25676 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

year;’’ and ‘‘To comply with Federal

law, we must use best efforts to obtain,

maintain, and submit the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 per calendar

year.’’

(B) The following are examples of

acceptable statements for authorized

committees, but are not the only

allowable statements: ‘‘Federal law

requires us to use our best efforts to

collect and report the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 in an election

cycle;’’ and ‘‘To comply with Federal

law, we must use best efforts to obtain,

maintain, and submit the name, mailing

address, occupation and name of

employer of individuals whose

contributions exceed $200 per election

cycle.’’

(ii) The request and statement shall

appear in a clear and conspicuous

manner on any response material

included in a solicitation. The request

and statement are not clear and

conspicuous if they are in small type in

comparison to the solicitation and

response materials, or if the printing is

difficult to read or if the placement is

easily overlooked.

(2) For each contribution received

aggregating in excess of $200 per

calendar year (or per election cycle, in

the case of an authorized committee)

which lacks required contributor

information, such as the contributor’s

full name, mailing address, occupation

or name of employer, the treasurer

makes at least one effort after the receipt

of the contribution to obtain the missing

information. * * *

* * * * *

Dated: April 27, 2000.

Darryl R. Wold,

Chairman, Federal Election Commission.

[FR Doc. 00–10962 Filed 5–2–00; 8:45 am]

BILLING CODE 6715–01–U

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 940, 950, 955 and

956

[No. 2000–20]

RIN 3069–AA98

Federal Home Loan Bank Acquired

Member Assets, Core Mission

Activities, Investments and Advances

AGENCY: Federal Housing Finance

Board.

ACTION: Proposed rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is proposing to

add a new part 955 to its regulations to

authorize the Federal Home Loan Banks

(Banks) to hold acquired member assets

(AMA) and to amend its recently

adopted part 940 to enumerate the types

of core mission assets (CMA) that must

be addressed in the Banks’ strategic

business plans. The Finance Board is

also proposing related changes to its

regulations governing the Banks’

investment and advances authorities.

DATES: Comments on this proposed rule

must be received in writing on or before

June 2, 2000.

ADDRESSES: Comments should be

mailed 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, N.W., Washington, D.C.

20006. Comments will be available for

public inspection at this address.

FOR FURTHER INFORMATION CONTACT:

James L. Bothwell, Director and Chief

Economist, (202) 408–2821; Scott L.

Smith, Deputy Director, (202) 408–2991;

Ellen E. Hancock, Senior Financial

Analyst, (202) 408–2906; Christina K.

Muradian, Senior Financial Analyst,

(202) 408–2584, Office of Policy,

Research and Analysis; or Eric M.

Raudenbush, Senior Attorney-Advisor,

(202) 408–2932; Office of General

Counsel, Federal Housing Finance

Board, 1777 F Street, N.W., Washington,

D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

A. General

On November 12, 1999, the President

signed into law the Federal Home Loan

Bank System Modernization Act of 1999

(Modernization Act), see Title VI of the

Gramm-Leach-Bliley Act, Public Law

106–102 (1999), which amended the

Federal Home Loan Bank Act (Bank

Act), 12 U.S.C. 1421 through 1449,

among other things, to establish a new

capital structure for the Banks, to

authorize the Banks to accept additional

types of collateral as security for

advances, and to devolve to the Banks

from the Finance Board full authority

over their corporate governance, all

subject to the rules and regulations of

the Finance Board. In order to

implement these and other statutory

changes, the Finance Board has already

adopted: a final rule devolving certain

corporate governance authorities to the

Banks, see 65 FR 13663 (March 14,

2000); an interim final rule conforming

certain membership and advances

requirements to the requirements of the

Modernization Act, see 65 FR 13866

(March 15, 2000); a final rule setting

forth a corporate governance framework

for the Banks, which was published in

the Federal Register on May 1, 2000; a

final rule reorganizing the Finance

Board’s regulations to better

accommodate the substantive regulatory

changes, see 65 FR 8253 (Feb. 18, 2000);

and a proposed rule that would amend

the Finance Board’s advances collateral

regulation and make other related

changes to the regulations. In addition,

the Finance Board intends to adopt a

proposed rule on risk management and

capital during the second quarter of

2000. By statute, the Finance Board is

required to publish a final rule on

capital by November of 2000.

Under the revised Bank Act and the

new regulations, each Bank will have

authority to engage in a wider range of

asset activities than in the past, will

have more discretion in establishing its

capital structure, and will have more

freedom to operate its business without

the day-to-day involvement of the

Finance Board. As the agency charged

by Congress with the duty to ensure that

the Banks carry out their statutory

mission, see 12 U.S.C. 1422a(a), the

Finance Board believes that it is

especially important to keep the Banks

focused on their mission as they

exercise their expanded statutory and

regulatory authorities. To this end, the

Finance Board’s recently-adopted final

governance rule requires that each

Bank’s board of directors have in place

at all times a strategic business plan that

describes how the Bank’s business

activities will achieve the mission of the

Bank (to be codified at 12 CFR 917.5).

In order to clarify this requirement, the

Finance Board established in its

regulations a new part 940, which, in

§ 940.2 defines the ‘‘mission of the

Banks’’ as providing to members and

associates financial products and

services, including but not limited to

advances, that assist and enhance such

members’ and associates financing of:

(a) Housing, including single-family and

multifamily housing serving consumers

at all income levels; and (b) community

lending. This definition of the mission

of the Banks and the regulatory

provisions that implement it are

intended to ensure maximum use of the

cooperative structure of the Bank

System to provide funds for housing

finance and community lending.

In order to further clarify the strategic

business planning requirement, this

proposed rule would enumerate in

regulation those specific Bank activities

that the Finance Board considers to be

‘‘core mission activities’’ (CMA); that is,

those activities that are within the

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25677

1The FMP is a non-codified policy of the Finance

Board that governs Bank investments and other

financial management matters.

authority of the Banks to undertake that

are most central to the achievement of

the Banks’ mission.

The addition of a CMA provision at

this time will also help each Bank in

developing and implementing its new

capital structure plan, which, under the

Modernization Act, must be submitted

to the Finance Board for approval

within 270 days after the promulgation

of the Finance Board’s final capital

regulation. As required in the

Modernization Act, the forthcoming

capital rule will implement a risk-based

capital requirement and new leverage

requirements that will be supported by

new classes of stock, one of which will

be considered permanent capital. To

accomplish the transition to the new

capital structure, the Modernization Act

also requires each Bank to develop and

submit for Finance Board approval its

capital structure plan. The design of

each Bank’s plan, as well as the Bank’s

ability to sell equity to its members

under its new capital structure, will

depend on its projections of Bank

business activities and income, which

should conform to the Bank’s strategic

business plan. Because a Bank will need

to address mission activities in its

strategic business plan, the CMA

definition will also be an important

consideration in the drafting of the

capital structure plan. Therefore, the

Finance Board has determined that it is

necessary for CMA to be defined prior

to the Banks’ drafting of their strategic

business plans.

In addition, the proposed rule would

codify in regulation the Banks’ authority

to hold acquired member assets

(AMA)—that is, whole loans eligible as

collateral for Bank advances that may be

acquired from Bank members or

associates. This authority would be an

expansion and refinement of the Banks’

existing authority (granted by resolution

of the Finance Board) to establish

programs under which they acquire

mortgage assets from members, while

sharing with the member the credit risk

associated with the loans. Because AMA

would constitute a core mission activity,

it is logical for the Finance Board to set

forth in regulation the parameters for

such acquisitions at this time.

Finally, the proposed rule would

codify new regulations regarding the

investment and advances authorities of

the Banks so that the Banks will have

full regulatory authority to engage in

CMA.

B. Bank Investment Practices as Related

to the Definition of CMA

Consolidated obligations (COs) issued

under section 11 of the Bank Act, 12

U.S.C. 1431, are the primary source of

funding for the Banks. COs are debt

instruments issued in the global capital

markets for which the twelve Banks are

jointly and severally liable. Because of

the Banks’ status as governmentsponsored enterprises (GSEs), the costs

to the Banks of obtaining such funding

are substantially less than the borrowing

costs to other entities for issuing

comparable debt. The Banks pass the

benefit of this funding advantage to

their members, primarily through

wholesale loans (called advances)

priced lower than the members could

otherwise obtain to provide support for

housing finance and community

lending, in fulfillment of the Banks’

mission. Prior to enactment of the

Financial Institutions Reform, Recovery

and Enforcement Act of 1989 (FIRREA),

Public Law 101–73, 103 Stat. 413

(1989), which amended the Bank Act in

response to the savings and loan crisis

of the 1980s, the Banks used all of their

COs to fund advances, thus directly

using their GSE funding advantage to

meet their mission of enhancing the

availability of housing finance.

In large part due to the financial

burdens imposed on the Banks as a

result of the savings and loan crisis and

the enactment of FIRREA, the Banks

began in 1991 to use a portion of the

proceeds from COs to finance

investments—primarily money market

investments and mortgage backed

securities (MBS)—bearing little or no

relation to the Banks’ public purpose. Of

these investments, MBS have been

appreciably more profitable per dollar

invested than money market

investments.

The Finance Board initially limited

MBS investment by the Banks in part

because of concern about the Banks’

ability to manage the interest rate and

options risk associated with these

assets. However, now that the Banks

have developed more effective

techniques for hedging these risks, and

there are policy limits in place

constraining the Banks’ interest rate risk

exposure, the MBS limit can be viewed

less as a safety and soundness constraint

and more as a means to restrain a nonmission-related activity. MBS generally

are traded in large, well-established and

liquid markets. As such, it is the view

of the Finance Board that the Banks’

presence in these markets does not

result in increased availability of funds

for housing, or in a lower cost of funds.

Moreover, and perhaps most

importantly for the Finance Board, the

Banks’ MBS investments generally do

not involve the Banks working with or

through Bank System members and thus

do not contribute to the cooperative

nature of the Bank System as do

advances and certain other financial

products and services offered by the

Banks. Thus, although MBS are

housing-related, the extent to which

these investments support the Banks’

housing finance mission is debatable.

The increase in investments not

directly related to the Banks’ public

purpose was a rational response to the

sharp fall-off in Bank System advances

and net income that occurred as a result

of the savings and loan crisis. As a

percentage of total assets, the level of

such non-mission-related investments

rose substantially in the early 1990s, but

has begun to decline appreciably in

recent years as the membership base of

the Bank System and the level of

advances outstanding to members have

increased. Investments represented 29

percent of Bank System assets at the end

of 1999 compared with 50 percent at

year-end 1995.

Bank System earnings and advances

are now at record levels. Outstanding

advances, surpassing the previous all

time high of $167 billion in the second

quarter of 1997, reached $396 billion at

year end 1999. Net income has steadily

increased to $2.1 billion in 1999 after

dropping to a recent low of $850 million

in 1992. In addition, although the Banks

initially increased investments as a

substitute for declining advances, Bank

investments generally have increased

since 1992 along with advances.

Investments increased over 100 percent,

from $79 billion to $171 billion,

between 1992 and 1999. To some extent,

the Finance Board has viewed this

growth as a means to compensate for a

trend toward lower spreads on advances

due to increased funding competition

from other sources.

However, given its duty under the

Bank Act to ensure that the Banks carry

out their housing finance mission, see

12 U.S.C. 1422a(a)(3)(B)(ii), the Finance

Board has been concerned for some time

that the Banks have used substantial

amounts of the proceeds of their COs to

finance arbitrage investments. Once the

Banks’ ability to generate income had

demonstrably improved, the Finance

Board initiated steps to address the

Bank System-wide growth of nonmission-related investments. A first step

was to recognize that, while the detailed

list of restrictions and limits placed on

the Banks’ investment authority by the

Federal Home Loan Bank System

Financial Management Policy (FMP) 1

successfully ensured the safety and

soundness of the Banks, the FMP

provided little, if any, flexibility or

25678 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

incentive for the Banks to seek out and

develop new assets and activities that

are permissible under the Bank Act and

that, because they assist and enhance

member lending for housing finance, are

consistent with the mission of the Bank

System.

To address this lack of flexibility, the

Finance Board amended the FMP in

1996 to permit the Banks, among other

things, to engage in new activities

designed in part to add to their balance

sheets higher yielding, yet missionrelated, assets that would also preserve

and promote the cooperative nature of

the Bank System. See FMP, section

II.B.12. The first such activities were

approved on a pilot program basis in

1996 and 1997 and have been in

operation since then. After several years

of experience with these pilot programs,

the Finance Board approved a more

general authorization for Bank

acquisition of single-family mortgage

assets, which required that these

programs involve credit risk-sharing

with members in order to promote the

cooperative nature of the Bank System.

See Finance Board Res. No. 99–50 (Oct.

4, 1999), and Finance Board Resolution

No. 99–66 (Dec. 14, 1999).

Part 955 of the proposed rule would

refine and expand these authorities by

authorizing the Banks to hold AMA. As

proposed in part 955, AMA transactions

would enhance the cooperative nature

of the Bank System by allocating the

risk components of the transaction

between the member and the Bank

according to the ability of each to

manage such risk. Specifically, members

are best suited to manage credit risk,

because they are most familiar with

their customers and the local market.

