[Federal Register Volume 65, Number 138 (Tuesday, July 18, 2000)]
[Rules and Regulations]
[Pages 44414-44432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17133]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 917, 926, 944, 950, 952, 961 and 980

[No. 2000-34 ]
RIN 3069-AA97


Federal Home Loan Bank Advances, Eligible Collateral, New 
Business Activities and Related Matters

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its Advances Regulation and other regulations to implement the 
requirements of the Federal Home Loan Bank System Modernization Act of 
1999 by: allowing the Federal Home Loan Banks (Banks) to accept from 
community financial institution (CFI) members new categories of 
collateral to secure advances; expanding the purposes for which the 
Banks may make long-term advances to CFI members; and removing the 
limit on the amount of a member's advances that may be secured by other 
real estate-related collateral. The Finance Board also is making 
related and other technical changes to its regulations on General 
Definitions, Powers and Responsibilities of Bank Boards of Directors 
and Senior Management, Federal Home Loan Bank Housing Associates, 
Community Support Requirements, Community Investment Cash Advance 
Programs and Standby Letters of Credit, and adopting a new regulation 
on New Business Activities.

DATES: The final rule is effective on August 17, 2000.

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director, (202) 
408-2821, Scott L. Smith, Deputy Director, (202) 408-2991, or Julie 
Paller, Senior Financial Analyst, (202) 408-2842, Office of Policy, 
Research and Analysis; or Eric E. Berg, Senior Attorney-Advisor, (202) 
408-2589, Eric M. Raudenbush, Senior Attorney-Advisor, (202) 408-2932, 
or Sharon B. Like, (202) 408-2930, Senior Attorney-Advisor, Office of 
General Counsel, Federal Housing Finance Board, 1777 F Street, N.W., 
Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

A. Historical Benefits of Federal Home Loan Bank System

    The Federal Home Loan Bank System (Bank System) comprises twelve 
regional Banks that are instrumentalities

[[Page 44415]]

of the United States organized under the authority of the Federal Home 
Loan Bank Act (Bank Act). See 12 U.S.C. 1423, 1432(a). The Banks are 
cooperatives; only members of a Bank may own the capital stock of a 
Bank and only members and certain eligible nonmember borrowers (housing 
associates) (such as state housing finance agencies) may obtain access 
to the products provided by a Bank. See 12 U.S.C. 1426, 1430(a), 1430b. 
Each Bank is managed by its own board of directors and serves the 
public by enhancing the availability of residential housing finance and 
community lending credit through its members and housing associates. 
See 12 U.S.C. 1427. Any eligible institution (typically, an insured 
depository institution) may become a member of a Bank by satisfying 
certain criteria and by purchasing a specified amount of a Bank's 
capital stock. See 12 U.S.C. 1424, 1426; 12 CFR part 925.
    As government sponsored enterprises (GSEs), the Banks are granted 
certain privileges that enable them to borrow funds in the capital 
markets on terms more favorable than could be obtained by private 
entities, so that the Bank System generally can borrow funds at a 
modest spread over the rates on U.S. Treasury securities of comparable 
maturity. The Banks pass along their GSE funding advantage to their 
members, and ultimately to consumers, by providing secured loans, 
called advances, and other financial products and services at rates and 
terms that would not otherwise be available to their members.
    The Banks must fully secure advances with eligible collateral. See 
12 U.S.C. 1430(a). At the time of origination or renewal of an advance, 
a Bank must obtain a security interest in collateral eligible under one 
or more of the collateral categories set forth in the Bank Act. See 12 
U.S.C. 1430(a).
    Under section 10 of the Bank Act and part 950 of the Finance 
Board's regulations, the Banks have broad authority to make advances in 
support of residential housing finance, which includes community 
lending, defined, in the final rule, as providing financing for 
economic development projects for targeted beneficiaries and, for CFIs, 
purchasing or funding small business loans, small farm loans or small 
agri-business loans. See 12 U.S.C. 1430(a), (i), (j); 12 CFR parts 900, 
950. The Banks also are required to offer two programs, the Affordable 
Housing Program (AHP) and the Community Investment Program (CIP), to 
provide subsidized or at-cost advances, respectively, in support of 
unmet housing finance or targeted economic development credit needs. 
See 12 U.S.C. 1430(i), (j); 12 CFR parts 951, 952. In addition, section 
10(j)(10) of the Bank Act authorizes the Banks to establish additional 
Community Investment Cash Advance (CICA) Programs for targeted 
community lending, defined as providing financing for economic 
development projects for targeted beneficiaries. See 12 U.S.C. 
1430(j)(10); 12 CFR part 952.

B. Expanded Access to Bank System Benefits

    On November 12, 1999, the President signed into law the Federal 
Home Loan Bank System Modernization Act of 1999 (Modernization Act) \1\ 
which, among other things, amended the Bank Act by providing smaller 
lenders with greater access to membership in the Bank System and 
greater access to Bank advances. The Modernization Act established a 
category of members consisting of depository institutions whose 
deposits are insured by the Federal Deposit Insurance Corporation 
(FDIC) that have less than $500,000,000 in average total assets (based 
on an average of total assets over three years) called community 
financial institutions (CFIs),\2\ and authorized the Banks to make 
long-term advances to CFI members for the purposes of providing funds 
for small businesses, small farms and small agri-businesses. See 
Modernization Act, sections 602, 604(a)(2), 605. The Modernization Act 
also authorized the Banks to accept from CFI members as security for 
advances secured loans for small business, agriculture, or securities 
representing a whole interest in such secured loans. See id., section 
604(a)(5)(C).
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    \1\ The Modernization Act is Title VI of the Gramm-Leach-Bliley 
Act, Pub. L. No. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
    \2\ The Finance Board recently adopted an Interim Final Rule 
that amended the Finance Board's Membership Regulation to implement 
the Modernization Act amendments regarding membership in the Bank 
System. See 65 FR 13866 (March 15, 2000). The Finance Board adopted 
the Interim Final Rule as a Final Rule, with several changes, at its 
June 23, 2000 Board meeting.
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    For all members, the Modernization Act removed the statutory limit 
on the amount of aggregate outstanding advances that could be secured 
by ``other real estate-related collateral,'' which had been capped at 
30 percent of a member's capital. See id., section 604(a)(5)(B). The 
Banks, therefore, are now authorized to accept other real estate-
related collateral as security for advances to any member as long as 
the collateral has a readily ascertainable value and the Bank is able 
to perfect a security interest in that collateral. See 12 U.S.C. 
1430(a)(3)(D) (as amended).

C. Proposed Rule

    On May 8, 2000, the Finance Board issued a notice of proposed 
rulemaking that proposed amendments to the Finance Board's regulations 
to implement the new statutory authorities described above. See 65 FR 
26518 (May 8, 2000). The public comment period on the proposed rule 
closed on June 7, 2000. The Finance Board received letters from a total 
of 64 commenters, including: 11 Banks; 15 financial institution trade 
associations; 34 Bank members; 1 home builders' association; the Farm 
Credit System trade association; the Bank's trade association; and a 
Congressman. Comments as they relate to specific issues raised by the 
proposed rule are discussed below.

