commercial loans to

farmers,’’ or Schedule RC–C, Part II of

the Report of Condition and Income

filed by insured commercial banks and

FDIC-supervised savings banks as

‘‘loans to finance agricultural

production and other loans to farmers;’’

or

(2) For which the CFI, on a case-bycase basis, documents that the borrower

meets the eligibility standards for a

small business concern under the Small

Business Administration’s regulations at

13 CFR part 121, or any successor

provisions.

Small business loans means loans:

(1) With an original amount

(including the aggregate of all loans to

a particular borrower) of not more than

$1,000,000 that are reported on either:

Schedule SB of the Thrift Financial

Report filed by savings associations as

‘‘permanent mortgage loans secured by

nonfarm, nonresidential properties’’ or

‘‘nonmortgage, nonagricultural

commercial loans,’’ or Schedule RC–C,

Part II of the Report of Condition and

Income filed by insured commercial

banks and FDIC-supervised savings

banks as ‘‘loans secured by nonfarm,

nonresidential properties,’’ or

‘‘Commercial and industrial loans to

U.S. addresses;’’ or

(2) For which the CFI, on a case-bycase basis, documents that the borrower

meets the eligibility standards for a

small business concern under the Small

Business Administration’s regulations at

13 CFR part 121, or any successor

provisions.

Small farm loans means loans:

(1) With an original amount

(including the aggregate of all loans to

a particular borrower) of not more than

$500,000 that are reported on either:

Schedule SB of the Thrift Financial

Report filed by savings associations as

‘‘loans secured primarily by farms,’’ or

Schedule RC–C, Part II of the Report of

Condition and Income filed by insured

commercial banks and FDIC-supervised

savings banks as ‘‘loans secured by

farmland (including farm residential

and other improvements);’’ or

(2) For which the CFI, on a case-bycase basis, documents that the borrower

meets the eligibility standards for a

small business concern under the Small

Business Administration’s regulations at

13 CFR part 121, or any successor

provisions.

* * * * *

13. Remove § 950.2.

14. Remove § 950.3.

15. Section 950.4 is redesignated as

§ 950.2.

16. Section 950.14 is redesignated as

§ 950.3, and the heading and paragraphs

(a) and (b)(1) are revised to read as

follows:

§ 950.3 Purpose of long-term advances;

proxy test.

(a) A Bank shall make long-term

advances only for the purpose of

enabling any member to purchase or

fund new or existing residential housing

finance assets, which include, for CFI

members, small business loans, small

farm loans and small agri-business

loans.

(b)(1) Prior to approving an

application for a long-term advance, a

Bank shall determine that the principal

amount of all long-term advances

currently held by the member does not

exceed the total book value of

residential housing finance assets held

by such member. The Bank shall

determine the total book value of such

residential housing finance assets, using

the most recent Thrift Financial Report,

Report of Condition and Income,

financial statement or other reliable

documentation made available by the

member.

* * * * *

17. Section 950.5 is redesignated as

§ 950.4.

18. Section 950.6 is redesignated as

§ 950.5, and paragraphs (b)(1), (b)(2)(ii),

(b)(3), (d)(1) and (d)(3) are revised to

read as follows:

§ 950.5 Terms and conditions for

advances.

* * * * *

(b) Advance pricing. (1) General. A

Bank shall not price its advances to

members below:

(i) The marginal cost to the Bank of

raising matching term and maturity

funds in the marketplace, including

embedded options; and

(ii) The administrative and operating

costs associated with making such

advances to members.

(2) * * *

(ii) Each Bank shall include in its

member products policy required by

§ 917.4 of this chapter, standards and

criteria for such differential pricing and

shall apply such standards and criteria

consistently and without discrimination

to all members applying for advances.

(3) Exceptions. The advance pricing

policies contained in paragraph (b)(1) of

this section shall not apply in the case

of:

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26531

(i) A Bank’s CICA programs; and

(ii) Any other advances that are

volume limited and specifically

approved by the Bank’s board of

directors.

* * * * *

(d) Putable or convertible advances.

(1) Disclosure. A Bank that offers a

putable or convertible advance to a

member shall disclose in writing to such

member the type and nature of the risks

associated with putable or convertible

advance funding. The disclosure should

include detail sufficient to describe

such risks.

(2) Replacement funding for putable

advances. If a Bank terminates a putable

advance prior to the stated maturity date

of such advance, the Bank shall offer to

provide replacement funding to the

member.