Accordingly, under the general risksharing structure set forth in part 955 of

the proposed rule, members would

maintain their traditional customer

relationships, including marketing,

servicing, underwriting and managing

credit risk. Because the Banks are

capital market experts and have more

ready access to these markets, they

would be responsible for managing

liquidity, interest rate, and options risks

under proposed part 955. It is

anticipated that expansion of these

AMA activities will permit the Banks to

reduce their holdings of money market

investments and MBS, while providing

an adequate return on investment of

shareholder capital.

A second major step taken by the

Finance Board to address concerns

about the Bank System-wide growth of

non-mission-related investments was

the publication of a proposed Financial

Management and Mission Achievement

(FMMA) rule. See 64 FR 52163 (Sept.

27, 1999). Among other things, the

proposed FMMA rule would have

established mission-related regulatory

standards, including a definition of

CMA and a CMA-to-COs percentage

requirement. The Finance Board

withdrew the proposed FMMA rule

following enactment of the

Modernization Act, as certain

provisions of the FMMA rule, as

proposed, would no longer meet the

requirements of the Bank Act as

amended.

C. Comments Received on the Proposed

FMMA Rule Related to the Core Mission

Definition and Requirement

Prior to and following the withdrawal

of the proposed FMMA rule, the

Finance Board received 19 comments on

the provisions of the proposal that

related to mission achievement: six from

Banks, four from Bank members, four

from trade associations, two from

community groups, one from a Bank

Affordable Housing Advisory Council,

one from a state housing finance agency

and one from a private sector

individual. In general, the comments

expressed concerns about the mission

provisions of the rule. The comments

from the Banks, Bank members and

several trade associations primarily

focused on their opposition to two

provisions related to CMA: (1) A

requirement that, following a transition

period, each Bank maintain an annual

average ratio of at least 100 percent of

CMA to the book value of the Bank’s

total outstanding COs; and (2) a

limitation on the dollar amount of

advances to members with assets of

greater than $500 million that would

count as CMA. Neither of these

provisions is included in this proposed

rule.

The Banks, Bank members and several

trade associations also opposed the

general exclusion of MBS as a core

mission activity in the proposed FMMA

rule. Several commenters argued that it

is not within the province of the

Finance Board to determine that

investment in MBS is not part of the

mission of the Banks. To the contrary,

the Bank Act authorizes the Finance

Board to supervise the Banks and to

promulgate and enforce such

regulations and orders as are necessary

from time to time to carry out the

provisions of the Bank Act. See 12

U.S.C. 1422b(a)(1). Among the

provisions of the Bank Act are those

outlining the duties of the Finance

Board, which include the duty to ensure

that the Banks carry out their housing

finance mission. See id.

§ 1422a(a)(3)(B)(ii).

Because Congress has not expressly

defined the parameters of the Banks’

housing finance mission, it is the

responsibility of the Finance Board—as

the body charged with the duty to

ensure that the Banks fulfill that

mission and, more generally, as the

supervisory regulator of the Banks and

the agency charged with the

administration of the Bank Act—to

make this judgment reasonably

considering both empirical evidence

and the provisions of the Bank Act.

As discussed above, the MBS markets

are large, well-established and liquid

and the Finance Board has been

presented with no evidence that the

Banks’ presence in these markets

generally results in increased

availability of funds for housing or

reduces the cost of funds. Additionally,

these investments generally do not

involve working with or through Bank

System members and, therefore, do not

contribute to the cooperative nature of

the Bank System. As a result, the

Finance Board has chosen to continue to

exclude MBS from the definition of core

mission activities in this proposed rule.

Several Banks, one Bank Affordable

Housing Advisory Council, one trade

association and one state housing

finance agency expressed concerns

about the ability of housing finance

agencies to meet the requirements

necessary for housing finance agency

(HFA) bonds to count as CMA under the

proposed FMMA rule. It is the judgment

of the Finance Board that HFA bonds

that are acquired from a Bank System

member or associate have the

characteristics of AMA. Accordingly,

under this proposed rule, HFA bonds

qualify as AMA and, thus, also as CMA.

The Finance Board has attempted to

address these comments regarding HFA

bonds in drafting proposed part 955 (see

the discussion of part 955 below)

explaining under what conditions HFA

bonds meet the requirements of AMA

and therefore qualify as CMA.

Two community groups supported the

targeted equity investments included as

CMA in the proposed FMMA rule and

suggested that the authority should be

expanded to include a wider range of

investments. The Finance Board has

expanded the targeted investments that

qualify as CMA in this proposed rule to

include certain debt investments, as

well as equity investments. The private

sector commenter described an

investment vehicle that he felt would

assist the Banks in making investments

in small business investment companies

formed pursuant to 15 U.S.C. 681(d)

(SBICs) included as CMA in the

proposed FMMA rule. These comments

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25679

2Whole single family residential mortgage loans

insured by the United States government consist of

loans insured by the Federal Housing

Administration (FHA), guaranteed by the Veterans

Administration (VA) and insured by the Rural

Housing Service (RHS).

were considered by the Finance Board

in drafting this proposed rule.

The Finance Board invites anyone

with an interest in this proposed rule,

including all those who commented on

the proposed FMMA rule, to submit

written comments to the Finance Board

during the comment period.

II. Analysis of Proposed Rule

A. Core Mission Activities—Part 940

The proposed rule would define the

on- and off-balance sheet items that the

Finance Board has determined qualify

as CMA for the Banks. The Finance

Board would define CMA at this time in

order to clarify for the Banks the types

of business activities that the Finance

Board considers to be consistent with

maximizing the public benefit of the

Banks’ GSE status and to aid the boards

of directors of the Banks in the strategic

planning required of them under new

§ 917.5 of the regulations.

Section 940.1 of the proposed rule

would set forth definitions of terms

used in part 940. These terms are

discussed below as they relate to the

substantive provisions of the proposed

rule.

1. Advances as CMA—§ 940.3(a)(1)

Proposed § 940.3 lists those Bank

activities that would qualify as CMA.

Under proposed § 940.3(a)(1), all Bank

advances would qualify as CMA.

2. Acquired Member Assets as CMA—

§ 940.3(a)(2)

Under proposed § 940.3(a)(2), all

AMA held pursuant to proposed part

955 (discussed in detail below) would

qualify as CMA except for United States

government-insured or guaranteed

whole single-family residential

mortgage loans 2 acquired under a

commitment entered into after April 12,

2000. These loans would qualify as

CMA only in a dollar amount up to 33

percent of the total dollar amount of

AMA (not including governmentinsured or guaranteed whole singlefamily residential mortgage loans

acquired under a commitment entered

into on or before April 12, 2000)

acquired by a Bank during each

calendar year. For the year 2000, this

calculation would be made on a pro-rata

basis, based only on transactions

occurring after April 12, 2000.

In recognition of the fact that many

Banks do, and will in the future, hold

participation interests in AMA

originally acquired by other Banks, the

proposed rule would permit one or

more Banks to make the abovedescribed calculation by aggregating

both the total and government-insured

AMA on their respective balance sheets.

Naturally, under this provision, a Bank

may include itself in only one such

aggregated calculation in any calendar

year.

The Finance Board recognizes that

both conventional and governmentinsured or guaranteed residential

mortgage loans are within the

parameters established for AMA.

However, in order to provide incentive

for the Banks to maintain a broad focus

that encompasses acquisition of

significant amounts of conventional

loans, the Finance Board is permitting

Banks to count as CMA one dollar of

government-insured AMA for every two

dollars of conventional loans acquired

as AMA.

The distribution of the Banks’ current

mortgage portfolio suggests that a high

percentage of government-insured loans

have been acquired when compared to

the percentage of such loans in the total

mortgage market. The proposed rule

would encourage the Banks to see to it

that the composition of their mortgage

portfolios more closely reflects the

distribution of loans made in the

marketplace. This provision is intended

to reduce the emphasis on governmentinsured loans that currently exists in the

Banks’ mortgage portfolio and to

provide an incentive for Bank

acquisition of conventional mortgages,

which was the original intent of the

Bank mortgage acquisition programs

approved by the Finance Board over the

last several years.

3. Letters of Credit and Intermediary

Derivative Contracts as CMA—

§§ 940.3(a)(3) and (a)(4)

Under proposed §§ 940.3(a)(3) and

(a)(4), standby letters of credit (SLOCs)

and intermediary derivative contracts

(primarily interest rate swaps),

respectively, would qualify as CMA.

4. Targeted Debt and Equity Investments

as CMA—§ 940.3(a)(5)

Under proposed § 940.3(a)(5)(i), nonsecuritized debt investments and equity

investments that primarily benefit lowor moderate-income households or areas

targeted for redevelopment by local,

state, tribal or Federal government

(including Federal empowerment zones

and enterprise and champion

communities) would be considered to

be CMA if the investment provides or

supports: affordable housing; economic

development; community services;

permanent jobs for members of low- or

moderate-income households; or area

revitalization or stabilization. This list

of investments is drawn primarily from

the Office of the Comptroller of the

Currency’s regulatory definition of

public welfare investments that are

permitted for national banks. See 12

CFR 24.3(a). Examples of investments

that would qualify as CMA under

proposed § 940.3(a)(5)(i) include, among

other things, stock in Community

Development Financial Institutions

(CDFIs), and secondary capital in

community development credit unions.

Part 956 of the proposed rule (discussed

in detail below) would authorize the

Banks to make such targeted

investments.

For purposes of proposed

§ 940.3(a)(5)(i), a low- or moderateincome household is defined to mean a

household with an income that is at or

below 115 percent of the area median

income, as published by the Department

of Housing and Urban Development

(HUD). Defining low- or moderateincome as no more than 115 percent of

area median income is consistent with

the low- or moderate-income targeted

beneficiaries of other Finance Board

housing and community lending

programs as set forth in the Community

Investment Cash Advance (CICA)

Programs regulation. See 12 CFR 952.3.

Proposed § 940.3(a)(5)(ii) would

require that these targeted nonsecuritized debt investments and

targeted equity investments involve one

or more members or associates in a

manner, financial or otherwise, and to a

degree to be determined by the Bank.

For instance, a Bank could determine at

a minimum that a member’s or

associate’s sponsorship of a nonprofit or

other community-based partner seeking

an investment constitutes sufficient

involvement for purposes of this

section. Another Bank may require a

greater degree of member or associate

participation, including financial

participation, at the Bank’s discretion.

This requirement is designed to promote

the cooperative nature of the Bank

System, yet provide flexibility to the

Bank in making such targeted

investments.

Because proposed § 940.3(a)(5)(i)

specifies that targeted investments that

count as CMA must be non-securitized

debt investments, investments in

mortgage-backed and other asset-backed

securities would not count as CMA even

if such securities appear to meet the

other requirements of proposed

§ 940.3(a)(5). For example, the loans in

collateral pools for MBS securitized by

loans made pursuant to the Community

Reinvestment Act (CRA MBS) provide

affordable housing for low- or moderateVerDate 27<APR>2000 09:17 May 02, 2000 Jkt 190000 PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 E:\FR\FM\03MYP1.SGM pfrm08 PsN: 03MYP1
25680 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

income households. However, the

characteristics of and market for CRA

MBS are very similar to the

characteristics of and market for other

MBS. As discussed above, although

MBS are housing-related, the extent to

which these investments support the

Banks’ housing finance mission is

debatable given the large, wellestablished and liquid markets in which

they trade. Moreover, MBS investments

generally do not involve the Banks

working with or through their members

and thus do not contribute to the

cooperative nature of the Bank System.

However, the Finance Board realizes

that there are some mortgage-backed or

asset-backed securities that should be

granted CMA status under proposed

§ 940.3(a)(5)(i) based upon a

determination that a Bank’s purchase of

such securities would substantially

contribute to opening an underserved

market that would not otherwise be

reached by the private sector. The

Finance Board’s goal is to characterize

as CMA those mortgage-backed and

asset-backed securities that substantially

contribute to opening an underserved

market that would not otherwise be

reached by the private sector, while at

the same time not characterizing as

CMA those securities that are already

traded in large, well-established and

liquid markets. The Finance Board

invites comment on an appropriate

standard for distinguishing between

mortgage-backed or asset-backed

securities that do substantially

contribute to opening underserved

markets and those that do not.

The Finance Board supports the use

of private capital to meet the needs of

underserved markets, communities and

areas and encourages the Banks to

consider making targeted investments as

described in proposed § 940.3(a)(5). It is

anticipated that each Bank could

accumulate $10 million to $30 million

of such investments, depending on the

size of the Bank, for a Bank Systemwide total of approximately $200

million in targeted investments. Any

such investment by a Bank would be

subject to the new business activity

requirements of proposed part 980

(which is included in the Finance

Board’s recently-adopted proposed rule

on advances collateral, and which is

discussed in more detail below), and the

requirements of the risk-based capital

rule to be proposed shortly by the

Finance Board. Specifically, it is

anticipated that, in the forthcoming

capital rule, the Finance Board will

assign the same capital treatment under

its risk-based capital requirement for

targeted investments that is assigned to

public welfare investments for national

banks. However, should the Banks

acquire more than $200 million of such

targeted investments, or should any one

Bank acquire more than the $10 million

to $30 million of such targeted

investments, the Finance Board might

consider imposing a higher capital

charge for additional amounts.