II. Analysis of Final Rule

A. Modernization Act Amendments Establishing Newly Eligible Collateral

1. New CFI-Eligible Collateral
    The Modernization Act amended the Bank Act to allow CFI members to 
pledge new types of collateral as security for advances, specifically, 
secured loans for small business or agriculture, or securities 
representing a whole interest in such secured loans. See Modernization 
Act, section 604(a)(5)(C). Proposed Sec. 950.7(b)(1) implemented this 
amendment by authorizing the Banks to accept from CFI members or their 
affiliates as security for advances, small business loans, small farm 
loans or small agri-business loans fully secured by collateral other 
than real estate, or securities representing a whole interest in such 
loans, provided that: (i) The loans have a readily ascertainable 
liquidation value and can be freely liquidated in due course; and (ii) 
the Bank can perfect a security interest in such collateral (CFI-
eligible collateral). Proposed Sec. 950.7(b)(1) also required that, 
prior to accepting any such CFI-eligible collateral, a Bank shall meet 
the new business activity requirements of proposed part 980. This 
requirement was intended to ensure that a Bank has the capacity to 
value, discount and manage the newly eligible collateral prior to 
making advances secured by such collateral.
    Proposed Sec. 950.7(b)(1) excluded loans secured by real estate 
because these types of loans were included in proposed 
Sec. 950.7(a)(4).
    a. Types of CFI-eligible collateral--Definitions of ``small 
business loans,'' ``small farm loans'' and ``small agri-business 
loans''. Proposed Sec. 950.1 defined the terms ``small business

[[Page 44416]]

loans,'' ``small farm loans'' and ``small agri-business loans'' using a 
loan size approach and an alternative business (or farm) size approach. 
Specifically, loans below a prescribed aggregate amount--$1 million for 
small business loans, and $500,000 for small farm loans and small agri-
business loans--were considered a proxy for business (or farm) size 
based on the loan size standards established by regulation of the 
agencies comprising the Federal Financial Institutions Examination 
Council (FFIEC),\3\ and met the proposed definitions. See 57 FR 54235 
(Nov. 17, 1992). As discussed in the SUPPLEMENTARY INFORMATION section 
of the proposed rule, these aggregate loan size limits were derived 
from the FFIEC requirement that financial institutions report to their 
primary regulators small business loans of up to $1 million and small 
farm loans of up to $500,000. See id. Loans above these aggregate loan 
size limits would not meet the proposed definitions, unless business 
data specific to the borrowing enterprise (annual gross receipts or 
number of employees) showed that the borrower met the eligibility 
standards for a small business (or farm) concern under the Small 
Business Administrations (SBA) regulations. See 13 CFR part 121.
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    \3\ FFIEC is a formal interagency body empowered to prescribe 
uniform principals, standards, and report forms for the federal 
examination of financial institutions by the Board of Governors of 
the Federal Reserve System, the FDIC, the National Credit Union 
Administration, the Office of the Comptroller of the Currency, and 
the Office of Thrift Supervision, and to make recommendations to 
promote uniformity in the supervision of financial institutions. See 
12 U.S.C. 3301 et seq.
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    As discussed in the SUPPLEMENTARY INFORMATION section of the 
proposed rule, the business size approach provides greater accuracy, 
but may result in costs that deter CFI members from fully employing 
Banks as a funding source for loans to small businesses and small 
farms. The loan size approach is less precise, but has the advantage of 
lower implementation costs, since it involves information already 
available to Federally regulated financial institutions in the reports 
they are required to file with their primary federal regulator.
    In the SUPPLEMENTARY INFORMATION section of the proposed rule, the 
Finance Board stated that the proposed definitions represented an 
appropriate compromise between these two approaches that would allow 
CFI members to use Bank System funding to finance small businesses and 
small farms, as authorized by the Modernization Act. See Modernization 
Act, section 604(a)(5)(C). The Finance Board requested comment on 
whether there were any other appropriate methods of categorizing or 
defining small business loans, small farm loans, and small agri-
business loans.
    Many of the community bank commenters noted that the expansion of 
eligible collateral to secure advances is critical to their funding 
needs. Many commenters of all types stated that neither of the 
alternatives set forth in the proposed definitions would allow CFI 
members to utilize such loans as a source of funding to the extent 
intended by Congress. The consensus among commenters was that the 
aggregate loan size limits set forth in the proposed definitions were 
too restrictive, and that the alternative documentation requirements 
for loans above the aggregate loan size limits would be too time-
consuming and burdensome to offer a practical alternative. Many 
commenters recommended instead that the Finance Board adopt a 
definitional approach tied to the legal ``loans to one borrower'' 
(LTOB) limits to which members already are subject. Other commenters 
variously recommended raising the maximum aggregate loan size limits, 
making any aggregate loan size limits uniform for all categories of 
CFI-eligible collateral, providing a mechanism that would adjust the 
aggregate loan size limits over time for inflation, and reducing 
documentation requirements. One commenter recommended adopting an 
aggregate loan size limit based on the standard for small farms 
developed by the Secretary of Agriculture (less than $250,000 in annual 
gross agricultural sales).
    Loans and extensions of credit by insured depository institutions 
are subject to statutory and regulatory LTOB limits. See, e.g., 12 
U.S.C. 84(a); 12 CFR part 32 (Office of the Comptroller of the 
Currency); 12 CFR 560.93 (Office of Thrift Supervision). Generally, the 
total loans and extensions of credit made by an insured depository 
institution to any one borrower may not exceed 15 percent of that 
institution's total unimpaired capital and unimpaired surplus, with 
exceptions for, among other things, loans fully secured by high quality 
and highly liquid collateral. See 12 U.S.C. 84(a)(1), (2), (c). These 
LTOB limits are intended to protect the safety and soundness of insured 
depository institutions by prohibiting concentration of lending to any 
one entity. Commenters pointed out that, in conjunction with the LTOB 
limits, the size limit on a member's CFI eligibility of $500 million in 
total assets effectively limits the size of the loans the member may 
pledge for advances. Various commenters calculated the ``effective'' 
loan limit resulting from the LTOB approach to range from $3.75 million 
to $6 million for a $500 million institution, depending on the 
institution's capital level. Several commenters pointed out that the 
Finance Board adopted a similar approach in amending the definition of 
``combination business or farm property'' in the Advances Regulation in 
order to permit members with assets of $500 million and less to pledge 
combination agriculture/residential loans and business/residential 
loans as eligible collateral. See 63 FR 35117 (June 29, 1998). The 
Finance Board noted at that time that by limiting the size of members 
that could pledge the loans, the Finance Board was indirectly limiting 
the size of the loans themselves. See id. at 35122.
    The Finance Board recognizes that the LTOB approach offers certain 
advantages over the definitions of ``small business loans,'' ``small 
farm loans,'' and ``small agri-business loans'' set forth in the 
proposed rule. For example, the aggregate loan size limits in the 
proposed rule represent static, one-size-fits-all loan amounts. One 
commenter noted, in this regard, that while the proposed aggregate loan 
size limits might not impact CFI members with assets of $100 million or 
less, the proposed limits could create an impediment for larger CFI 
members making larger loans. By contrast, the LTOB approach would 
result in aggregate loan size limits that are relative to the size of 
each CFI member and arguably more relevant and appropriate. 
Additionally, since LTOB restrictions are already in place, reliance on 
this measure would ease administration and limit implementation costs. 
Further, a CFI member's LTOB limit would follow the movement of its 
assets and capital, thereby making adjustments for inflation 
unnecessary.
    The Finance Board also recognizes that LTOB restrictions are not 
uniform. Legal lending limits for similarly sized CFI members will 
vary, not only because institutions will hold different amounts of 
capital and unimpaired surplus, but because LTOB restrictions 
themselves may vary in form or application among the federal and state 
regulatory bodies that promulgate and enforce such restrictions. Even 
within the same regulatory structure, the size of loan a CFI member is 
permitted to make may vary depending on the extent to which certain 
exceptions to the general LTOB limit may apply to that particular loan. 
However, the Finance Board does not believe that these variances, 
including the potential for higher loan amounts under certain 
circumstances, would prevent the LTOB approach from