* * * * *

19. Section 950.8 is resdesignated as

§ 950.6, and paragraphs (a) and (b)(1) are

revised to read as follows:

§ 950.6 Fees.

(a) Fees in member products policy.

All fees charged by each Bank and any

schedules or formulas pertaining to

such fees shall be included in the

Bank’s member products policy

required by § 917.4 of this chapter. Any

such fee schedules or formulas shall be

applied consistently and without

discrimination to all members.

(b) Prepayment fees. (1) Except where

an advance product contains a

prepayment option, each Bank shall

establish and charge a prepayment fee

pursuant to a specified formula which

makes the Bank financially indifferent

to the borrower’s decision to repay the

advance prior to its maturity date.

* * * * *

20. Section 950.9 is redesignated as

§ 950.7, paragraphs (a) introductory text,

(a)(3), (a)(4), (b) and (c) are revised, and

paragraphs (a) (5) and (f) are added, to

read as follows:

§ 950.7 Collateral.

(a) Eligible security for advances to all

members. At the time of origination or

renewal of an advance, each Bank shall

obtain from the borrowing member or,

in accordance with paragraph (f) of this

section, an affiliate of the borrowing

member, and thereafter maintain, a

security interest in collateral that meets

the requirements of one or more of the

following categories:

* * * * *

(3) Cash or deposits. Cash or deposits

in a Bank.

(4) Other real estate-related collateral.

(i) Other real estate-related collateral

provided that:

(A) Such collateral has a readily

ascertainable liquidation value and can

be freely liquidated in due course; and

(B) The Bank can perfect a security

interest in such collateral.

(ii) Eligible other real estate-related

collateral may include, but is not

limited to:

(A) Privately issued mortgage-backed

securities not otherwise eligible under

paragraph (a)(1)(ii) of this section;

(B) Second mortgage loans, including

home equity loans;

(C) Commercial real estate loans; and

(D) Mortgage loan participations.

(iii) A Bank shall not make total

advances to all members secured by

other real estate-related collateral in an

aggregate amount that would exceed the

highest level of total advances secured

by such collateral that the Bank has

previously made by more than 25

percent until it has met the new

business activity requirements of part

980 of this chapter.

(5) Securities representing equity

interests in eligible advances collateral.

Any security the ownership of which

represents an undivided equity interest

in underlying assets, all of which

qualify either as:

(i) Eligible collateral under paragraphs

(a)(1), (2), (3) or (4) of this section; or

(ii) Cash equivalents.

(b) Additional collateral eligible as

security for advances to CFI members or

their affiliates. (1) General. Subject to

the limitations set forth in part 980 of

this chapter, a Bank is authorized to

accept from CFI members or their

affiliates as security for advances small

business loans, small farm loans or

small agri-business loans fully secured

by collateral other than real estate, or

securities representing a whole interest

in such loans, provided that:

(i) Such collateral has a readily

ascertainable liquidation value and can

be freely liquidated in due course; and

(ii) The Bank can perfect a security

interest in such collateral.

(2) Change in CFI status. A Bank may

not accept as security for new advances

collateral under this section from a

member that loses its CFI status. A Bank

shall not require a member that loses its

CFI status and has outstanding advances

secured by collateral under this section

to repay such advances prior to the

stated maturities or to provide substitute

collateral eligible under paragraphs

(a)(1) through (5) of this section, based

solely on the member’s change in status,

and may allow such member to renew

maturing advances secured by collateral

under this section for up to 6 months.

(c) Additional advances collateral.

The provisions of paragraph (a) of this

section shall not affect the ability of any

Bank to take such steps as it deems

necessary to protect its secured position

on outstanding advances, including

requiring additional collateral, whether

or not such additional collateral

conforms to the requirements for

eligible collateral in paragraphs (a) or (b)

of this section or section 10 of the Act

(12 U.S.C. 1430).

* * * * *

(f) Pledge of advances collateral by

affiliates. Assets held by an affiliate of

a member that are eligible as collateral

under paragraphs (a) or (b) of this

section may be used to secure advances

to that member only if:

(1) The collateral is pledged to secure

either:

(i) The member’s obligation to repay

advances; or

(ii) A surety or other agreement under

which the affiliate has assumed, along

with the member, a primary obligation

to repay advances made to the member;

and

(2) The Bank obtains and maintains a

legally enforceable security interest

pursuant to which the Bank’s legal

rights and privileges with respect to the

collateral are functionally equivalent in

all material respects to those that the

Bank would possess if the member were

to pledge the same collateral directly,

and such functional equivalence is

supported by adequate documentation.