Since the proposed targeted

investment authority is new, the

Finance Board specifically requests

comment on any impediments the

Banks may face in making targeted

investments and how the Finance Board

might assist in reducing such

impediments.

5. Stock in SBICs as CMA—§ 940.3(a)(6)

Under proposed § 940.3(a)(6),

investments in SBICs formed pursuant

to 15 U.S.C. 681(d) would qualify as

CMA to the extent that the investment

is structured to be matched by an

investment in the same SBIC by a

member or associate of the Bank making

the investment in the SBIC. Investment

in such SBICs is explicitly authorized

under section 11(h) of the Bank Act, 12

U.S.C. 1431(h), and under part 956 of

the proposed rule, to the extent that

such investments are for the purpose of

aiding members. The member matching

requirement will be deemed to satisfy

the statutory requirement that Bank

investments in SBICs be for the purpose

of aiding members.

6. Other CMA Investments—

§ § 940.3(a)(7), (a)(8) and (a)(9)

Three other specific investments

would qualify as CMA under proposed

§ § 940.3(a)(7), (a)(8) and (a)(9): The

short-term tranche of SBIC securities

guaranteed by the Small Business

Administration (SBA); Section 108

Interim Notes and Participation

Certificates guaranteed by HUD

pursuant to section 108 of the Housing

and Community Development Act of

1974 (as amended), 42 U.S.C. 5308; and

investments and obligations for housing

and community development issued or

guaranteed under Title VI of the Native

American Housing Assistance and SelfDetermination Act of 1996 (NAHASDA),

25 U.S.C. 4191 through 4195. These

investments are all related to housing

and community lending and supported

by various government programs at the

federal level. The Finance Board

proposes to treat these investments as

CMA because of their potential to move

the private markets to better assist lowand moderate-income communities to

become more prosperous. By treating

these investments as CMA, the Finance

Board would be intentionally creating a

greater incentive for the Banks to make

these investments.

The Finance Board specifically

requests comment on whether any other

investment instruments that are

products of federal programs designed

to support housing and community

lending programs, should also be

included as CMA.

7. Status of MBS and HFA Bonds

Acquired Under the FMP—§ 940.3(b)

As discussed previously, the

proposed rule would neither prohibit

the Banks from making any investments

that they are currently permitted to

make under the FMP, nor restrict the

extent to which the Banks may fund any

particular investments with the

proceeds of COs. Proposed § 940.3(b)

would make clear that, should the

Finance Board enact any such

prohibitions or restrictions at some

future date, the agency will not limit the

authority of a Bank to hold to maturity,

or fund with the proceeds of COs, any

investments made under sections II.B.8.,

9., 10. or 11. of the FMP on or before

April 12, 2000 (the date the Finance

Board adopted this proposed rule),

except as may be necessary to ensure

the safety and soundness of the Banks.

These investments include: agency

and highly-rated private MBS; highlyrated securities backed by manufactured

housing or home equity loans; and state

or local HFA bonds. While HFA bonds

issued by, through, or on behalf of a

member or associate will qualify as

AMA under proposed part 955 (and,

thus, also as CMA), those that are issued

by, through, or on behalf of outside

parties do not so qualify. Although,

under part 956 of the proposed rule,

Banks may continue to invest in

nonmember or associate-related HFA

bonds, these would not qualify as CMA.

Similarly, neither MBS, nor securities

backed by manufactured housing or

home equity loans, would qualify as

CMA under the proposed rule.

B. Advances to Out-of-District Members

and Associates—§ 950.18

The proposed rule would add to the

Finance Board’s advances regulation a

new § 950.18, which would govern Bank

creditor relationships with out-ofdistrict members and associates.

Proposed § 950.18(a) would expressly

permit a Bank to purchase an

outstanding advance, or a participation

interest therein, from another Bank, or

to establish a debtor/creditor

relationship with a Bank System

member or associate in another district

at the time an advance is made, subject

to an arrangement with the member’s or

associate’s local Bank. Proposed

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25681

§ 950.18(b) would make clear that any

debtor/creditor relationship established

pursuant to § 950.18(a) would be subject

to all of the appropriate advances

requirements of part 950. The Finance

Board is proposing this addition to its

regulations at this time in order to make

explicit the parallel treatment of

advances and AMA transactions, in

which Banks may engage as an

incidental aspect to their advances

authority.

C. Acquired Member Assets—Part 955

Part 955 of the proposed rule

addresses AMA—that is, assets that a

Bank may acquire from or through its

members or associates in a transaction

that is in purpose and economic

substance functionally equivalent to the

business of making advances in that: (1)

It allows the member or associate to use

its eligible assets to access liquidity for

further mission-related lending; and (2)

all, or a material portion of, the credit

risk attached to the assets is being borne

by the member or associate.

Proposed § 955.1 would set forth

definitions of terms used in part 955.

These are discussed below in the

context of the substantive provisions.

1. Authorization to Hold AMA—§ 955.2

Section 955.2 of the proposed rule

generally would authorize each Bank to

hold AMA acquired from or through

Bank System members or associates,

either by a purchase or a funding

transaction, subject to the procedural

new business activity requirements

contained in proposed part 980 (which

was proposed as part of the Finance

Board’s recently-adopted proposed rule

on advances collateral and is described

in more detail below). Proposed § 955.2

would also set forth a three-pronged test

to be used in determining which assets

qualify as AMA.

First, under proposed § 955.2(a),

whole loans that are eligible to secure

advances to members under the Finance

Board’s proposed advances collateral

regulation (proposed to be codified at

§ 950.7), could qualify as AMA. These

assets include: (1) Fully disbursed,

whole first mortgage loans on improved

residential real property not more than

90 days delinquent; (2) mortgages or

other loans, regardless of delinquency

status, to the extent that the mortgage or

loan is insured or guaranteed by the

U.S. or any agency thereof, or otherwise

backed by the full faith and credit of the

U.S.; (3) other real estate-related whole

loans, provided that such loans have a

readily ascertainable liquidation value

and can be freely liquidated in due

course and the Bank can perfect a

security interest therein; and (4) when

acquired from community financial

institutions (CFIs) only, small business,

small farm or small agri-business loans

fully secured by collateral other than

real estate, or securities representing a

whole interest in such loans, provided

that such loans have a readily

ascertainable liquidation value and can

be freely liquidated in due course and

the Bank can perfect a security interest

in such loans. Under this provision,

single-family mortgages where the loan

amounts exceed the conforming loan

limits that apply to the Federal National

Mortgage Association (Fannie Mae) and

the Federal Home Loan Mortgage

Corporation (Freddie Mac), see 12

U.S.C. 1717(b)(2), could not qualify as

AMA. In addition, loans made to an

entity, or secured by property, not

located within a state of the United

States, the District of Columbia,

American Samoa, the Commonwealth of

the Northern Mariana Islands, Guam,

Puerto Rico, or the U.S. Virgin Islands

could not qualify as AMA.

In addition, under proposed

§ § 955.2(a)(2) and (3), whole loans

secured by manufactured housing,

regardless of whether such housing

qualifies as residential real property,

and state and local HFA bonds,

respectively, could qualify as AMA.

While manufactured housing loans may

under some circumstances qualify as

‘‘other real estate-related’’ collateral

eligible to secure advances, the Finance

Board has chosen to list such loans

explicitly in proposed § 955.2(a) in

order to make clear that such loans

could qualify as AMA.

Second, under proposed § 955.2(b), an

asset must have some connection with

a Bank System member or associate in

order to qualify as AMA—i.e., there

must be a member or associate nexus.

Specifically, proposed § 955.2(b)(1)

would require that the asset be either: (i)

Originated (if a loan) or issued (if a

bond) by, through, or on behalf of a

member or associate, or affiliate thereof;

or (ii) held for a valid business purpose

by the member or associate, or affiliate

thereof, prior to acquisition by a Bank.

The reference in the proposed rule to

assets issued ‘‘through, or on behalf of’’

a member, associate or affiliate is

intended to encompass HFA bonds

issued by an underwriter for the

member, associate or affiliate.

The valid business purpose

requirement is intended to account for

the fact that a member may acquire

loans from a nonmember during the

normal course of business and then sell

those loans to the Bank. The reference

to a ‘‘valid business purpose’’ is

intended to exclude any loans that are

passed from a nonmember through a

member to a Bank with the intent to

extend the benefits of Bank membership

to the nonmember.

Under proposed § 955.2(b)(2), the

assets must be acquired from either: (i)

A member or associate of the Bank

acquiring the assets; (ii) a member or

associate of another Bank, pursuant to

an arrangement with that Bank; or (iii)

another Bank. Under the proposed rule,

a Bank could acquire initial-offering

taxable HFA bonds from out-of-district

associates, provided that the Bank has

an agreement with the associate’s

district Bank granting permission to

make such acquisitions.

Third, under proposed § 955.2(c), the

member or associate must meet the

credit risk-sharing sharing requirements

that are detailed in proposed § 955.3. As

an exception to this requirement, the

Finance Board would consider assets

acquired under authorizations adopted

by the Finance Board pursuant to

section II.B.12. of the FMP to qualify as

AMA, up to the total dollar cap

contained in those authorizations, even

if the transactions do not meet the credit

risk-sharing requirements of proposed

§ 955.3.

2. Required Credit Risk-Sharing

Structure—§ 955.3

Section 955.3 of the proposed rule

would elaborate upon the credit risksharing requirement that is the third

prong of the AMA test set forth in

proposed § 955.2. The risk-sharing

requirements proposed in § 955.3 are

based on risk-sharing structures that

have evolved over time and are

currently in place at the Banks. Since

the first approval of the Federal Home

Loan Bank of Chicago’s Mortgage

Partnership Finance (MPF) pilot

program in late 1996, the Banks have

gained experience in the acquisition of

single-family mortgage assets and the

Finance Board has gained experience in

monitoring such acquisitions.

Commensurate with this increased

expertise, the Finance Board authorized

an expanded scope of mortgage

purchase activity in Resolution No. 98–

41 (Sept. 23, 1998), which permitted all

Banks to offer MPF, or substantially

similar programs, to their members on a

pilot basis. Later, to accommodate

member needs concerning capital

requirements, the Finance Board

authorized an alternative risk-sharing

structure in Resolution No. 99–50 (Oct.

4, 1999). With this approval, members

were able to share a portion of the credit

risk associated with mortgage lenders,

through the use of supplemental loanlevel insurance. By purchasing mortgage

insurance to cover a portion of the

25682 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

credit risk, members receive more

favorable capital treatment.

Through the credit risk-sharing

requirement, AMA activities would

serve to promote and preserve the basic

business relationship between the Banks

and their members that has been

established and maintained throughout

the history of the Bank System through

advance transactions. The Bank would

manage the interest rate risk, while the

member would manage a material

portion of the credit risk. This

requirement emphasizes the cooperative

nature of the Bank System by ensuring

that the member or associate shares with

the Bank the financial benefits and

responsibilities of the asset. Based on

the totality of its experience in

monitoring the Banks’ mortgage

purchase programs, the Finance Board

is confident that the credit risk-sharing

requirements set forth in proposed

§ 955.3 would efficiently allocate risks

so as to best use the core competencies

of the entities involved and provide

capital market funding and risk

management alternatives, all to the

ultimate benefit of the consumer.

Under proposed § 955.3(a)(1), a Bank

would be required to determine, at the

time of acquisition of member assets: (i)

The expected credit losses on the asset

or pool of assets; and (ii) the total credit

enhancement that is necessary to raise

the asset or pool of assets to at least the

fourth highest credit rating category, or

such higher credit rating as the Bank

may require. At a minimum, at the time

of acquisition, each asset or pool of

assets would be required to have an

estimated credit rating of at least the

fourth highest rating category. However,

the Bank may choose to require that

individual pools of assets have a credit

rating above the fourth highest rating

category.

Under proposed § 955.3(a)(2), the

Bank’s estimates of the expected credit

losses and total credit enhancements

would be required to be calculated

using a methodology that is confirmed

in writing by a Nationally Recognized

Statistical Rating Organization (NRSRO)

to be comparable to a methodology that

an NRSRO would use in conducting a

formal rating review of the assets or

pools of assets. Requiring that the

methodology used to determine

expected credit losses and credit

enhancements be affirmed by an NRSRO

would ensure that the Bank’s estimates

of credit ratings are reasonably accurate.

The methodology used to estimate the

expected credit losses and credit

enhancements would be required to

produce roughly the equivalent rating,

or equivalent ratings on average, to a

formal rating review of the assets or

pools of assets. Given that an NRSRO

conducting a formal rating of an asset or

pool of assets may take into account

qualitative factors that may not be

considered by a theoretical model, the

estimate of expected credit losses and

credit enhancement by a Bank would

not be required to be identical to that

determined by an NRSRO. However, the

estimate must produce approximately

the equivalent rating.

Second, under proposed § 955.3(b), a

Bank would be required to determine a

credit risk-sharing structure to be

entered into with its member or

associate that both: (1) Enhances the

asset or pool of assets to at least the

fourth highest credit rating category, or

such higher credit rating as required by

the Bank; and (2) incorporates credit

risk-sharing with the member or

associate.

When establishing an AMA program,

the credit enhancement structure would

be required to be designed in such a

way that it at least supports the asset or

pool of assets to the fourth highest

credit rating category or such higher

credit rating as required by the Bank.