[[Page 44417]]

serving as an appropriate method of categorizing or defining small 
business loans, small farm loans and small agri-business loans.
    On balance, the Finance Board is persuaded that the LTOB approach 
is the most reasonable and cost efficient means of implementing the 
Modernization Act in a manner that will facilitate CFI member access to 
Bank advances for the purpose of funding small businesses, small farms 
and small agri-businesses. Further, the Finance Board does not believe 
that the LTOB approach raises any additional safety and soundness 
concerns that cannot be adequately addressed by the collateral policy 
requirements in Sec. 917.4 and the new business activities requirements 
in part 980 discussed below. Accordingly, Sec. 950.1 of the final rule 
defines ``small business loans,'' ``small farm loans,'' and ``small 
agri-business loans'' as loans that are within the legal lending limit 
of the reporting CFI member and reported on certain regulatory 
financial reports as specifically provided in Sec. 950.1. To ensure 
that loan size is effectively limited by the definitions of ``small 
business loans,'' ``small farm loans,'' and ``small agri-business 
loans,'' the definitions shall apply only to whole loans and not to 
loan participations.
    As proposed, Sec. 950.7(b)(1) of the final rule does not explicitly 
refer to secured loans for agriculture, as does the Modernization Act. 
See Modernization Act, section 604(a)(5)(C). Instead, the Finance Board 
has interpreted ``agriculture loans'' to mean small farm loans and 
small agri-business loans, and substituted these terms, in the text of 
Sec. 950.7(b)(1). These terms also appear in Sec. 950.3, which sets 
forth the authorized purposes of long-term Bank advances, so their use 
in Sec. 950.7(b)(1) is consistent with the Finance Board's general 
policy of employing uniform terminology in its regulations whenever 
possible. The Finance Board also stated in the SUPPLEMENTARY 
INFORMATION section of the proposed rule that permitting the Banks to 
accept as collateral only ``small'' agriculture loans was consistent 
with both the Banks' mission of assisting members with community 
lending and with the Modernization Act's emphasis on small 
institutions' lending to small enterprises. See Modernization Act, 
sections 602, 604(a)(3), 604(a)(5)(C).
    Many commenters stated that the Finance Board's interpretation of 
the statutory term ``agriculture loans'' as small farm loans and small 
agri-business loans was unnecessarily restrictive, on the basis that 
the Modernization Act does not explicitly specify an aggregate size 
limit on secured loans for agriculture. The Finance Board's adoption of 
the LTOB approach to loan size definitions in the final rule resolves 
this issue, since it allows CFI members to pledge as collateral to 
secure advances farm loans and agri-business loans up to their 
respective legal lending limits.
    b. Restrictions on acceptance of CFI-eligible collateral. The 
primary duty of the Finance Board is to ensure that the Banks operate 
in a financially safe and sound manner. See 12 U.S.C. 1422a(a)(3)(A). 
As discussed in the SUPPLEMENTARY INFORMATION section of the proposed 
rule, in view of the potentially greater risks inherent in non-
mortgage, CFI-eligible collateral, with which the Banks have limited or 
no experience, the Finance Board, for safety and soundness reasons, 
considered whether limits or restrictions should be established on the 
types of collateral that could secure such loans or securities pledged 
by a CFI member or affiliate to secure an advance. For example, small 
business loans secured by accounts receivable or inventory, or small 
farm loans secured by crops or livestock, which may present greater 
risks than other types of secured small business or small farm loans, 
could have been excluded from the types of eligible collateral. The 
Finance Board chose not to impose limits or restrictions in the 
proposed rule, but instead to require in proposed Sec. 917.4 that the 
Banks have policies and capacity to value the collateral, whatever it 
may be. In addition, proposed part 980 treated the acceptance of CFI-
eligible collateral for the first time as a new business activity 
requiring 60-day notice to the Finance Board before the activity could 
be undertaken.
    The Finance Board requested comment on whether certain types of 
CFI-eligible collateral should be prohibited as eligible collateral on 
the basis of risk. Several commenters supported the approach in the 
proposed rule, stating that no types of CFI-eligible collateral are so 
inherently risky as to justify a prohibition on their acceptance, and 
that each Bank should have the discretion to determine risk parameters 
and eligibility standards for each type of CFI-eligible collateral it 
chooses to accept.
    The Finance Board continues to believe that requiring each Bank to 
determine the value of collateral in accordance with a member products 
policy established pursuant to Sec. 917.4 will minimize appropriately 
the Banks' exposure to risk in accepting CFI-eligible collateral. The 
Finance Board expects such policies, if properly developed and 
implemented, will take the appropriate risk factors into account in 
their valuation and discounting procedures. Of course, those policies, 
and the Banks' activities in this regard, would continue to be subject 
to examination by the Finance Board and to the new business activities 
requirements of part 980, discussed in section II.B., below. 
Accordingly, as proposed, the final rule establishes no limits on the 
types of collateral that may secure such loans or securities pledged by 
a CFI member or affiliate.
    c. CFI status. (i) Definition of ``CFI''--Determination of CFI 
status based on calculation of three-year total assets average. The 
Modernization Act defines a ``community financial institution'' as an 
FDIC-insured institution that has, as of the date of the transaction at 
issue, less than $500 million in average total assets, based on an 
average of total assets over the three years preceding that date. See 
Modernization Act, Sec. 602 (to be codified at 12 U.S.C. 1422(13)). The 
proposed rule included a definition of ``CFI'' in Sec. 900.1 that 
mirrored the statutory definition.
    A number of commenters recommended that the Banks be allowed to 
determine the status of their members by calculating the average total 
assets of their members on an annual basis, based on calendar year-end 
financial data available from the institutions' regulatory financial 
reports filed with their regulators, or, in the alternative, based on 
data available from the institutions' quarterly regulatory financial 
reports for the preceding three years. Commenters stated that it would 
be confusing to determine CFI status on a quarterly or monthly basis 
when Sec. 925.22(b)(1) of the Membership Regulation requires the Banks 
to calculate annually each member's minimum capital stock requirement 
using calendar year-end financial data. Commenters stated that 
calculation of CFI status on a quarterly or monthly basis would result 
in unnecessary administrative burdens and expense. Other commenters 
supported quarterly calculations of average total assets based on the 
institutions' quarterly regulatory financial reports over the three 
preceding years. Commenters also stated that calculation of CFI status 
on a quarterly or monthly basis would cause some members' CFI status to 
fluctuate more frequently, which, for members approaching the CFI asset 
cap, could have a negative effect on their reliance on Bank funding 
secured by CFI-eligible collateral.
    The Finance Board finds merit in these comments and believes it 
would be reasonable and less burdensome for