21. Section 950.10 is redesignated as

§ 950.8.

22. Section 950.11 is redesignated as

§ 950.9.

23. Section 950.12 is redesignated as

§ 950.10, and is revised to read as

follows:

§ 950.10 Collateral valuation; appraisals.

(a) Collateral valuation. Each Bank

shall determine the value of collateral

securing the Bank’s advances in

accordance with the collateral valuation

procedures set forth in the Bank’s

member products policy established

pursuant to § 917.4 of this chapter.

(b) Fair application of procedures.

Each Bank shall apply the collateral

valuation procedures consistently and

fairly to all borrowing members, and the

valuation ascribed to any item of

collateral by the Bank shall be

conclusive as between the Bank and the

member.

(c) Appraisals. A Bank may require a

member to obtain an appraisal of any

item of collateral, and to perform such

other investigations of collateral as the

Bank deems necessary and proper.

24. Section 950.15 is redesignated as

§ 950.11.

25. Section 950.17 is redesignated as

§ 950.12.

26532 Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules

26. Section 950.18 is redesignated as

§ 950.13.

27. Section 950.20 is redesignated as

§ 950.14 and transferred to subpart A.

28. Section 950.19 is redesignated as

§ 950.15.

29. The heading of Subpart B is

revised to read as follows:

Subpart B—Advances to Associates

30. Section 950.21 is redesignated as

§ 950.16, and is revised to read as

follows:

§ 950.16 Scope.

Except as otherwise provided in

§§ 950.14 and 950.17, the requirements

of subpart A apply to this subpart.

31. Sections 950.22 and 950.23 are

removed.

32. Section 950.24 is redesignated as

§ 950.17, and is amended by:

a. Removing the words ‘‘nonmember

mortgagee’’ and ‘‘nonmember

mortgagees’’, wherever they appear,

and, in their place, adding the words

‘‘associate’’ and ‘‘associates’’,

respectively; and

b. In paragraph (b)(2)(i) introductory

text, removing the term ‘‘§ 950.22(d)’’,

and, in its place, adding the term

‘‘§ 926.3(b)’’;

c. In paragraph (b)(2)(i)(B), removing

the terms ‘‘§ 950.9(a)(3)’’ and

‘‘§ 950.22(d)’’, and in their place, adding

the terms ‘‘§ 950.7(a)(3)’’ and

‘‘§ 926.3(b),’’ respectively; and

d. Revising paragraph (b)(2)(i)(C), to

read as follows:

§ 950.17 Advances to associates.

* * * * *

(b) * * *

(2) * * *

(i) * * *

(C) The real estate-related collateral

described in § 950.7(a)(4), provided that

such collateral is comprised of mortgage

loans on one-to-four family or

multifamily residential property.

* * * * *

PART 952—COMMUNITY INVESTMENT

CASH ADVANCE PROGRAMS

33. The authority citation for part 952

continues to read as follows:

Authority: 12 U.S.C. 1422b(a)(1) and 1430.

34. Amend § 952.3 by removing the

definition of ‘‘nonmember borrower’’.

35. Amend part 952 by:

a. Removing the term ‘‘community

lending’’, wherever it appears, and, in

its place, adding the term ‘‘targeted

community lending’’; and

b. Removing the terms ‘‘nonmember

borrower’’ and ‘‘nonmember

borrowers’’, wherever they appear, and,

in their place, adding the terms

‘‘associate borrower’’ and ‘‘associate

borrowers’’, respectively.

PART 961—STANDBY LETTERS OF

CREDIT

36. The authority citation for part 961

continues to read as follows:

Authority: 12 U.S.C. 1422b, 1429, 1430,

1430b, 1431.

37. Amend § 961.1 by:

a. Removing the definition of

‘‘community lending’’;

b. Removing the definition of

‘‘nonmember mortgagee’’;

c. Removing the definition of

‘‘nonmember SHFA’’;

d. Adding the definition of ‘‘SHFA

associate’’; and

e. Removing the definition of ‘‘small

business’’, to read as follows:

§ 961.1 Definitions.

* * * * *

SHFA associate means an associate

that is a ‘‘state housing finance agency,’’

as that term is defined in § 926.1 of this

chapter, and that has met the

requirements of § 926.3(b) of this

chapter.