More specifically, if the Bank acquires

a member asset and requires, for

example, the second highest rating, the

methodology used to assign financial

responsibilities to support that rating

would be required to conform to a

structure that has been confirmed in

writing by an NRSRO as sufficient to

achieve the desired rating. For example,

one factor that may be considered in

determining the methodology used

under a credit enhancement structure

may be the order in which credit losses

are allocated among entities. If a Bank

makes modifications to a credit

enhancement structure that is already in

place, it would be required to obtain

written confirmation from an NRSRO

that the new structure is sufficient to

achieve the desired rating.

At the same time that a Bank

determines a credit enhancement

structure that supports the credit rating

of an asset or pool of assets, the Bank

would be required to implement a credit

risk-sharing structure with the member

or associate from which the Bank

acquired the asset or pool of assets. The

proposed rule would require that the

risk-sharing structure be established in

one of two ways: (i) The member or

associate from which the Bank acquired

an asset or pool of assets directly bears

the economic consequences of all credit

losses in excess of expected losses up to

the fourth highest credit rating or such

higher credit rating as required by the

Bank; or (ii) the member or associate

from which the Bank acquired an asset

or pool of assets directly bears the

economic consequences of all credit

losses up to the amount of expected

losses, and the member or associate

assumes responsibility for additional

credit losses as is necessary to enhance

the asset or pool of assets to the fourth

highest credit rating category, or such

higher rating as required by the Bank.

Under either structure, expected

losses would have to be estimated by a

Bank as required pursuant to proposed

§ 955.3(a). In other words, the Bank

would need to determine the expected

losses on an asset or pool of assets using

a methodology that is confirmed in

writing by an NRSRO to be comparable

to a methodology that an NRSRO would

use in conducting a formal rating review

of an asset or pool of assets.

Recognizing that advantages exist

under each structure, the Finance Board

is proposing that the Banks be given

flexibility to offer products or programs

under either of the structures. However,

any combination of the requirements set

forth in the two separate structures

would be prohibited. Under both of

these structures, members would

directly bear the responsibility for a

material portion of credit risk, whether

it is borne as expected losses or in

excess of expected losses. By allowing

the flexibility to use either structure,

members would be able to choose the

program that best suits their needs.

Under the first structure, the member

would bear a larger portion of credit

risk. Under the second structure, the

member would be responsible for the

first layer of losses, thereby linking the

member’s compensation to the credit

quality of the asset.

Under the first structure, the member

or associate from which a Bank acquired

an asset or pool of assets would be

required to bear directly the economic

consequences of all credit losses in

excess of expected losses. The Bank

could bear economic responsibility for

the expected credit losses on an asset or

pool of assets. In general, expected

credit losses are roughly ten percent of

the credit enhancement necessary to

raise the asset or pool of assets to the

second highest credit rating. Under this

structure, the Bank would bear

responsibility for a relatively small

amount of credit losses and the member

would take on the relatively larger

amount of credit risk. Under the second

structure, the member or associate

would directly bear responsibility for

the expected losses but the larger

portion of credit risk may be allocated

among different entities. Under the

second structure, only the member or

associate from which the Bank acquired

an asset or pool of assets would be

permitted to bear directly the economic

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25683

responsibility of all credit losses up to

an amount at least equal to the expected

credit losses on an asset or pool of

assets. The Bank would not be

permitted to bear the economic

responsibility for the expected credit

losses on a given asset or pool of assets.

Also, neither affiliates of members or

associates that may have originated or

held for a valid business purpose an

asset or pool of assets, nor any other

member or associate in the Bank’s

district could bear the economic

responsibility of expected credit losses

on an asset or pool of assets. The

member or associate itself would be

required to bear the economic

responsibility of the expected credit

losses to ensure member or associate

involvement and to ensure that the

member or associate bears the

consequences of the credit quality of the

asset or pool of assets.

The economic responsibility of the

expected credit losses may be borne by

the member or associate in a variety of

ways. For instance, under the product

developed by the Federal Home Loan

Bank of Chicago known as MPF 100,

a Bank establishes an account to absorb

credit losses. As the Bank incurs losses,

it is reimbursed by the member through

the reduction of credit enhancement

fees paid to the member by the Bank.

Essentially, the fees paid to the member

are contingent upon the performance of

the asset.

The Finance Board has determined

that expected credit losses are typically

of sufficient size that members or

associates, when responsible for such

losses, have incentive to seek ways to

achieve better than expected

performance. In the case of acquiring

mortgage loans, by requiring that the

member or associate bear economic

responsibility for expected credit losses,

a system of risk and reward is

established that is based on the core

competencies of the participating

institutions. Since member financial

institutions are most knowledgeable

regarding their local housing markets,

this structure allows members the

opportunity to benefit from their

expertise in underwriting mortgage

loans in their communities. The credit

risk sharing structure is based on the

concept that different institutions have

different capacities. The Banks are

capital market specialists, with the

ability to bear market risks well, while

depository institutions are experts in

credit risk evaluation since they know

their communities best. Therefore, by

establishing a structure where the

member or associate from which the

Bank acquired the asset or pool of assets

bears economic responsibility for the

amount of the expected credit losses,

members or associates are rewarded for

their credit risk management expertise.

In addition to the member or associate

from which the Bank acquired an asset

or pool of assets bearing the economic

responsibility of credit losses up to the

amount of expected credit losses, the

member or associate from which the

Bank acquired an asset or pool of assets

would be required to provide for

additional credit loss coverage such that

the member’s or associate’s total credit

enhancement responsibility (i.e.,

expected credit losses plus additional

credit loss coverage) is sufficient to

achieve at least the fourth highest credit

rating, or such higher rating as required

by the Bank. The additional credit loss

coverage would have to be provided by

the member or associate from which the

Bank acquired the asset or pools of

assets, but under proposed

§ 955.3(b)(2)(ii)(B), the member or

associate may allocate the additional

credit loss coverage responsibility in

whole or in part, and in any

combination, among: (1) The member or

associate itself; (2) any other member or

associate in the Bank’s district; and (3)

loan-level insurance, including U.S.

government insurance or guarantee.

It would be the responsibility of the

member or associate from which the

Bank acquired the asset or pool of assets

to determine the allocation of the

additional credit loss coverage among

itself, any other member or associate in

the Bank’s district and any insurer. If

loan-level insurance is used, proposed

§ 955.3(b)(2)(ii)(B)(3) would require that

the insurer be rated not lower than the

second highest rating category and the

member or associate be legally obligated

at all times to transfer or replace the

equivalent insurance should the insurer

be downgraded below the second

highest rating category.

The use of loan-level insurance is to

provide the member or associate from

which the Bank acquired the asset or

pool of assets more favorable capital

treatment. The member or associate may

also allocate its additional credit loss

coverage requirement to the U.S.

government either through government

insurance or guarantee.

Regardless of how the additional

credit loss coverage is allocated among

the above-mentioned entities, the

expected credit losses must be borne by

the member or associate from which the

Bank acquired the asset or pool of

assets. In the case of an FHA-insured

loan, the loan would meet the risksharing requirements since it is insured

by the government; however, the

member or associate would have to bear

the economic responsibility of all

unreimbursed servicing expenses, up to

the amount of expected losses on the

loan or loan pool. The same would be

true of VA-guaranteed loans and RHSinsured loans. In the case of HFA bonds,

the bonds would meet the proposed

required credit risk-sharing structure

because any losses beyond the

insurance or guarantee would be borne

by the HFA, not the Bank. HFA bonds

are usually rated in at least the third

highest credit rating category based on

the fact that the bonds are backed by

FHA-insured, VA-guaranteed or private

mortgage insurance (PMI)-insured

whole loans. In many cases the bonds

are backed by loans securitized by the

Government National Mortgage

Association (Ginnie Mae), Fannie Mae

or Freddie Mac and are rated in the

highest credit rating category.

Additional bondholder protections

frequently include mortgage reserve

funds.

3. Reporting Requirements for AMA—

§ 955.4

Proposed § 955.4 addresses the Banks’

reporting requirements for AMA that are

residential mortgages. The Finance

Board is proposing to require Banks that

acquire single-family and multifamily

mortgage assets to submit to the Finance

Board quarterly mortgage reports, which

will include semi-annual loan-level

reporting.

Proposed § 955.4(a)(1) would require

that loan-level data be collected and

maintained by each Bank acquiring

AMA that are residential mortgages. The

Finance Board has specified two lists of

loan-level data elements: the first for

single-family loans and the second for

multifamily loans. These lists are

included as appendices to the proposed

rule. The data collected are intended to

be used to create a data base and

reporting infrastructure for monitoring

the Banks’ risk management and

achievement of the public purpose of

their residential mortgage purchase

programs on a par with that now

imposed on Fannie Mae and Freddie

Mac. Thus, the information proposed to

be collected by the Finance Board is

largely similar to information required

to be reported to HUD and the Office of

Federal Housing Enterprise Oversight

(OFHEO) by Fannie Mae and Freddie

Mac.

A few of the data items proposed to

be collected are not regularly reported

by Fannie Mae and Freddie Mac to

either HUD or OFHEO. The Finance

Board is proposing to collect originating

lender name, city and state for both

single-family and multifamily

acquisitions. Fannie Mae and Freddie

Mac are only required to report on the

25684 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

3 Department of Housing and Urban

Development, Rental Housing Assistance—The

Crisis Continues: The 1997 Report to Congress on

Worst Case Housing Needs (April 1998) and

Waiting in Vain—An Update on America’s Rental

Housing Crisis (March 1999).

lender from which they acquired the

loans. Under proposed § 955.2(b)(1)(ii),

the Banks are permitted to acquire loans

held for a valid business purpose by a

Bank System member or associate or

affiliate. In order to monitor compliance

with this provision, data on the

originating lender are necessary.

‘‘Front-end ratio’’ and ‘‘back-end

ratio’’ are two additional items that

Fannie Mae and Freddie Mac do not

regularly report to either HUD or

OFHEO, but collect and maintain for

underwriting and credit scoring

purposes. HUD collected this

information as part of its examination of

the GSEs’ automated underwriting

processes. The Finance Board is

proposing to collect this information to

evaluate the risk of acquired loans, and

possibly to examine the extent to which

the Banks’ programs are reaching

borrowers not served by the

conventional market. ‘‘Self-employment

indicator’’ is not provided by Fannie

Mae and Freddie Mac to its regulators.

However, the Finance Board is

proposing to collect this information

because the agency believes that it will

be useful to assess risk and to examine

the extent to which the Banks’ programs

are reaching borrowers not served by the

conventional market. Lastly,

‘‘prepayment penalties’’ for singlefamily loans is not reported by Fannie

Mae and Freddie Mac, but is reported

for multifamily loans to OFHEO.

Prepayment penalties were rarely used

by single-family lenders, but have begun

to grow in popularity. The Finance

Board is proposing to collect this

information to examine prepayment

speeds so that the market risk of the

loans may be calculated.

A number of the items on the lists are

not applicable to current AMA

programs. As proposed, the lists were

compiled as broadly as possible to

accommodate future programs. Under

proposed § 955.4(a)(2), the list of

required loan-level elements may be

revised by the Finance Board from timeto-time through the notice-and-comment

rulemaking process.

Under proposed § 955.4(b), within 60

days of the end of every quarter of every

calendar year, the Banks that hold AMA

that are residential mortgages would be

required to submit a mortgage report, in

a format to be determined by the

Finance Board, that includes

aggregations of the loan-level mortgages.

The mortgage report would include

year-to-date dollar volume, number of

units, and number of mortgages on

owner-occupied and rental properties

acquired by the Bank. The mortgage

report for the second and fourth quarters

would be required to include, in

addition to the aggregate mortgage

report submitted every quarter, year-todate loan-level data consisting of the

data elements addressed in proposed

§ 955.4(a). The Banks would be required

to submit the mortgage reports to the

Finance Board in a machine readable

format, to be specified by the Finance

Board. Under proposed § 955.4(c), the

Finance Board could, at any time,

require reports in addition to those

specified in proposed § 955.5(b).

The Finance Board is not at this time

proposing the establishment of goals

related to mortgage assets. To date,

AMA mortgage asset volume is small

relative to the mortgage market and, as

discussed below, the Banks’ balance

sheets largely consist of loans that are

regionally concentrated. Nonetheless,

the Finance Board has begun to consider

the establishment of goals. Since AMA

programs, such as MPF, provide

members with an alternative to selling

loans in the secondary market, staff has

reviewed the characteristics of MPF

loans in the context of the GSE Housing

Goals imposed on Fannie Mae and

Freddie Mac as required under the

Federal Housing Enterprises Financial

Safety and Soundness Act of 1992

(FHEFSSA). 12 U.S.C. 4541 et seq.

FHEFSSA directs HUD to establish

the target levels for three separate goals

for the GSEs’ mortgage purchases. These

three goals are: (1) A low- and moderateincome goal, intended to achieve

increased purchases by the GSEs of

mortgages on housing for low- and

moderate-income families; (2) a central

cities, rural areas, and other

underserved areas goal, intended to

achieve increased purchases by the

GSEs of mortgages financing housing in

areas that are underserved in terms of

mortgage credit; and (3) a special

affordable housing goal, intended to

achieve increased purchases by the

GSEs of mortgages on owner-occupied

and rental housing to meet the

unaddressed need of, and be affordable

to, low-income families in low-income

areas and very low-income families.