[[Page 44418]]

the Banks to determine their members' CFI status by calculating 
annually the members' average total assets based on data drawn from the 
members' regulatory financial reports for the three most recent 
calendar year-ends. The April 1 effective date adopted in the final 
rule provides sufficient time for the Banks to use calendar year-end 
data available from the regulatory financial reports.
    The issue of how to calculate the three-year total assets average 
also arises in the context of the membership application review process 
regarding the determination of whether an applicant for membership 
qualifies as a CFI and, therefore, is exempt from the statutory 
requirement that at least 10 percent of its total assets must be 
residential mortgage loans. See 12 U.S.C. 1424(a)(2) (1994). Because 
the calculation of the three-year total assets average affects the 
determination of CFI status for both membership and advances collateral 
purposes, consistent with the proposed Advances Collateral Rule, the 
final rule moves the definition of ``CFI'' to Sec. 900.1, which 
contains general definitions applying to all Finance Board regulations. 
The final rule revises the proposed definition of ``CFI'' to include 
the calculation for advances collateral purposes described above, as 
well as a separate calculation for membership purposes discussed in the 
SUPPLEMENTARY INFORMATION section of the Finance Board's final rule on 
membership and advances adopted by the Finance Board on June 23, 2000.
    (ii) Change in CFI status. The proposed rule provided that if a 
member that previously qualified as a CFI loses its CFI status, the 
Bank may not accept as security for new advances CFI-eligible 
collateral from that member. Proposed Sec. 950.7(b)(2) also provided 
that a Bank shall not require a member that loses its CFI status and 
has outstanding advances secured by CFI-eligible collateral to repay 
such advances prior to the stated maturities, or to provide substitute 
collateral, eligible under paragraphs (a)(1) through (5), based solely 
on the member's change in CFI status. All of the comments addressing 
the change in CFI status provisions in proposed Sec. 950.7(b)(2) 
supported allowing outstanding advances held by members that no longer 
qualify as CFIs to run to their stated maturities. Accordingly, this 
provision is adopted without change in Sec. 950.7(b)(2)(i) of the final 
rule.
    Proposed Sec. 950.7(b)(2) also authorized a Bank to allow a member 
that has lost its CFI status to renew maturing advances secured by CFI-
eligible collateral for up to 6 months in order to provide the member 
with sufficient time to wind down advances and replace them with other 
funding in an orderly fashion. The Finance Board requested comment on 
whether allowing renewals of such advances is appropriate and, if so, 
whether allowing renewals for up to 6 months would provide sufficient 
time for members to obtain alternative funding. Some of the commenters 
stated that the proposed 6-month renewal period for maturing advances 
was not enough time for members to obtain replacement funding for 
maturing advances. Alternative suggestions from commenters included a 
12-month renewal period, an 18-month renewal period, and allowing 
members to maintain a permanent maximum eligible collateral limit, 
based on one-to two-year historical usage. In addition, some of the 
commenters indicated that it would be difficult to determine which 
advances are secured by CFI-eligible collateral and which advances are 
secured by other collateral.
    Based on the comments, Sec. 950.7(b)(2) of the final rule has been 
revised to apply to members that no longer qualify as CFIs and have 
total advances outstanding that exceed the amount that can be fully 
secured by collateral under Sec. 950.7(a) (non-CFI-eligible 
collateral).
    While the Finance Board believes that it is inappropriate to allow 
CFI members that lose their CFI status to continue to pledge CFI-
eligible collateral as security for advances indefinitely, it does 
acknowledge that the proposed 6-month renewal period may not be long 
enough for members to obtain replacement funding for maturing advances. 
A 12-month renewal period would appear to be a more reasonable amount 
of time for transition, especially given that the calculation of CFI 
status is based on a three-year total assets average and a member, 
therefore, is likely to be aware of its potential loss of CFI status 
well before it actually occurs. Accordingly, Sec. 950.7(b)(2)(ii) of 
the final rule has been revised to provide that maturing advances may 
be renewed to mature no later that 12 months from the date the Bank 
determines that a member ceases to qualify as a CFI. Since, as 
discussed above, Sec. 900.1 of the final rule requires each Bank to 
perform the CFI calculation of the three-year total assets average on 
an annual basis effective April 1 of each year, the 12-month renewal 
period will run from April 1 of the year that a Bank determines that a 
member no longer qualifies as a CFI to March 31 of the following year.
    Section 950.7(b)(2) of the final rule also provides that the total 
of a member's advances under Sec. Sec. 950.7(b)(2)(i) and (ii) shall be 
fully secured by collateral set forth in paragraphs (a) and (b) of this 
section.
    d. Readily ascertainable value. Proposed Sec. 950.7(b)(1) 
authorized the Banks to accept from CFI members or their affiliates as 
security for advances, CFI-eligible collateral provided that: (i) the 
loans have a readily ascertainable liquidation value and can be freely 
liquidated in due course; and (ii) the Bank can perfect a security 
interest in such collateral. The basis of this standard was the Finance 
Board's belief that the liquidation value of collateral, and the 
ability to liquidate the collateral quickly, was an appropriate measure 
of the value of CFI-eligible collateral securing an advance.
    A substantial number of Bank commenters opposed the proposed 
standard on the grounds that liquidation value is difficult to measure 
and, therefore, impractical as a standard. The commenters also found 
the phrase ``freely liquidated in due course'' to be unclear in terms 
of when and how frequently such determination would have to be made.
    In response to the Banks' concerns, Sec. 950.7(a)(4) is revised in 
the final rule to provide that CFI-eligible collateral is eligible to 
secure advances if it has ``a readily ascertainable value, can be 
reliably discounted to account for liquidation and other risks, and can 
be liquidated in due course.'' This standard is intended to clarify 
that the critical factor is the Bank's ability to reliably discount the 
collateral in question. The phrase ``can be liquidated in due course'' 
is intended to mean that there are no known impediments to liquidation 
at the time the collateral is accepted by the Bank. This change also is 
made in Sec. 950.7(a)(4)(i)(A) of the final rule with respect to other 
real estate-related collateral.
2. Cash or Deposits in a Bank
    Current Sec. 950.9 of the Advances Regulation (redesignated as 
Sec. 950.7 in the final rule) sets forth the types of eligible 
collateral that a Bank may accept to secure advances. The Modernization 
Act revised section 10(a)(3) of the Bank Act to add ``cash'' to the 
types of eligible collateral. See Modernization Act, section 
604(a)(5)(A). As proposed, Sec. 950.7(a)(3) of the final rule 
implements this change by adding cash as eligible collateral.
3. Other Real Estate-Related Collateral
    a. New business activity notice requirement. The Modernization Act 
amended section 10(a)(4) of the Bank Act by removing the limit on the 
dollar amount of advances that may be secured by other real estate-
related collateral,