* * * * *

38. Amend part 961 by:

a. Removing the terms ‘‘nonmember

mortgagee’’ and ‘‘nonmember

mortgagees’’, wherever they appear,

and, in their place, adding the terms

‘‘associate’’ and ‘‘associates’’,

respectively; and

b. Removing the terms ‘‘nonmember

SHFA’’ and ‘‘nonmember SHFAs’’,

wherever they appear, and, in their

place, adding the terms ‘‘SHFA

associate’’ and ‘‘SHFA associates’’,

respectively.

39. Amend § 961.2 by revising

paragraphs (a)(2), (c)(1), and (c)(2)(i), to

read as follows:

§ 961.2 Standby letters of credit on behalf

of members.

(a) * * *

(2) To assist members in facilitating

community lending;

* * * * *

(c) Eligible collateral. (1) Any standby

letter of credit issued or confirmed on

behalf of a member may be secured in

accordance with the requirements for

advances under § 950.7(a) of this

chapter.

(2) * * *

(i) Collateral eligible to secure

advances under § 950.7(b)(1) of this

chapter, regardless of whether the

applicant is a community financial

institution;

* * * * *

40. Amend § 961.3 by:

a. In the introductory text of

paragraph (a), removing the term

‘‘§§ 950.24(b)(1)(i) or (ii)’’ and, in its

place, adding the term

‘‘§§ 950.17(b)(1)(i) or (ii)’’;

b. Revising paragraph (a)(2); and

c. In paragraph (b), removing the term

‘‘950.24(b)(2)(i)(A), (B) or (C)’’ and, in its

place, adding the term

‘‘950.17(b)(2)(i)(A), (B) or (C)’’, to read

as follows:

§ 961.3 Standby letters of credit on behalf

of associates.

(a) * * *

(2) To assist associates in facilitating

community lending;

* * * * *

41. Amend § 961.4 by removing the

term ‘‘§§ 969.5. 950.24(b)(2)(i)(B) or

950.24(d)’’ in paragraph (a)(1) and, in its

place, adding the term

‘‘§§ 950.17(b)(2)(i)(B), 950.17(d), or

969.2’’.

42. Amend § 961.5 by:

a. Revising paragraph (a); and

b. In paragraph (b)(2), removing the

reference to ‘‘§§ 950.9(b), 950.9(d),

950.9(e), 950.10, 950.11 and 950.12’’,

and, in its place, adding a reference to

§§ 950.7(d), 950.7(e), 950.8, 950.9 and

950.10’’, to read as follows:

§ 961.5 Additional provisions applying to

all standby letters of credit.

(a) Requirements. Each standby letter

of credit issued or confirmed by a Bank

shall:

(1) Contain a specific expiration date,

or be for a specific term; and

(2) Require approval in advance by

the Bank of any transfer of the standby

letter of credit from the original

beneficiary to another person or entity.

* * * * *

43. In subchapter J, add a new part

980 to read as follows:

PART 980—NEW BUSINESS

ACTIVITIES

Sec.

980.1 Definitions.

980.2 Limitation on Bank authority to

undertake new business activities.

980.3 New business activity notice

requirement.

980.4 Commencement of new business

activities.

980.5 Notice by the Finance Board.

980.6 Finance Board consent.

980.7 Examinations; requests for additional

information.

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a),

1431(a), 1432(a).

§ 980.1 Definitions.

As used in this part:

New business activity means any

business activity undertaken,

transacted, conducted, or engaged in by

Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed Rules 26533

a Bank that has not been previously

undertaken, transacted, conducted, or

engaged in by that Bank, or was

previously undertaken, transacted,

conducted, or engaged in under

materially different terms and

conditions, and that:

(1) Involves the acceptance of

collateral enumerated under

§ § 950.7(a)(4)(i) and (ii) of this chapter

in an amount greater than that set forth

in § 950.7(a)(4)(iii);

(2) Involves the acceptance of classes

of collateral enumerated under

§ 950.7(b) of this chapter for the first

time;

(3) Entails risks not previously and

regularly managed by that Bank, its

members, or both, as appropriate; or

(4) Involves operations not previously

undertaken by that Bank.

§ 980.2 Limitation on Bank authority to

undertake new business activities.

No Bank shall undertake any new

business activity except in accordance

with the procedures set forth in this

part.

§ 980.3 New business activity notice

requirement.