FHEFSSA directs HUD to determine

the target levels for the GSE Housing

Goals after considering the following six

factors: (1) National housing needs; (2)

economic, housing and demographic

conditions; (3) performance and effort of

Fannie Mae and Freddie Mac toward

achieving the Housing Goals in previous

years; (4) the size of the conventional

mortgage market serving the targeted

population or areas relative to the size

of the overall conventional mortgage

market; (5) the ability of the GSEs to

lead the industry in making mortgage

credit available for the targeted

population or areas; and (6) the need to

maintain the sound financial condition

of the GSEs.

Currently, factors exist that impede a

proper evaluation of MPF loans with

respect to the GSE Housing Goals. One

of these factors is the size of the MPF

portfolio. MPF loans outstanding on the

Banks’ balance sheets are small relative

to the size of the mortgage market and

the size of Fannie Mae’s and Freddie

Mac’s portfolios. Because MPF business

has occurred only over a limited time

period and with a relatively small

number of member institutions, MPF is

not yet representative of the broader

market. Under MPF, the majority of the

loans have been acquired on properties

located in a single state (Wisconsin),

while the GSE Housing Goals are

established to reflect relevant criteria at

the national level. Additionally, under

MPF, the Banks are acquiring only

single-family loans, while the GSE

Housing Goals are established to reflect

the inclusion of multifamily loans and

a number of other types of loans that

Fannie Mae and Freddie Mac currently

purchase, and which are considered

when HUD sets the targets for the GSE

Housing Goals.

Under the proposed rule, the Banks

would be explicitly permitted to acquire

multifamily mortgage assets, so long as

the new business activity requirements

of proposed part 980 (which is included

in the Finance Board’s recently-adopted

proposed rule on advances collateral,

and which is discussed in more detail

below) are met. Prior to this proposed

rule, the Banks have had only limited

authority to acquire multifamily

mortgage assets. This authority was not

granted under Finance Board Resolution

No. 99–50, which authorized only

single-family mortgage programs.

According to two recent HUD reports

on rental housing,3 for various reasons,

the supply of affordable rental housing

has fallen short of the need. Moreover,

absent concerted measures to address

the problem, this trend will continue as

the age of the existing affordable rental

housing stock increases. In order to help

address this need, the Finance Board is

not only proposing to authorize the

acquisition of multifamily member

assets, but is encouraging the Banks to

become active participants in this

market. As GSEs, the Banks have a

public purpose to provide liquidity to

underserved markets. Given the demand

for affordable rental housing, the Banks

are encouraged to expand their

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25685

community partnerships and offer

members competitive alternatives in the

multifamily mortgage market.

Although the factors mentioned above

limit the validity of any comparison of

MPF to the GSE Housing Goals, the

Finance Board has sought to examine

how well MPF loans compare to the

GSE Housing Goals, controlling, to the

extent possible, for the factors noted

above. Overall, the data suggest that the

distribution of MPF loans compares

favorably to the GSE Housing Goals

when single-family loans are isolated.

The Finance Board’s analysis has shown

that, as of year-end 1999, MPF has

exceeded the special affordable housing

goal and met the low-and moderateincome goal for 1999. However, the

program has fallen short of the central

cities, rural areas, and other

underserved areas housing goal for

1999. Given that the underlying factors

used in establishing the target for the

central cities, rural areas, and other

underserved areas housing goal assume

a national program, it is not surprising

that MPF loans did not achieve this

goal. Because the majority of MPF loans

are located in Wisconsin, a regional bias

exists that particularly impacts the

compliance of the MPF program with

this goal.

The Finance Board anticipates

implementing demographic goals, as

determined by the Finance Board in due

consideration of the existing GSE

Housing Goals, at such time as the

conventional residential mortgage

programs of the Banks, in the aggregate,

have achieved a size and scope

indicative of a mature program. For

example, a mature program for the

Banks’ conventional residential

mortgage programs might be deemed to

exist beginning in the year that the

annual aggregated acquisition volume

for all conventional residential mortgage

programs for the Bank System exceeds

100,000 loans or $10 billion. Once

either 100,000 loans or $10 billion in

loans are acquired within a one-year

period, such a program presumably

would be national in scope. Similarly, a

smaller set of programs, under which

75,000 loans are acquired within a oneyear period, could also be considered

national in scope if it were

geographically dispersed among more

than half of the Banks—for example,

with seven different Banks accounting

for at least ten percent of the loan

acquisition volume.

Ideally, any benchmark for the

implementation of program goals will be

empirically based. The possible 100,000

loan trigger is derived from the

estimated number of loans acquired by

Freddie Mac in 1992, the first year goals

were imposed on the GSEs. The number

of Freddie Mac loans may be an

appropriate benchmark because Freddie

Mac is the smaller of the two housing

GSEs, yet its activity is national in

scope.

The alternative criteria would allow

that a sufficient volume may occur at

less than 100,000 loans but only if the

program is clearly national in scope.

The criterion that 7 different Banks

account for at least 10 percent of the

acquired conventional residential

mortgage volume would ensure a

geographically diverse pool at the lower

loan total and ensure that no one Bank

accounts for more than 40 percent of

volume if the program is to be

considered national in scope. The

Finance Board specifically requests

comment on the proposed measure of

program maturity discussed above.

The statutorily established GSE

Housing Goals will eventually be used

as a baseline in determining the goals

and targets for AMA that are residential

mortgages. However, in establishing

goals, the Finance Board will conduct

research and analysis beyond the GSE

Housing Goals in order to establish the

most suitable goals and targets given the

factors surrounding AMA residential

mortgage programs. Until goals for the

Banks’ residential mortgage AMA

programs are established, the Finance

Board will continue to monitor the

Banks’ AMA portfolios that consist of

residential mortgages with reference to

the GSE Housing Goals. Any housing

goals that may be implemented will be

subject to the notice-and-comment

rulemaking process.

4. Administrative and Investment

Transactions Between Banks—§ 955.5

Proposed § 955.5 addresses the

delegation of administrative AMA

program duties and terminability of

AMA program agreements between

Banks. Under proposed § 955.5(a), a

Bank would be permitted to delegate the

administration of an AMA program,

including the fulfillment of regulatory

reporting requirements, to another Bank

whose administrative office has been

examined and approved by the Finance

Board to process AMA transactions.

Further, the proposed rule would

require that the existence of such a

delegation, or the possibility that such

a delegation may be made, be disclosed

to any potential participating member or

associate before any AMA-related

agreements are signed with that member

or associate.

Proposed § 955.5(b) would require

that any agreement made between two

or more Banks in connection with any

AMA program be made terminable by

either party after a reasonable notice

period. Under this provision, no Bank

could be required to fund, purchase,

sell, or process any new AMA after the

termination of such an agreement.

5. Risk-Based Capital Requirement for

AMA—§ 955.6

Under proposed § 955.6, each Bank

must hold retained earnings plus

specific loan loss reserves as support for

the credit risk of all AMA estimated by

the Bank to be below the second highest

credit rating in an amount equal to or

greater than: the outstanding balance of

the assets or pools of assets, times a

factor associated with the credit rating

of the assets or pools of assets as

determined by the Finance Board.

The proposed rule would allow Banks

to hold AMA that is of a credit quality

that, though still of an investment grade,

is less than what has typically been

permitted by the Finance Board under

the FMP for Bank investments. This

provision is intended to ensure the

safety and soundness of any exercise of

the Banks’ expanded authority prior to

the implementation of a risk-based

capital regulation. The credit risks and

operational aspects of managing AMA

assets are the same as those faced by

regulated banking institutions, and such

institutions are required to maintain

risk-based capital to offset these risk

factors. The ratio of retained earnings

plus loan loss reserves should reflect

losses based on the default rates of

similarly rated securities (based on the

credit rating achieved by the AMA

assets once acquired by the Bank and

including all loss accounts and credit

enhancements). The methodology to

determine the long-term default rate

factor associated with the credit rating

will be discussed in the upcoming riskbased capital rulemaking.

D. Amendments to Part 956—

Investments

The proposed rule would replace in

its entirety existing part 956 of the

Finance Board’s regulations, which

governs Bank investments (prior to the

recent reorganization of the Finance

Board’s regulations, see 65 FR 8253

(Feb. 18, 2000), the investment

regulations were contained in 12 CFR

934.1, 934.2 and 934.13).

Under sections 11(g), 11(h) and 16(a)

of the Bank Act, 12 U.S.C. 1431(g),

1431(h), 1436(a), a Bank may, subject to

the rules and regulations of the Finance

Board, invest in: (1) Obligations of the

United States, see id. §§ 1431(g), 1431(h)

and 1436(a); (2) deposits in banks or

trust companies, see id. § 1431(g); (3)

obligations, participations or other

instruments of, or issued by, Fannie

25686 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

Mae or Ginnie Mae, see id. §§ 1431(h),

1436(a); (4) mortgages, obligations, or

other securities that are, or ever have

been sold by Freddie Mac, see id.

§§ 1431(h), 1436(a); (5) stock of Fannie

Mae, see id. § 1431(h); (6) stock,

obligations, or other securities of any

SBIC formed pursuant to 15 U.S.C.

681(d) (to the extent the investment is

made for purposes of aiding Bank

members), see 12 U.S.C. 1431(h); and (7)

instruments that the Bank has

determined are permissible investments

for fiduciary and trust funds under the

laws of the state in which the Bank is

located, see id. §§ 1431(h), 1436(a).

Currently, § 956.2 of the regulations

(formerly § 934.1) limits the Banks’

statutory investment authority by

permitting a Bank to make investments

only pursuant to specific authorizations

of the Finance Board, or in conformity

with ‘‘stated [Finance] Board policy.’’ 12

CFR 956.2(a). Since 1991, the ‘‘stated

policy’’ referred to in the regulation has

been the FMP, which, among other

things, sets forth a list of permissible

Bank investments that is narrower than

that which could be permitted under the

statute.

The investments authorized under

section II.B. of the FMP are: (1)

Overnight and term federal funds with

a remaining term to maturity not

exceeding nine months; (2) overnight

and term resale agreements with a

remaining term to maturity not

exceeding nine months; (3) United

States dollar deposits with a remaining

term to maturity not exceeding nine

months; (4) commercial paper, bank

notes and thrift notes traded in U.S.

financial markets and rated P–1 (by

Moody’s) or A–1 (by Standard & Poor’s)

with a remaining term to maturity not

exceeding nine months; (5) banker’s

acceptances with a remaining term to

maturity not exceeding nine months; (6)

marketable obligations issued or

guaranteed by the United States; (7)

marketable direct obligations of United

States government-sponsored agencies

and instrumentalities, for which the

credit of such institutions is pledged for

the repayment of both principal and

interest; (8) MBS issued, guaranteed or

fully insured by Ginnie Mae, Fannie

Mae, or Freddie Mac, or collateralized

mortgage obligations (CMOs) or real

estate mortgage investment conduits

(REMICs) backed by such MBS; (9) other

MBS, CMOs and REMICs rated Aaa (by

Moody’s) or AAA (by Standard &

Poor’s); (10) asset-backed securities

collateralized by manufactured housing

loans or home equity loans and rated

Aaa (by Moody’s) or AAA (by Standard

& Poor’s); (11) marketable direct

obligations of state or local government

units or agencies, rated at least Aa (by

Moody’s) or AA (by Standard & Poor’s),

where the purchase of such obligations

by a Bank provides to the issuer the

customized terms, necessary liquidity,

or favorable pricing required to generate

needed funding for housing or

community development; and (12) upon

the fulfillment of certain conditions,

and with the prior approval of the

Finance Board, other investments that

support housing and community

development.

Under proposed part 956, the Banks

would no longer be limited to a list of

specific, approved investments. Instead,

proposed § 956.2 would permit the

Banks to hold all of the investments that

are authorized under the Bank Act (with

the exception of Fannie Mae common

stock), subject to the safety and

soundness restrictions set forth in

proposed § 955.3, and subject to the

procedural requirements contained in

proposed part 980 (which was proposed

as part of the Finance Board’s recentlyadopted proposed rule on advances

collateral and is described in more

detail below).

The only investment that is explicitly

enumerated in the Bank Act that would

not be permitted under proposed § 956.2

is investment in the stock of Fannie

Mae. As discussed below, proposed

§ 956.3(a)(1) would prohibit Banks from

investing in instruments that provide an

ownership interest in an entity, with an

exception for equity investments that

qualify as core mission activities under

proposed part 940. Because the Finance

Board does not believe that Fannie Mae

stock could under any circumstances

qualify as a core mission activity, and

because Fannie Mae stock is not an

authorized investment under the FMP

and is not currently held as an

investment by any Bank, it has been

omitted from the list of authorized

investments in proposed § 956.2.

Both sections 11(h) and 16(a) of the

Bank Act state that the Banks may be

authorized to invest in ‘‘such securities

as fiduciary and trust funds may be

invested in under the laws of the state

in which the * * * Bank is located.’’

See 12 U.S.C. 1431(h), 1436(a). In

implementing this authority through

§ 956.2(f) of the proposed rule, the word

‘‘instruments’’ has been substituted for

the word ‘‘securities’’ to reflect in the

proposed rule the Finance Board’s

construction of the term ‘‘securities,’’ as

used in sections 11(h) and 16(a) of the

Bank Act, to encompass the broad range

of financial investment instruments and

not merely those instruments that are

within the technical definition of

‘‘securities’’ set forth in the federal

securities laws. See 15 U.S.C 77b(1).