[[Page 44419]]

which had been set at 30 percent of the member's capital. See 
Modernization Act, section 604(a)(5)(B). Section 950.7(a)(4) of the 
final rule implements this change by removing the 30 percent 
limitation. As discussed in the SUPPLEMENTARY INFORMATION section of 
the proposed rule, because the Banks have had no or limited experience 
with accepting other real estate-related collateral, the Banks will 
need to build capacity and exercise caution in evaluating and accepting 
such collateral. For this reason, the proposed rule treated the 
acceptance of other real estate-related collateral as a new business 
activity, and proposed Sec. 950.7(a)(4)(iii) prohibited a Bank from 
making total advances to all members secured by other real estate-
related collateral in an aggregate amount exceeding 25% of the highest 
level of advances previously secured by such collateral (125% trigger), 
until the Bank met the new business activity requirements of proposed 
part 980. Proposed Sec. 980.3 required a Bank to provide at least 60 
days prior notice to the Finance Board to include, among other things, 
information demonstrating the Bank's capacity, sufficiency of 
experience and expertise to safely value, discount and manage the risks 
associated with other real estate-related collateral. Under proposed 
Sec. Sec. 980.4 and 980.5, the Bank was permitted to commence 
acceptance of other real-estate related collateral if, 60 days after 
receipt by the Finance Board of the notice, the Finance Board had not 
issued to the Bank a notice of disapproval, a notice instructing the 
Bank not to commence the new activity pending further consideration by 
the Finance Board, a notice of intent to examine, or a request for 
additional information, or if the Finance Board had issued a letter of 
approval.
    The Finance Board requested comment on what the appropriate 
threshold should be for triggering the new business activity 
requirement with respect to the use of other real estate-related 
collateral, and whether there should be any other limits on the use of 
such collateral to ensure that the Banks' lending against this type of 
collateral was done in a safe and sound manner. A number of commenters 
opposed the proposed 125% trigger, stating that it was too severe, and 
several suggested a higher trigger. Most of the commenters recommended 
a trigger linked to a percentage or dollar limit per member. Various 
commenters recommended a trigger of 100% of member capital, 55% of 
member capital, 55% of Bank capital, and 100% of Bank capital. One 
commenter recommended that the final rule establish specific discount 
rates to be used by the Banks, rather than the Finance Board reviewing 
each Bank's capacity, sufficiency of experience and expertise to safely 
discount and manage the risks associated with other real estate-related 
collateral. Many commenters observed that the Banks had ample 
experience accepting this type of collateral without limit before the 
30 percent cap was imposed by amendment of the Bank Act in 1989 and, 
thus, already were well qualified to manage and discount this type of 
collateral.
    The Finance Board has reconsidered the 125% trigger in light of the 
comments, as being more restrictive than may be necessary, and has 
deleted the trigger from the final rule. However, because other real 
estate-related collateral has only been accepted by a few Banks in 
limited amounts since 1989, and because the Bank System's operations 
were very different prior to 1989, the Finance Board still believes it 
necessary for the Banks to establish policies and procedures to 
adequately value and discount this type of collateral. Rather than 
dictating specific discount rates to be applied by the Banks, which is 
a management function more appropriately administered by the Banks, 
which are in the best position to assess their members' underwriting 
capacity and the quality of loans pledged, Sec. 980.1 of the final rule 
treats a Bank's acceptance of other real estate-related collateral of 
any amount as a new business activity, regardless of whether the Bank 
has accepted such collateral in the past, and Sec. 980.3(b) requires 
the Bank to file a new business activity notice with the Finance Board 
prior to accepting such collateral. As stated in the SUPPLEMENTARY 
INFORMATION section of the proposed rule, in evaluating a Bank's 
notice, the Finance Board intends to encourage conservative discounting 
of new collateral until the Bank gains experience in valuing such 
collateral. However, in order to expedite the Banks' acceptance of such 
collateral while ensuring that it is done in a safe and sound manner, 
Sec. 980.4(b) of the final rule allows a Bank to begin accepting such 
collateral immediately upon receipt by the Finance Board of the notice. 
The Finance Board intends to review the Banks' acceptance of such 
collateral through either special examinations or the regular 
examination process as it deems appropriate.
    b. Pledge of all available collateral before pledge of other real 
estate-related collateral. The Finance Board requested comment in the 
SUPPLEMENTARY INFORMATION section of the proposed rule on whether 
members should be required to pledge all available collateral under 
proposed Secs. 950.7(a)(1) through (3) prior to pledging other real 
estate-related collateral under paragraph (4), in order to prevent 
members from using only their least liquid collateral to secure Bank 
advances. While each Bank has the discretion to include such a 
requirement in its member products policy, the Finance Board questioned 
whether it would be appropriate to require collateral prioritization by 
regulation, especially in light of the Modernization Act authorization 
for the Finance Board to review, and increase, the Banks' standards for 
other real estate-related collateral. See Modernization Act, section 
604(a)(7).
    A number of commenters opposed imposition of a collateral 
prioritization requirement, recommending instead that decisions on 
adoption of any collateral prioritization standards be left to the 
discretion of each Bank, although one Bank supported the proposal as 
sound credit policy. The Finance Board believes generally that 
decisions on adopting collateral prioritization standards should be 
dealt with by each Bank in the context of its collateral policies. 
Accordingly, the final rule does not include a collateral 
prioritization requirement.
    c. Readily ascertainable value. Current Sec. 950.9(a)(4)(i)(A) of 
the Advances Regulation requires other real estate-related collateral 
to have a readily ascertainable value. See 12 CFR 950.9(a)(4)(i)(A). 
The Finance Board stated in the SUPPLEMENTARY INFORMATION section of 
the proposed rule that the liquidation value of collateral, and the 
ability to liquidate the collateral quickly, is a more appropriate 
measure of the value of other real estate-related collateral securing 
an advance, particularly given the lifting of the 30 percent cap. 
Accordingly, proposed Sec. 950.7(a)(4)(i)(A) provided that other real 
estate-related collateral have a readily ascertainable liquidation 
value and be able to be freely liquidated in due course. As discussed 
above, this change also was proposed in Sec. 950.7(b)(1)(i) with 
respect to CFI-eligible collateral.
    A significant number of Bank commenters opposed this change on the 
ground that liquidation value is difficult or impossible to measure 
and, therefore, impractical as a standard. The commenters also found 
the phrase ``freely liquidated in due course'' to be unclear in terms 
of when and how frequently such determination would have to be made.