At least sixty days prior to

undertaking a new business activity, a

Bank shall submit to the Finance Board

a written notice containing the

following information:

(a) General requirements. Except as

provided in paragraph (b) of this

section, a Bank’s notice of new business

activity shall include:

(1) An opinion of counsel citing the

statutory, regulatory, or other legal

authority for the new business activity;

(2) A good faith estimate of the

anticipated dollar volume of the activity

over the short-and long-term;

(3) A full description of:

(i) The purpose and operation of the

proposed activity;

(ii) The market targeted by the

activity;

(iii) The delivery system for the

activity;

(iv) The effect of the activity on the

housing, or relevant community

lending, market; and

(4) A demonstration of the Bank’s

capacity, through staff, or contractors

employed by the Bank, sufficiency of

experience and expertise, to safely

administer and manage the risks

associated with the new activity;

(5) An assessment of the risks

associated with the activity, including

the Bank’s ability to manage these risks

and the Bank’s ability to manage the

risks associated with increasing

volumes of the new activity; and

(6) The criteria that the Bank will use

to determine the eligibility of its

members or associates to participate in

the new activity.

(b) New collateral activities. If a

proposed new business activity relates

to the acceptance of collateral under

§ 950.7 of this chapter, a Bank’s notice

of new business activity shall include:

(1) A description of the classes or

amounts of collateral proposed to be

accepted by the Bank;

(2) A copy of the Bank’s member

products policy, adopted pursuant to

§ 917.4 of this chapter;

(3) A copy of the Bank’s procedures

for determining the value of the

collateral in question, established

pursuant to § 950.10 of this chapter; and

(4) A demonstration of the Bank’s

capacity, personnel, technology,

experience and expertise to value,

discount and manage the risks

associated with the collateral in

question.

§ 980.4 Commencement of new business

activities.

A Bank may commence a new

business activity:

(a) Sixty days after receipt by the

Finance Board of the notice of new

business activity under § 980.3, if the

Finance Board has not issued to the

Bank a notice of disapproval, a notice of

intent to examine, or a request for

additional information under § 980.5; or

(b) Immediately upon issuance by the

Finance Board of a letter of approval

under § 980.6.

§ 980.5 Notice by the Finance Board.

(a) Issuance. Within sixty days after

receipt of a notice of new business

activity under § 980.3, the Finance

Board may issue to a Bank a notice that:

(1) Disapproves the new business

activity;

(2) Instructs the Bank not to

commence the new business pending

further consideration by the Finance

Board;

(3) Declares an intent to examine the

Bank;

(4) Requests additional information

including but not limited to the requests

listed in § 980.7;

(5) Establishes conditions for the

Finance Board’s approval of the new

business activity, including but not

limited to the conditions listed in

§ 980.7; or

(6) Contains other instructions or

information that the Finance Board

deems appropriate under the

circumstances.

(b) Effect. Following receipt of a

notice issued pursuant to paragraph (a)

of this section, a Bank may not

undertake any new business activity

that is the subject of the notice until the

Bank has received the Finance Board’s

consent pursuant to § 980.6.

§ 980.6 Finance Board consent.

The Finance Board may at any time

provide consent for a Bank to undertake

a particular new business activity and

setting forth the terms and conditions

that apply to the activity, with which

the Bank shall comply if the Bank

undertakes the activity in question.

§ 980.7 Examinations; requests for

additional information.

(a) General. Nothing in this part shall

limit in any manner the right of the

Finance Board to conduct any

examination of any Bank.

(b) Requests for additional

information and conditions for

approval. With respect to a new

business activity, nothing in this part

shall limit the right of the Finance

Board at any time to:

(1) Request further information from a

Bank concerning a new business

activity; and

(2) Require a Bank to comply with

certain conditions in order to undertake,

or continue to undertake, the new

business activity in question, including

but not limited to:

(i) Successful completion of pre-or

post-implementation safety and

soundness examinations;

(ii) Demonstration by the Bank of

adequate operational capacity,

including the existence of appropriate

policies, procedures and controls;

(iii) Demonstration by the Bank of its

ability to manage the risks associated

with accepting increasing volumes of

particular collateral, or holding

increasing volumes of particular assets,

including the Bank’s capacity reliably to

value, discount and market the

collateral or assets for liquidation;

(iv) Demonstration by the Bank that

the new business activity is consistent

with the housing finance and

community lending mission of the

Banks and the cooperative nature of the

Bank System; and

(v) Finance Board review of any

contracts or agreements between the

Bank and its members or associates.

Dated: March 22, 2000.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 00–11078 Filed 5–5–00; 8:45 am]

BILLING CODE 6725–01–P