The broad investment authority

established under proposed § 956.2

would be limited by a number of safety

and soundness-related restrictions set

forth in proposed § 956.3. For reasons of

safety and soundness, proposed

§ 956.3(a)(1) generally would prohibit

the Banks from making any investment

in instruments that would provide an

ownership interest in an entity (e.g.,

common or preferred stock, rights,

warrants or convertible bonds).

However, in order to permit Banks to

make the types of targeted equity

investments that qualify as core mission

activities, the proposed rule would

except from this prohibition equity

investments that would qualify as CMA

under proposed § § 940.3(a)(5) and (6).

The Finance Board anticipates that such

targeted equity investments would

represent only a small portion of a

Bank’s balance sheet and that the

additional risk associated with such

investments would be mitigated by

requiring the Bank to hold adequate

capital against these investments.

Although the proposed equity

investment authority is narrow, this

authorization would be less restrictive

than what is currently permitted under

the FMP, which permits equity

investments only in the stock of SBICs.

Proposed § 956.3(a)(2) would prohibit

the Banks from investing in instruments

issued by foreign entities, except United

States branches and agency offices of

foreign commercial banks. Such

instruments conceivably could qualify

as permissible investments for fiduciary

and trust funds and, therefore, would be

permissible Bank investments unless

specifically prohibited. This is

consistent with the current prohibition

in the FMP. See Finance Board Res. No.

97–05 (Jan. 14, 1997).

Proposed § 956.3(a)(3) generally

would prohibit the Banks from investing

in debt instruments that are not rated as

investment grade (i.e., one of the four

highest credit rating categories given by

an NRSRO). In order to permit Banks to

invest in CMA that may be below

investment grade, proposed

§ 956.3(a)(3)(i) would except such CMA

from the prohibition on belowinvestment grade debt securities. As is

the case with CMA-related equity

investments, it is anticipated that

below-investment grade CMA debt

investments would represent only a

small portion of a Bank’s balance sheet

and that the additional risk associated

with such investments would be

mitigated by requiring the Bank to hold

adequate capital against these

investments. Under proposed

§ 956.3(a)(3)(ii), the Banks would not be

required to divest themselves of debt

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25687

instruments that are downgraded to

below-investment grade after the

instruments already have been acquired

by the Bank.

Under the FMP, the Banks are

permitted to invest in debt instruments

that are rated in the third highest credit

rating category or higher, although debt

investments that are in the third highest

credit rating category may be held only

for a term of one day. Thus, the

authorization set forth in the proposed

rule is somewhat broader than that

which is permitted under the FMP.

Finally, proposed § 956.3(a)(4) would

prohibit the Banks from acquiring whole

mortgages or other whole loans, or

interests in mortgages or loans, except:

(i) AMA acquired under part 955 of the

proposed rule; (ii) marketable direct

obligations of state or local government

units or agencies, particularly state or

local HFA bonds that do not qualify as

AMA, having at least the second highest

credit rating from a NRSRO, where the

purchase of such obligations by the

Bank provides to the issuer the

customized terms, necessary liquidity,

or favorable pricing required to generate

needed funding for housing or

community lending; (iii) MBS, or assetbacked securities collateralized by

manufactured housing loans or home

equity loans, that are ‘‘securities’’ under

the Securities Act of 1933, 15 U.S.C.

77b(a)(1); and (iv) loans held or

acquired pursuant to section 12(b) of the

Bank Act, 12 U.S.C. 1432(b). As

described in detail above, proposed part

955 establishes parameters regarding the

types of whole loans that the Banks may

acquire from members and associates

and the nature of the transactions

through which such assets may be

acquired. Proposed § 956.3(a)(4)(i) is

intended to make clear that part 955 of

the regulations is the sole source of

regulatory authority regarding the

Banks’ acquisition of whole loans and

that any whole loan acquisitions must

meet the requirements of part 955 in

order to be permissible.

Under proposed § 956.3(a)(4)(ii), the

Banks could continue to invest in state

or local HFA bonds that do not qualify

as AMA (i.e., those not issued by,

through, or on behalf of a Bank System

member or associate). However, HFA

bonds not qualifying as AMA also

would not qualify as CMA.

The reference in proposed

§ 956.3(a)(4)(iii) to MBS and assetbacked securities that meet the

definition of the term ‘‘securities’’ in the

Securities Act of 1933 is intended to

make clear that Banks may continue to

invest in the types of MBS and assetbacked securities that are commonly

available in the securities marketplace,

but may not attempt to circumvent the

AMA requirements of proposed part 955

by deeming unsecuritized pools of

mortgages or other loans to be MBS or

asset-backed securities.

Proposed § 956.3(a)(4)(iii) would also

except from the loan investment

restriction, housing project loans

guaranteed under the Foreign

Assistance Act of 1961, as amended, 22

U.S.C. 2181, 2182, 2184, which are

expressly authorized by Congress as

Bank investments under section 12(b) of

the Bank Act. 12 U.S.C. 1432(b).

Proposed § 956.3(b) would prohibit a

Bank from taking a position in any

commodity or foreign currency.

Proposed § 956.3(b) also provides that,

in the event that a Bank becomes

exposed to currency, commodity or

equity risks through participation in

COs that are linked to a foreign currency

or to equity or commodity prices, such

risks must be hedged. The Banks

currently do not have expertise in these

areas and the Finance Board can discern

no reason for the Banks to have or

develop expertise in managing the risks

associated with foreign exchange rates

or commodities.

Under proposed § 956.4, the Banks

must hold retained earnings plus

specific loan loss reserves as support for

the credit risk of all investments that are

not rated by an NRSRO, or are rated

below the second highest credit rating,

in an amount equal to or greater than

the outstanding balance of the

investments times a factor associated

with the credit rating of the investments

as determined by the Finance Board. It

is expected that this specific provision

will be superseded at the time that a

final capital rule is promulgated, to be

replaced by specific capital

requirements relating to each credit

rating category.

Except for those provisions in the

FMP that are directly overridden by this

proposed rule, all provisions of the FMP

would remain in effect until expressly

repealed by the Finance Board.

Accordingly, Bank investment in agency

and private MBS, CMOs and REMICs

and in asset-backed securities secured

by manufactured housing or home

equity loans would continue to be

limited to a total amount equal to 300

percent of a Bank’s capital. It is

anticipated that the remaining

provisions of the FMP will be repealed,

or at least codified as regulations, at

such time as the Finance Board

promulgates a final rule on capital and

risk management.

E. Effect of Proposed Part 980 of the

Recently-Adopted Proposed Rule on

Advances Collateral

As mentioned several times above,

under this proposed rule, the Banks’

exercise of their AMA and investment

authorities would be subject to the new

business activity procedural

requirements set forth in proposed part

980, which was recently adopted as part

of the Finance Board’s proposed rule on

advances collateral. Under proposed

part 980, each Bank would be required

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 new types of

AMA transactions and new types of

investments. While a Bank could

proceed with a new business activity

after 60 days if not expressly prevented

from doing so by the Finance Board,

proposed part 980 would give the

Finance Board the opportunity to

disapprove or restrict such activities, as

necessary, on a case-by-case basis. A

‘‘new business activity’’ would include:

(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 prior notice requirement

would apply to any Bank desiring to

pursue a new activity, even if another

Bank has already undertaken the same

activity.

As discussed above, the proposed

expansion of the Banks’ member asset

and investment authorities would

present new management challenges for

the Banks. By making the Banks’

exercise of their authorities under

proposed parts 955 and 956 subject to

the new business activity review

procedure, the Finance Board would,

among other things, explicitly reserve

the right to conduct pre-implementation

safety and soundness examinations of

new Bank business activities and to

apply safety and soundness restrictions

to such activities, where necessary.

III. 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

25688 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

not have a significant economic impact

on a substantial number of small

entities.

List of Subjects in 12 CFR Parts 900,

940, 950, 955 and 956

Community development, Credit,

Federal home loan banks, Housing,

Reporting and recordkeeping

requirements.

Accordingly, the Finance Board

hereby proposes to amend title 12,

chapter IX, Code of Federal Regulations,

as follows:

PART 900—GENERAL DEFINITION

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, a definition of the

term ‘‘acquired member assets or

AMA,’’ to read as follows:

§ 900.1 Definitions applying to all

regulations.

* * * * *

Acquired member assets or AMA

means those assets that may be acquired

by a Bank under part 955 of this

chapter.

* * * * *

3. The heading for part 940 is revised

to read as follows:

PART 940—CORE MISSION

ACTIVITIES

4. The authority citation for part 940

continues to read as follows:

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

1430, 1430b, 1431.

5. In part 940, amend § 940.1 by

adding, in alphabetical order,

definitions of the terms ‘‘Financial

Management Policy’’, ‘‘low- or

moderate-income household’’, and

‘‘SBIC’’, to read as follows:

§ 940.1 Definitions.

* * * * *

Financial Management Policy (FMP)

has the meaning set forth in § 956.1 of

this chapter.

Low- or moderate-income household

means a household with an income that

is at or below 115 percent of the area

median household income, as published

by the Department of Housing and

Urban Development.

SBIC means a small business

investment company formed pursuant

to 15 U.S.C. 681(d).

6. Amend part 940 by adding a new

§ 940.3, to read as follows:

§ 940.3 Core mission activities.

(a) General. The following Bank

activities qualify as core mission

activities:

(1) Advances;

(2) Acquired member assets (AMA),

except that United States governmentinsured or guaranteed whole singlefamily residential mortgage loans

acquired under a commitment entered

into after April 12, 2000 shall qualify

based on the following calculations,

which, at the discretion of two or more

Banks, may be made based on aggregate

transactions among those Banks:

(i) For calendar year 2000, such loans

shall qualify in a dollar amount up to 33

percent of: the total dollar amount of

AMA acquired by a Bank after April 12,

2000, less the dollar amount of United

States government-insured or

guaranteed whole single-family

residential mortgage loans acquired after

April 12, 2000 under commitments

entered into on or before April 12, 2000;

and

(ii) For calendar year 2001 and

subsequent years, such loans shall

qualify in a dollar amount up to 33

percent of: the total dollar amount of

AMA acquired by a Bank during that

year, less the dollar amount of United

States government-insured or

guaranteed whole single-family

residential mortgage loans acquired

under commitments entered into on or

before April 12, 2000.

(3) Standby letters of credit;

(4) Intermediary derivative contracts;

(5) Non-securitized debt investments

or equity investments that:

(i) Primarily benefit low- or moderateincome households, or areas targeted for

redevelopment by local, state, tribal or

Federal government (including Federal

empowerment zones and enterprise and

champion communities) by providing or

supporting one or more of the following

activities:

(A) Affordable housing;

(B) Economic development;

(C) Community services;

(D) Permanent jobs for members of

low- or moderate-income households; or

(E) Area revitalization or stabilization;

and

(ii) Involve one or more members or

associates in a manner, financial or

otherwise, and to a degree to be

determined by the Bank;

(6) Investments in SBICs, to the extent

that a Bank’s investment is structured to

be matched by an investment in the

same activity by members or associates

of the Bank making the investment;

(7) The short-term tranche of SBIC

securities guaranteed by the Small

Business Administration;

(8) Section 108 Interim Notes and

Participation Certificates guaranteed by

the Department of Housing and Urban

Development under section 108 of the

Housing and Community Development

Act of 1974, as amended (42 U.S.C.

5308);

(9) Investments and obligations issued

or guaranteed under Title VI of the

Native American Housing Assistance

and Self-Determination Act of 1996 (25

U.S.C. 4191 through 4195).

(b) Status of certain investments made

under the FMP. Notwithstanding that

certain investments made by a Bank

pursuant to sections II.B.8. through 11.

of the FMP do not qualify as core

mission activities, any limit on such

assets that may be promulgated by the

Finance Board shall not limit the

authority of a Bank to hold to maturity,

or to fund using the proceeds of

consolidated obligations, such assets

held by the Bank as of April 12, 2000,

except as may be necessary to ensure

the safety and soundness of the Banks.

PART 950—ADVANCES

7. 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.

8. Amend part 950 by adding a new

subpart C to read as follows:

Subpart C—Advances to Out-ofDistrict Members and Associates

§ 950.18 Advances to out-of-district

members and associates.

(a) Establishment of creditor/debtor

relationship. Any Bank may become a

creditor to a member or associate of

another Bank through the purchase of

an outstanding advance, or a

participation interest therein, from the

other Bank, or through an arrangement

with the other Bank that provides for

the establishment of such a creditor/

debtor relationship at the time an

advance is made.

(b) Applicability of advances

requirements. Any debtor/creditor

relationship established pursuant to

paragraph (a) of this section shall be

subject to all of the provisions of this

part that would apply to an advance

made by a Bank to its own members or

associates.

9. In subchapter G, add a new part

955 to read as follows:

PART 955—ACQUIRED MEMBER

ASSETS

Sec.

955.1 Definitions.

955.2 Authorization to hold acquired

member assets.

955.3 Required credit-risk sharing structure.

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25689

955.4 Reporting requirements for acquired

member assets.