[[Page 44420]]

    In response to the Banks' concerns, the final rule has been revised 
to provide that other real estate-related collateral is eligible to 
secure advances if it has ``a readily ascertainable value, can be 
reliably discounted to account for liquidation and other risks, and can 
be liquidated in due course.'' This standard is intended to clarify 
that the critical factor is the Bank's ability to reliably discount the 
collateral in question. The phrase ``can be liquidated in due course'' 
is intended to mean that there are no known impediments to liquidation 
at the time the collateral is accepted by the Bank. As discussed above, 
this change also is made in Sec. 950.7(b)(1)(i) of the final rule with 
respect to CFI-eligible collateral.
4. Removal of Combination Business or Farm Property From Definition of 
``Residential Real Property''
    Under current Sec. 950.1 of the Advances Regulation, the term 
``residential real property'' is defined to include combination 
business or farm property, where at least 50 percent of the total 
appraised value of the combined property is attributable to the 
residential portion of the property or, in the case of a CFI, 
combination business or farm property on which is located a permanent 
structure actually used as a residence (other than for temporary or 
seasonal housing), where the residence constitutes an integral part of 
the property. 12 CFR 950.1. This provision allows mortgage loans on 
combination properties to qualify as eligible collateral and to be 
included in a member's total residential housing assets for the 
purposes of qualifying for membership and obtaining long-term advances. 
The Modernization Act's removal of the statutory limit on the amount of 
advances that may be secured by other real estate-related collateral 
has eliminated the need to allow combination business or farm property 
to be counted under the mortgage loan category of eligible collateral. 
In addition, the Modernization Act's removal of the requirement that 
CFI members have 10 percent of their total assets in residential 
mortgage loans to qualify for membership and the expansion of the 
purposes for which advances may be made to CFI members has reduced the 
significance of counting such combination properties as residential 
mortgage loans.
    The Finance Board requested comment on whether there were any 
reasons to retain combination business or farm property in the 
definition of ``residential real property.'' A number of commenters 
generally acknowledged that for most institutions seeking to join and 
borrow from the Bank System, the removal of the 30 percent cap on other 
real estate-related collateral and the exemption of CFI members from 
the 10 percent residential mortgage loans requirement reduced the need 
for the inclusion of combination business or farm property loans as 
``residential real estate.'' However, commenters pointed out that 
institutions that do not qualify as CFI members would still benefit 
from the inclusion of combination property loans held in portfolio so 
long as such loans continued to qualify as ``residential real estate.'' 
For that reason, commenters urged that these types of loans be retained 
in the definition.
    The Finance Board believes that non-CFI members have sufficient 
other means available by which to meet the 10 percent residential 
mortgage loans requirement (for example, purchasing mortgage-backed 
securities), and would not have to rely on loans on combination 
properties to meet the requirement. Accordingly, as proposed, the final 
rule removes combination business or farm property from the definition 
of ``residential real property'' in Sec. 950.1.

B. New Business Activity Requirement

    As discussed above, the changes in types and amounts of collateral 
that may now be pledged to secure advances will present new management 
challenges for the Banks. In order to ensure that entering into these 
and other new types of business activities will not create safety and 
soundness concerns, the proposed rule added a new part 980. Proposed 
Sec. 980.3 required a Bank to provide at least 60 days prior written 
notice to the Finance Board of any new business activity that the Bank 
wished to undertake--including the acceptance of increased volumes of 
other real estate-related collateral (based on a 125% trigger, 
discussed in section II.A.3.a. above) and of new CFI-eligible 
collateral for the first time--so that the Finance Board could 
disapprove, examine, or impose restrictions on, such activities, as 
necessary, on a case-by-case basis. In addition to the acceptance of 
new or increased volumes of collateral, proposed Sec. 980.1 defined a 
``new business activity'' as any business activity undertaken, 
transacted, conducted or engaged in by a Bank that has not been 
previously approved by the Finance Board, including: (1) A business 
activity that has not been undertaken previously by that Bank, or was 
undertaken previously under materially different terms and conditions; 
(2) a business activity that entails risks not previously and regularly 
managed by that Bank, its members, or both, as appropriate; or (3) a 
business activity that involves operations not previously undertaken by 
that Bank. The prior notice requirement applied to any Bank desiring to 
pursue a new business activity, even if another Bank had already 
undertaken the same activity. With respect to accepting either newly 
eligible collateral or significantly higher volumes of other real 
estate-related collateral, proposed Sec. 980.3(b) required that the 
written notice include: a description of the classes or amounts of 
collateral proposed to be accepted by the Bank; a copy of the Bank's 
member products policy; a copy of the Bank's procedures for determining 
the value of the collateral in question; and a demonstration of the 
Bank's capacity, personnel, technology, experience and expertise to 
value, discount and manage the risks associated with the collateral in 
question. This requirement was intended to ensure that a Bank has the 
capacity to value, discount and manage the additional collateral prior 
to making advances secured by such collateral.
    Many commenters, including most of the Banks, criticized the 
proposed definition of ``new business activity'' in Sec. 980.1 as vague 
or overly broad, and recommended that the definition be revised to 
include only a new program or new product undertaking and not an 
expansion or refinement of an existing line of business. Some 
commenters opposed any prior notice requirement for undertaking new 
business activities, while other commenters opposed a prior notice 
requirement specifically for acceptance of increased volumes of other 
real estate-related collateral and CFI-eligible collateral for the 
first time. Commenters stated that a prior notice requirement was 
unnecessary and inconsistent with the general movement toward 
devolution of corporate governance responsibilities by the Finance 
Board to the Banks' boards of directors. Commenters expressed concern 
that a prior notice requirement would significantly delay a Bank's 
ability to meet marketplace demand or engage in new business 
activities, or stifle innovation.
    Notwithstanding the concerns of the commenters, the Finance Board 
continues to believe, as discussed above, that a prior notice 
requirement is necessary in order to maintain adequate safety and 
soundness oversight over the Banks' acceptance of the newly eligible 
types of collateral and undertaking of other new business activities. 
Accordingly, the proposed prior notice requirement is retained in the 
final rule. However, the Finance Board agrees with commenters that the 
proposed definition of ``new business activity''

[[Page 44421]]

may be more broad than necessary. Accordingly, the final rule revises 
the definition of ``new business activity'' in Sec. 980.1 by 
substituting the words ``such that'' for ``and that'' in the 
introductory text, which has the effect of including only those 
activities specifically enumerated in paragraphs (1) through (4) of the 
definition as ``new business activities.'' In addition, as further 
discussed in section II.A.3.a. above, based on the comments, the 
Finance Board believes that the proposed 125% trigger requiring notice 
of acceptance of other real estate-related collateral in 
Sec. 950.7(a)(4)(iii) may be more restrictive than necessary, and has 
deleted the trigger from the final rule. Instead, ``new business 
activity'' is defined in the final rule to include the acceptance of 
any other real estate-related collateral, and Sec. 980.4 is revised to 
permit a Bank to commence accepting other real estate-related 
collateral immediately upon receipt by the Finance Board of a notice of 
new business activity under Sec. 980.3. This change will enable Banks 
to accept other real estate-related collateral without undue delay as a 
result of the Sec. 980.3 prior notice requirement.
    A substantial number of commenters also stated that the proposed 
requirement that the Banks establish procedures for determining the 
value of other real estate-related collateral and new CFI-eligible 
collateral on a loan-by-loan basis was administratively burdensome. 
Commenters recommended that the Banks therefore be permitted to adopt a 
valuation methodology based on evaluating a member's credit management 
systems (``institutional underwriting''). Although the Banks evaluate 
their members from a credit risk perspective, the Banks historically 
have been collateralized lenders, relying on the collateral securing 
advances. The Banks' policies of overcollateralizing advances have 
resulted in the Bank System never suffering a credit loss since it was 
established in 1932. In light of the significant challenges associated 
with implementation of the new collateral authority in the 
Modernization Act, the Finance Board does not believe that this is an 
appropriate time for the Bank System to turn its attention away from 
its traditional focus of evaluating the collateral securing its 
advances.