955.5 Administrative and investment

transactions between Banks.

955.6 Risk-based capital requirement for

acquired member assets.

Appendix A to Part 955—Reporting

requirements for single-family acquired

member assets that are residential

mortgages: loan-level data elements

Appendix B to Part 955—Reporting

requirements for multi-family acquired

member assets that are residential

mortgages: loan-level data elements

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

1430, 1430b, 1431.

§ 955.1 Definitions.

As used in this section:

Affiliate has the meaning set forth in

§ 950.1 of this chapter.

Financial Management Policy (FMP)

has the meaning set forth in § 956.1 of

this chapter.

NRSRO has the meaning set forth in

§ 966.1 of this chapter.

Residential real property has the

meaning set forth in § 950.1 of this

chapter.

State has the meaning set forth in

§ 925.1 of this chapter

§ 955.2 Authorization to hold acquired

member assets.

Subject to the requirements of part

980 of this chapter, each Bank may hold

assets acquired from or through Bank

System members or associates by means

of either a purchase or a funding

transaction, subject to each of the

following requirements:

(a) Loan type requirement. The assets

are either:

(1) Whole loans that are eligible to

secure advances under § § 950.7(a)(1)(i),

(a)(2)(ii), (a)(4), or (b)(1) of this chapter,

excluding:

(i) Single-family mortgages where the

loan amount exceeds the limits

established pursuant to 12 U.S.C.

1717(b)(2); and (ii) Loans made to an

entity, or secured by property, not

located in a state;

(2) Whole loans secured by

manufactured housing, regardless of

whether such housing qualifies as

residential real property; or (3) State and

local housing finance agency bonds;

(b) Member or associate nexus

requirement. The assets are:

(1) Either:

(i) Originated or issued by, through, or

on behalf of a Bank System member or

associate, or an affiliate thereof; or (ii)

Held for a valid business purpose by a

Bank System member or associate, or an

affiliate thereof, prior to acquisition by

a Bank; and

(2) Are acquired either:

(i) From a member or associate of the

acquiring Bank;

(ii) From a member or associate of

another Bank, pursuant to an

arrangement with that Bank; or

(iii) From another Bank; and

(c) Credit risk-sharing requirement.

The transactions through which the

Bank acquires the assets either:

(1) Meet the credit risk-sharing

requirements of § 955.3 of this part; or

(2) Were authorized by the Finance

Board under section II.B.12. of the FMP

and are within any total dollar cap

established by the Finance Board at the

time of such authorization.

§ 955.3 Required credit risk-sharing

structure.

(a) Determination of necessary credit

enhancement. (1) At the time of

acquisition of acquired member assets

(AMA), a Bank shall determine:

(i) The expected credit losses on each

asset or pool of assets; and

(ii) The total credit enhancement

necessary to enhance the asset or pool

of assets to at least the fourth highest

credit rating category, or such higher

credit rating as the Bank may require.

(2) The Bank’s estimates of expected

losses and total credit enhancement

required under paragraph (a)(1) of this

section shall be determined using a

methodology that is confirmed in

writing by an NRSRO to be comparable

to a methodology that the NRSRO

would use in conducting a formal rating

review of the asset or pool of assets.

(b) Credit risk-sharing structure.

Based on the determinations required

under paragraph (a) of this section, a

Bank shall implement a credit

enhancement structure that:

(1) As evidenced by a written

confirmation from an NRSRO, enhances

the asset or pool of assets to at least the

fourth highest credit rating category, or

such higher credit rating as the Bank

may require; and

(2) Incorporates credit risk-sharing

with the member or associate such that

either:

(i) The member or associate from

which a Bank acquired an asset or pool

of assets directly bears the economic

consequences of all credit losses in

excess of expected losses, as estimated

by the Bank using the methodology

described in paragraph (a) of this

section, up to the amount necessary to

enhance the asset or pool of assets to the

fourth highest credit rating category, or

such higher rating as required by the

Bank; or

(ii)(A) The member or associate from

which the Bank acquired an asset or

pool of assets directly bears the

economic consequences of all credit

losses up to the amount of expected

losses on the asset or pool of assets, as

estimated by the Bank using the

methodology described in paragraph (a)

of this section; and

(B) The member or associate assumes

responsibility for such additional credit

loss coverage as is necessary to enhance

the asset or pool of assets to the fourth

highest credit rating category, or such

higher rating as required by the Bank,

which coverage may be provided by, or

allocated among:

(1) The member or associate;

(2) Any other member or associate in

the Bank’s district;

(3) Loan-level insurance, including

United States government insurance or

guarantee, where the member or

associate is legally obligated at all times

to maintain such insurance with an

insurer rated not lower than the second

highest credit rating category.

§ 955.4 Reporting requirements for

acquired member assets.

(a) Loan-level data elements. (1) Each

Bank that acquires AMA that are

residential mortgages shall collect and

maintain loan-level data on each

mortgage held, as specified in appendix

A (for single-family mortgage assets) or

appendix B (for multifamily mortgage

assets) to this part.

(2) The Finance Board may, from

time-to-time, amend the lists of required

loan-level data elements set forth in

appendices A and B of this part by

publication of a document in the

Federal Register.

(b) Quarterly mortgage reports. Within

60 days of the end of every quarter of

every calendar year, each Bank that

acquires AMA that are residential

mortgages shall submit to the Finance

Board a Mortgage Report, which shall

include:

(1) Aggregations of the loan-level

mortgage data compiled by the Bank

pursuant to paragraph (a) of this section

for year-to-date mortgage acquisitions,

in a format specified by the Finance

Board;

(2) Year-to-date dollar volume,

number of units and number of

mortgages on owner-occupied and

rental properties relating to AMA

acquired by the Bank; and

(3) For the second and fourth quarter

Mortgage Reports only, year-to-date

loan-level data that:

(i) Comprises the data elements

required to be collected and maintained

by the Bank under paragraph (a) of this

section; and

(ii) Appears in a machine-readable

format specified by the Finance Board.

(c) Additional reports. The Finance

Board may at any time require a Bank

to submit reports in addition to those

required under paragraph (b) of this

section.

25690 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

§ 955.5 Administrative and investment

transactions between Banks.

(a) Delegation of administrative

duties. A Bank may delegate the

administration of an AMA program to

another Bank whose administrative

office has been examined and approved

by the Finance Board to process AMA

transactions. The existence of such a

delegation, or the possibility that such

a delegation may be made, must be

disclosed to any potential participating

member or associate before any AMArelated agreements are signed with that

member or associate.

(b) Terminability of agreements. Any

agreement made between two or more

Banks in connection with any AMA

program shall be made terminable by

either party after a reasonable notice

period.

(c) Delegation of pricing authority. A

Bank that has delegated its AMA pricing

function to another Bank shall retain a

right to refuse to acquire AMA at prices

it does not consider appropriate.

§ 955.6 Risk-based capital requirement for

acquired member assets.

Each Bank shall hold retained

earnings plus specific loan loss reserves

as support for the credit risk of all AMA

estimated by the Bank to be below the

second highest credit rating in an

amount equal to or greater than: the

outstanding balance of the assets or

pools of assets times a factor associated

with the credit rating of the assets or

pools of assets as determined by the

Finance Board.

Appendix A to Part 955—Reporting

Requirements For Single-Family Acquired

Member Assets That Are Residential

Mortgages: Loan-Level Data Elements

1. FHLBank District Flag—Two-digit

numeric code designating the District

FHLBank that originally acquired the loan.

2. Participating FHLBank District Flag—

Two-digit numeric code designating the

District FHLBank that purchased a

participation in the loan.

3. Loan Number—Unique numeric

identifier used by the FHLBanks for each

mortgage acquisition.

4. US Postal State—Two-digit numeric

Federal Information Processing Standard

(FIPS) code.

5. US Postal Zip Code—Five-digit zip code

for the property.

6. MSA Code—Four-digit numeric code for

the property’s metropolitan statistical area

(MSA) if the property is located in an MSA.

7. Place Code—Five-digit numeric FIPS

code.

8. County—County, as designated in the

most recent decennial census by the Bureau

of the Census.

9. Census Tract/Block Numbering Area

(BNA)—Tract/BNA number as used in the

most recent decennial census by the Bureau

of the Census.

10. 1990 Census Tract-Percent Minority—

Percentage of a census tract’s population that

is minority based on the most recent

decennial census by the Bureau of the

Census.

11. 1990 Census Tract-Median Income—

Median family income for the census tract.

12. 1990 Local Area Median Income—

Median income for the area.

13. Tract Income Ratio—Ratio of the 1990

census tract median income to the 1990 local

area median income (i.e., loan-level data

element number 11 divided by loan-level

data element number 12).

14. Borrower(s) Annual Income—

Combined income of all borrowers.

15. Area Median Family Income—Current

median family income for a family of four for

the area as established by HUD.

16. Borrower Income Ratio—Ratio of

Borrower(s) annual income to area median

family income.

17. Acquisition Unpaid Principal Balance

(UPB)—UPB in whole dollars of the mortgage

when acquired by the FHLBank.

18. Loan-to-Value (LTV) Ratio at

Origination—LTV ratio of the mortgage at the

time of origination.

19. Participation Percentage—Where the

mortgage acquisition is a participation, the

percentage of the mortgage for each FHLBank

listed in loan-level data element number 2.

20. Date of Mortgage Note—Date the

mortgage note was created.

21. Date of Acquisition—Date the FHLBank

acquired the mortgage.

22. Purpose of Loan—Indicates whether

the mortgage was a purchase money

mortgage, a refinancing, a construction

mortgage, or a financing of property

rehabilitation.

23. Cooperative Unit Mortgage—Indicates

whether the mortgage is on a dwelling unit

in a cooperative housing building.

24. Product Type—Indicates the product

type of the mortgage, i.e., fixed rate,

adjustable rate mortgage (ARM), balloon,

graduated payment mortgage (GPM) or

growing equity mortgages (GEM), reverse

annuity mortgage, or other.

25. Federal Guarantee—Numeric code that

indicates whether the mortgage has a Federal

guarantee, and from which agency.

26. Term of Mortgage at Origination—Term

of the mortgage at the time of origination in

months.

27. Amortization Term—For amortizing

mortgages, the amortization term of the

mortgage in months.

28. Originating Lender Institution—Name

of the institution that originated the loan.

29. Originating Lender City—City location

of the institution that originated the loan.

30. Originating Lender State—State

location of the institution that originated the

loan.

31. Acquiring Lender Institution—Name of

the institution from which the FHLBank

acquired the mortgage.

32. Acquiring Lender City—City location of

the institution from which the FHLBank

acquired the mortgage.

33. Acquiring Lender State—State location

of the institution from which the FHLBank

acquired the mortgage.

34. Type of Seller Institution—Type of

institution that sold the mortgage to the GSE,

i.e., mortgage company, Savings Association

Insurance Fund (SAIF) insured depositary

institution, Bank Insurance Fund (BIF)

insured depositary institution, National

Credit Union Association (NCUA) insured

credit union, or other seller.

35. Number of Borrowers—Number of

borrowers.

36. First-Time Home Buyer—Numeric code

indicating whether the mortgagor(s) are firsttime homebuyers; second mortgages and

refinancings are not treated as first-time

homebuyers.

37. Mortgage Purchased under the Banks’

Community Investment Cash Advances

(CICA) Programs—Indicates whether the

Bank purchased the mortgage under an AHP

or CIP program.

38. Acquisition Type—Indicates whether

the FHLBank acquired the mortgage with

cash, by swap, with a credit enhancement, a

bond or debt purchase, reinsurance, risksharing, real estate investment trust (REIT),

or a real estate mortgage investment conduit

(REMIC), or other.

39. FHLBank Real Estate Owned—

Indicates whether the mortgage is on a

property that was in the FHLBank’s real

estate owned (REO) inventory.

40. Borrower Race or National Origin—

Numeric code indicating the race or national

origin of the borrower.

41. Co-Borrower Race or National Origin—

Numeric code indicating the race or national

origin of the co-borrower.

42. Borrower Gender—Numeric code that

indicates whether the borrower is male or

female.

43. Co-Borrower Gender—Numeric code

that indicates whether the co-borrower is

male or female.

44. Age of Borrower—Age of borrower in

years.

45. Age of Co-Borrower—Age of coborrower in years.

46. Occupancy Code—Indicates whether

the mortgaged property is an owner-occupied

principal residence, a second home, or a

rental investment property.

47. Number of Units—Indicates the

number of units in the mortgaged property.

48. Unit—Number of Bedrooms—Where

the property contains non-owner-occupied

dwelling units, the number of bedrooms in

each of those units.

49. Unit—Affordable Category—Where the

property contains non-owner-occupied

dwelling units, indicates under which, if any,

of the special affordable goals the units

qualified.

50. Unit—Reported Rent Level—Where the

property contains non-owner-occupied

dwelling units, the rent level for each unit in

whole dollars.

51. Unit—Reported Rent Plus Utilities—

Where the property contains non-owneroccupied dwelling units, the rent level plus

the utility cost for each unit in whole dollars.

52. Geographically Targeted Indicator—

Numeric code that indicates loans made in

census tracts classified as underserved by

HUD.

53. Interest Rate—Note rate on the loan.

54. Loan Amount—Loan balance at

origination.

Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules 25691

55. Front-end Ratio—Ratio of principal,

interest, taxes, and insurance to borrower(s)

income.

56. Back-end Ratio—Ratio of all debt

payments to borrower(s) income.

57. Borrower FICO Score—Fair, Isaacs, Co.

credit score of borrower.

58. Co-Borrower FICO Score—Fair, Isaacs,

Co. credit score of co-borrower.

59. PMI Percent—Percent of original loan

balance covered by private mortgage

insurance.

60. Credit Enhancement—Numeric code

indicating type of credit enhancement.

61. Self-Employed Indicator—Numeric

indicator for whether the borrower is selfemployed.

62. Property Type—Numeric indicator for

whether the property is single-family

detached, condominium, townhouse, PUD,

etc.

63. Default Status—Numeric indicator for

whether the loan is currently in default.

64. Termination Date—Date on which the

loan terminated.

65. Termination Type—Numeric indicator

for whether the loan terminated in a

prepayment, foreclosure, or other types of

termination.

66. ARM Index—Index used for the

calculation of interest on an ARM.

67. ARM margin—Margin added to the

index for calculation of the interest on an

ARM.

68. Prepayment Penalty Terms—Numeric

indicator for types of prepayment penalties.

Appendix B to Part 955—Reporting

Requirements for Multi-Family Acquired

Member Assets That Are Residential

Mortgages: Loan-Level Data Elements

1. FHLBank District Flag—Two-digit

numeric code designating the District

FHLBank that originally acquired the loan.

2. Participating FHLBank District Flag—

Two-digit numeric code designating the

District FHLBank that purchased a

participation in the loan.

3. Loan Number—Unique numeric

identifier used by the FHLBanks for each

mortgage acquisition.

4. US Postal State—Two-digit numeric

Federal Information Processing Standard

(FIPS) code.

5. US Postal Zip Code—Five-digit zip code

for the property.

6. MSA Code—Four-digit numeric code for

the property’s metropolitan statistical area

(MSA) if the property is located in an MSA.

7. Place Code—Five-digit numeric FIPS

code.

8. County—County, as designated in the

most recent decennial census by the Bureau

of the Census.

9. Census Tract/Block Numbering Area

(BNA)—Tract/BNA number as used in the

most recent decennial census by the Bureau

of the Census.

10. 1990 Census Tract-Percent Minority—

Percentage of a census tract’s population that

is minority based on the most recent

decennial census by the Bureau of the

Census.

11. 1990 Census Tract-Median Income—

Median family income for the census tract.

12. 1990 Local Area Median Income—

Median income for the area.

13. Tract Income Ratio—Ratio of the 1990

census tract median income to the 1990 local

area median income (i.e., loan-level data

element number 11 divided by loan-level

data element number 12).

14. Area Median Family Income—Current

median family income for a family of four for

the area as established by HUD.

15. Affordability Category—Indicates

under which, if any, of the special affordable

goals mandated by HUD for Fannie Mae and

Freddie Mac, the property would qualify.

16. Acquisition Unpaid Principal Balance

(UPB)—UPB in whole dollars of the mortgage

when purchased by the FHLBank.

17. Loan-to-Value (LTV) Ratio at

Origination—LTV ratio of the mortgage at the

time of origination.

18. Participation Percentage—Where the

mortgage acquisition is a participation, the

percentage of the mortgage when the note

was created for each FHLBank listed in loanlevel data element number 2.

19. Date of Mortgage Note—Date the

mortgage note was created.

20. Date of Acquisition—Date the FHLBank

acquired the mortgage.

21. Purpose of Loan—Indicates whether

the mortgage was a purchase money

mortgage, a refinancing, a construction

mortgage, or a financing of property

rehabilitation.

22. Cooperative Project Loan—Indicates

whether the mortgage is a project loan on a

cooperative housing building.

23. Mortgagor Type—Indicates the type of

mortgagor, i.e., an individual, a for-profit

entity such as a corporation or partnership,

a nonprofit entity such as a corporation or

partnership, a public entity, or other type of

entity.

24. Product Type—Indicates the product

type of the mortgage, i.e., fixed rate,

adjustable rate mortgage (ARM), balloon,

graduated payment mortgage (GPM) or

growing equity mortgages (GEM), reverse

annuity mortgage, or other.

25. Government Insurance—Indicates

whether any part of the mortgage has

government insurance.

26. FHA Risk Share Percent—The

percentage of the risk assumed for the

mortgage purchased under a risk-sharing

arrangement with FHA.

27. Mortgage Purchased under the Banks’

Community Investment Cash Advances

(CICA) Programs—Indicates whether the

Bank purchased the mortgage under an AHP

or CIP program.

28. Acquisition Type—Indicates whether

the FHLBank acquired the mortgage with

cash, by swap, with a credit enhancement, a

bond or debt purchase, reinsurance, risksharing, real estate investment trust (REIT),

or a real estate mortgage investment conduit

(REMIC), or other.

29. Term of Mortgage at Origination—Term

of the mortgage at the time of origination in

months.

30. Amortization Term—For amortizing

mortgages, the amortization term of the

mortgage in months.

31. Originating Lender Institution—Name

of the entity that originated the loan.

32. Originating Lender City—City location

of the entity that originated the loan.

33. Originating Lender State—State

location of the entity that originated the loan.

34. Acquiring Lender Institution—Name of

the entity from which the FHLBank acquired

the mortgage.

35. Acquiring Lender City—City location of

the entity from which the FHLBank acquired

the mortgage.

36. Acquiring Lender State—State location

of the institution from which the FHLBank

acquired the mortgage.

37. Type of Seller Institution—Type of

institution that sold the mortgage to the GSE,

i.e., mortgage company, Savings Association

Insurance Fund (SAIF) insured depositary

institution, Bank Insurance Fund (BIF)

insured depositary institution, National

Credit Union Association (NCUA) insured

credit union, or other seller.

38. FHLBank Real Estate Owned—

Indicates whether the mortgage is on a

property that was in the FHLBank’s real

estate owned (REO) inventory.

39. Number of Units—Indicates the

number of units in the mortgaged property.

40. Geographically Targeted Indicator—

Numeric code that indicates loans made in

census tracts classified as underserved by

HUD.

41. Public Subsidy Program—Indicates

whether the mortgage property is involved in

a public subsidy program and which level(s)

of government are involved in the subsidy

program, i.e., Federal government only, other

only, Federal government, etc.

42. Unit Class Level—The following data

apply to unit types in a particular mortgaged

property. The unit types are defined by the

Banks for each property and are

differentiated based on the number of

bedrooms in the units and on the average

contract rent for the units. A unit type must

be included for each bedroom size category

in the property;

A. Unit Type XX—Number of

Bedroom(s)—the number of bedrooms in the

unit type;

B. Unit Type XX—Number of Units—the

number of units in the property within the

unit type;

C. Unite Type XX—Average Reported Rent

Level—the average rent level for the unit type

in whole dollars; and

D. Unit Type XX—Average Reported Rent

Plus Utilities—the average reported rent level

plus the utility cost for each unit in whole

dollars; and

E. Unit Type XX—Affordability Level—the

ratio of the average reported rent plus

utilities for the unit type to the adjusted area

median income

F. Unit Type XX—Tenant Income

Indicator—indicates whether the tenant’s

income is less than 60 percent of area median

income, greater than or equal to 60 percent

but less than 80 percent of area median

income, greater than or equal to 80 percent

but less than 100 percent of area median

income, or greater than or equal to 100

percent of area median income.

43. Interest Rate—Note rate on the loan.

44. Debt Service Coverage Ratio—Ratio of

net operating income to debt service.

45. Default Status—Numeric indicator for

whether the loan is currently in default.

46. Termination Date—Date on which the

loan terminated.

25692 Federal Register / Vol. 65, No. 86 / Wednesday, May 3, 2000 / Proposed Rules

47. Termination Type—Numeric indicator

for whether the loan terminated in a

prepayment, foreclosure, or other types of

termination.

48. ARM Index—Index used for the

calculation of interest on an ARM.

49. ARM margin—Margin added to the

index for calculation of the interest on an

ARM.

50. Prepayment Penalty Terms—Numeric

indicator for types of prepayment penalties.

10. In subchapter G, revise part 956 to

read as follows:

PART 956—FEDERAL HOME LOAN

BANK INVESTMENTS

Sec.

956.1 Definitions.

956.2 Authorized investments.

956.3 Prohibited investments and

prudential rules.

956.4 Risk-based capital requirement for

investments.

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

1431, 1436.

§ 956.1 Definitions.

As used in this part:

Deposits in banks or trust companies

has the meaning set forth in § 969.3 of

this chapter.

Financial Management Policy means

the Financial Management Policy For

The Federal Home Loan Bank System

approved by the Finance Board

pursuant to Finance Board Resolution

No. 96–45 (July 3, 1996), as amended by

Finance Board Resolution No. 96–90

(Dec, 6, 1996), Finance Board

Resolution No. 97–05 (Jan. 14, 1997),

and Finance Board Resolution No. 97–

86 (Dec. 17, 1997).

GAAP means Generally Accepted

Accounting Principles.

Investment grade means:

(1) A credit quality rating in one of

the four highest credit rating categories

by an NRSRO and not below the fourth

highest credit rating category by any

NRSRO; or

(2) If there is no credit quality rating

by an NRSRO, a determination by a

Bank that the issuer, asset or instrument

is the credit equivalent of investment

grade using credit rating standards

available from an NRSRO or other

similar standards.

NRSRO has the meaning set forth in

§ 966.1 of this chapter.

§ 956.2 Authorized investments.

In addition to assets enumerated in

parts 950 and 955 of this chapter and

subject to the applicable limitations set

forth in this part and in part 980 of this

chapter, each Bank may invest in:

(a) Obligations of the United States;

(b) Deposits in banks or trust

companies;

(c) Obligations, participations or other

instruments of, or issued by, the Federal

National Mortgage Association or the

Government National Mortgage

Association;

(d) Mortgages, obligations, or other

securities that are, or ever have been,

sold by the Federal Home Loan

Mortgage Corporation pursuant to 12

U.S.C. 1454 or 1455;

(e) Stock, obligations, or other

securities of any small business

investment company formed pursuant

to 15 U.S.C. 681(d), to the extent such

investment is made for purposes of

aiding members of the Bank; and

(f) Instruments that the Bank has

determined are permissible investments

for fiduciary or trust funds under the

laws of the state in which the Bank is

located.

§ 956.3 Prohibited investments and

prudential rules.

(a) Prohibited investments. A Bank

may not invest in:

(1) Instruments that provide an

ownership interest in an entity, except

for investments described in

§§ 940.3(a)(5) and (6) of this chapter;

(2) Instruments issued by non-United

States entities, except United States

branches and agency offices of foreign

commercial banks;

(3) Debt instruments that are not rated

as investment grade, except:

(i) Investments described in

§ 940.3(a)(5) of this chapter; and

(ii) Debt instruments that were

downgraded to a below investment

grade rating after acquisition by the

Bank; or

(4) Whole mortgages or other whole

loans, or interests in mortgages or loans,

except:

(i) Acquired member assets;

(ii) Marketable direct obligations of

state or local government units or

agencies, having at least the second

highest credit rating from a NRSRO,

where the purchase of such obligations

by the Bank provides to the issuer the

customized terms, necessary liquidity,

or favorable pricing required to generate

needed funding for housing or

community lending;

(iii) Mortgage-backed securities, or

asset-backed securities collateralized by

manufactured housing loans or home

equity loans, that meet the definition of

the term ‘‘securities’’ under 15 U.S.C.

77b(a)(1); and

(iv) Loans held or acquired pursuant

to section 12(b) of the Act (12 U.S.C.

1432(b)).

(b) Foreign currency or commodity

positions prohibited. A Bank may not

take a position in any commodity or

foreign currency. If a Bank participates

in consolidated obligations

denominated in a currency other than

U.S. Dollars or linked to equity or

commodity prices, the currency,

commodity and equity risks must be

hedged.

§ 956.4 Risk-based capital requirement for

investments.

Each Bank shall hold retained

earnings plus specific loan loss reserves

as support for the credit risk of all

investments that are not rated by a

NRSRO, or are rated below the second

highest credit rating, in an amount equal

to or greater than the outstanding

balance of the investments times a factor

associated with the credit rating of the

investments as determined by the

Finance Board.

Dated: April 12, 2000.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 00–10909 Filed 5–2–00; 8:45 am]

BILLING CODE 6725–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 2000–SW–05–AD]

Airworthiness Directives; Agusta

S.p.A. Model A109A and A109A II

Helicopters

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

adoption of a new airworthiness

directive (AD) applicable to Agusta

S.p.A. Model A109A and A109A II

helicopters. This proposal would

require radiographic inspection of the

internal surface of each main rotor blade

spar (spar) for corrosion. This proposal

is prompted by the discovery of

corrosion on the internal surfaces of the

spar in the area adjacent to the main

rotor blade inertia balance weights. The

actions specified by the proposed AD

are intended to prevent failure of a main

rotor blade due to corrosion on the

internal surface of the spar and

subsequent loss of control of the

helicopter.

DATES: Comments must be received on

or before July 3, 2000.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Office of the

Regional Counsel, Southwest Region,

Attention: Rules Docket No. 2000-SW–