C. Clarification of Other Collateral Provisions in Existing Regulation

1. Securities Representing Equity Interests in Eligible Collateral
    Current Sec. 950.9(a)(5) of the Advances Regulation provides that a 
Bank may accept as collateral any security, such as mutual fund shares, 
the ownership of which represents an undivided equity interest in 
underlying assets, all of which qualify either as: (i) Eligible 
collateral under paragraph (a)(1) (mortgage loans and privately issued 
mortgage-backed securities) or paragraph (a)(2) (agency securities); or 
(ii) cash or cash equivalents. As discussed above, cash is now included 
as eligible collateral under paragraph (a)(3). Accordingly, for greater 
clarity, a reference to paragraph (a)(3) is included in 
Sec. 950.7(a)(5)(i) of the final rule and the reference to cash in 
paragraph (a)(5)(ii) is removed.
    The current Advances Regulation does not include a definition of 
``cash equivalents.'' As proposed, Sec. 950.1 of the final rule defines 
``cash equivalents'' as investments that: (1) Are readily convertible 
into known amounts of cash; (2) have a remaining maturity of 90 days or 
less at the acquisition date; and (3) are held for liquidity purposes. 
This definition codifies a Finance Board regulatory interpretation 
(Regulatory Interpretation 2000-RI-1 (March 6, 2000)) that allowed a 
Bank to accept as collateral under Sec. 950.7(a)(5), shares of mutual 
funds that enter into certain limited types of repurchase agreements. 
For cash management purposes, mutual funds typically hold securities, 
pursuant to repurchase agreements, that represent short-term 
investments as part of their daily cash management activities. A mutual 
fund's ability to enter into such repurchase agreements, typically with 
a maturity of less than 90 days, allows the excess cash in the fund to 
be invested without losing liquidity or incurring price risk. Even 
mutual funds with particularly restrictive investment limitations, such 
as those limited to mortgage loans, government securities, and agency 
securities, typically use repurchase agreements to maintain a liquidity 
position and manage the fund.
    The Financial Accounting Standards Board (FASB) defines ``cash 
equivalents'' for financial reporting purposes as short-term, highly 
liquid investments that are both: (a) readily convertible into cash; 
and (b) so near their maturity that they present insignificant risk of 
changes in value because of changes in interest rates. See FAS 95 
Paragraphs 8-10. FASB also states that, generally, only investments 
with original maturities of three months or less qualify under that 
definition. See id.
    The definition of ``cash equivalents'' is derived from the FASB 
definition, but adapts it by requiring that investments have a 
remaining maturity of 90 days or less at the acquisition date, because 
this standard is more practical to implement than a requirement that 
investments be so near their maturity that they present insignificant 
risk of changes in value because of changes in interest rates. In 
addition, a requirement that the investments be held for liquidity 
purposes is included in the definition. The Banks will be required to 
determine on a case-by-case basis whether this requirement has been 
met.
    Other real estate-related collateral under current Sec. 950.9(a)(4) 
was not originally included in current Sec. 950.9(a)(5)(i) because the 
dollar amount of advances that could be secured by other real estate-
related collateral was limited to 30 percent of the member's capital 
and the Finance Board believed this limitation would result in 
monitoring complexities that would make the inclusion of other real 
estate-related collateral in Sec. 950.9(a)(5)(i) impractical. See 64 FR 
16618 (April 6, 1999). As discussed above, the Modernization Act 
amended section 10(a)(4) of the Bank Act by removing the 30 percent cap 
on other real estate-related collateral. See Modernization Act, section 
604(a)(5)(B). Since this impediment has been eliminated, 
Sec. 950.7(a)(5)(i) of the final rule includes a reference to other 
real estate-related collateral under Sec. 950.7(a)(4).
2. Bank Restrictions on Eligible Collateral
    Section 9 of the Bank Act provides that the Banks have discretion 
to deny, or to approve with conditions, a request for an advance, and 
section 10(a)(1) confers on the Banks the authority to determine 
whether collateral is sufficient to fully secure an advance. See 12 
U.S.C. 1429, 1430(a)(1). Current Sec. 950.9(b) of the Advances 
Regulation grants a Bank the discretion to further restrict the types 
of eligible collateral it will accept as security for advances based on 
the creditworthiness or operations of the borrower, the quality of the 
collateral, or other reasonable criteria. 12 CFR 950.9(b). In the 
SUPPLEMENTARY INFORMATION section of the proposed rule, the Finance 
Board stated that the discretionary authority conferred on the Banks by 
current Sec. 950.9(b) was unnecessary in light of the Banks' statutory 
authority, and because the factors listed in current Sec. 950.9(b) are 
ordinarily considered in valuing collateral. Accordingly, the proposed 
rule removed current Sec. 950.9(b). However, a number of Bank 
commenters requested that this provision be retained in the final rule 
because it further clarifies the Banks' statutory authority in this 
area. Based on

[[Page 44422]]

these comments, the provision has been retained in Sec. 950.7(c) of the 
final rule.
3. Pledge of Advances Collateral by Affiliates
    The Bank Act does not directly address the acceptance of eligible 
collateral from an affiliate, apart from section 10(e) of the Bank Act, 
which gives a priority to any security interest granted by a member or 
its affiliates, subject to certain exceptions. See 12 U.S.C. 1430(e). 
Implicit in Congress' inclusion of collateral pledged by an affiliate 
in the so-called ``superlien provision'' is the authority for the Banks 
to accept collateral from members' affiliates. Accordingly, the Finance 
Board has determined that Congress has authorized the Banks to accept 
collateral not only from a wholly-owned subsidiary, but from any 
affiliate of a member, and states that expressly, as proposed, in 
Sec. 950.7(f) of the final rule. Several Bank commenters supported this 
interpretation of the statutory authority of the Banks to accept 
eligible collateral from members' affiliates.
    As proposed, Sec. 950.7(f)(1) of the final rule requires that the 
pledge of collateral by an affiliate of a member used to secure 
advances to the member shall either directly secure the member's 
obligation to repay the advances, or secure a surety or other agreement 
under which the affiliate has assumed, along with the member, a primary 
co-obligation to repay the advances made to the member. Because the 
Bank Act requires that each advance be fully secured, see 12 U.S.C. 
1430(a), a guaranty by an affiliate of a member's obligation, backed by 
the eligible assets held by the affiliate, would not meet the 
requirements of the Bank Act or the final rule, as the collateral would 
then be securing the affiliate's secondary obligation and not the 
advance itself. As provided by Sec. 950.7(f)(1), however, where the 
affiliate enters into a surety arrangement under which it assumes a 
primary joint and several co-obligation to repay the advance made to 
the member, and fully secures this primary surety obligation with 
eligible collateral, such collateral would be considered as securing 
the advance itself, as required by the statute.
    As proposed, Sec. 950.7(f)(2) of the final rule requires the Bank 
to obtain from an affiliate, and maintain, a legally enforceable 
security interest pursuant to which the Bank's legal rights and 
privileges with respect to the collateral are functionally equivalent 
in all material respects to those that the Bank would possess if the 
member were to pledge the same collateral directly. The Bank would be 
required to have on file adequate documentation demonstrating this 
functional equivalence. The Finance Board anticipates that Banks that 
decide to accept collateral from affiliates of members will need to 
make this determination on a case-by-case basis, after careful legal 
review and analysis, taking into consideration the structure of the 
transaction and the law of the state that governs the transaction.
    These regulatory additions represent a modification of an earlier 
proposal on third-party collateral that was published for comment by 
the Finance Board, but that was subsequently withdrawn. In December 
1998, the Finance Board published a proposed rule to amend the Advances 
Regulation (at that time designated as 12 CFR part 935), that, among 
other things, would have permitted the Banks to accept pledges of 
eligible collateral from a member's ``qualifying investment 
subsidiary'' (QIS) if the Bank were able to obtain and maintain a 
security interest in the collateral pursuant to which its rights and 
privileges were functionally equivalent to those that the Bank would 
possess if the member were to pledge the collateral directly. Under the 
December 1998 proposed rule, the term ``qualifying investment 
subsidiary'' would have included business entities that: (1) Are wholly 
owned by a member; (2) are operated solely as passive investment 
vehicles on behalf of that member; and (3) hold only cash equivalents 
and assets that are eligible collateral under Sec. Sec. 935.9(a)(1) and 
(2) of the Advances Regulation. See 63 FR 67625 (Dec. 8, 1998).
    In proposing the December 1998 amendments, the Finance Board 
intended to codify into regulation a series of Finance Board regulatory 
interpretations regarding the acceptance of eligible collateral held by 
a real estate investment trust and state security corporation 
subsidiaries. However, in response to the proposed rule, a large number 
of commenters questioned the Finance Board's proposal to address only 
pledges of collateral from a narrow class of wholly-owned subsidiaries, 
while ignoring collateral arrangements with other types of affiliates 
that may be permissible under the Bank Act. In light of these comments, 
the Finance Board removed the QIS provisions from the text of the final 
rule pending further analysis of the issue. See 64 FR 16618 (April 6, 
1999).
    In conjunction with Sec. 950.7(f) of the final rule, and consistent 
with the proposed rule, the final rule amends Sec. 950.1 by defining an 
``affiliate'' as any business entity that controls, is controlled by, 
or is under common control with, a member. The definition of 
``affiliate'' is intended to limit the scope of eligible third-party 
collateral to assets over which the member exercises control or shares 
control.
4. Bank Advances Policy
    Consistent with the proposed rule, the final rule removes existing 
Sec. 950.3 of the Finance Board's Advances Regulation. That section 
requires each Bank's board of directors to adopt and review a policy on 
advances and outlines some basic criteria for the content of the 
advances policy. The final rule moves the requirement for the Bank's 
board of directors to adopt and periodically re-adopt an advances or 
credit policy to new Sec. 917.4, ``Bank Member Products Policy.'' The 
Finance Board believes that it would make for a more logical 
presentation in its regulations to have all of the requirements for 
Bank policies contained in one regulatory part (part 917), rather than 
to have such requirements scattered throughout its regulations. The 
requirements for Bank member products policies are discussed in section 
II.F. 2., below.
5. Removal of Non-QTL Definitions
    Prior to the enactment of the Modernization Act, section 10(e) of 
the Bank Act restricted access to Bank advances to Bank members that 
did not meet the qualified thrift lender (QTL) test.\4\ These 
restrictions limited the purposes for which non-QTL members could 
obtain advances, limited Bank System-wide advances to non-QTL members 
to 30 percent of total Bank System advances outstanding, and gave QTL 
members a priority over non-QTL members in obtaining advances. See 12 
U.S.C. 1430(e)(1), (2) (1994). The Bank Act also established a 
statutory presumption, for the purpose of determining the minimum 
amount of Bank capital stock that a member must purchase pursuant to 
section 6(b) of the Bank Act, that each member has at least 30 percent 
of its assets in home mortgage loans. See 12 U.S.C. 1430(e)(3) (1994). 
Coupled with the section 6(b) requirement that all members must 
subscribe to Bank stock equaling at least one percent of the member's 
aggregate

[[Page 44423]]

unpaid loan principal, this presumption effectively limited the dollar 
amount of advances that a non-QTL member could obtain in relation to 
the amount of Bank stock it had purchased. See id.
---------------------------------------------------------------------------

    \4\ The ``qualified thrift lender'' test is set forth in section 
10(m) of the Home Owners'' Loan Act, 12 U.S.C. 1467a(m), and applies 
directly only to savings associations. Originally enacted in 1987, 
the QTL test was intended to ensure that savings associations 
remained committed to the business of providing housing-related 
loans. Failure to meet the test subjected both the savings 
association and its holding company to certain statutory penalties, 
including reduced access to Bank advances for the association. In 
1989, Congress revised the QTL test and the penalties for failing to 
meet it, including more severe restrictions on access to Bank 
advances for savings associations, as well as for commercial banks, 
that did not meet the test.
---------------------------------------------------------------------------

    The Modernization Act repealed section 10(e) of the Bank Act in its 
entirety, thereby providing access to Bank advances without regard to 
the percentage of housing-related assets a member holds. See 
Modernization Act, section 604(c). In a recently adopted Interim Final 
Rule that was finalized on June 23, 2000, the Finance Board removed the 
provisions in its Membership and Advances Regulations containing the 
additional capital stock purchase requirements and limitations on 
advances applicable to non-QTL members. See 65 FR 13866 (March 15, 
2000). Consistent with the proposed rule, the final rule removes all 
remaining references to non-QTL status from the Advances Regulation. 
See 12 CFR 950.1, 950.21 (1999). Specifically, Sec. 950.1 of the final 
rule deletes the following QTL-related definitions from the Advances 
Regulation: definitions of the terms ``Actual thrift investment 
percentage'' or ``ATIP;'' ``Non-Qualified Thrift Lender Member;'' 
``Qualified Thrift Lender'' or ``QTL;'' and ``Qualified Thrift Lender 
test'' or ``QTL test.'' 12 CFR 950.1.

D. Modernization Act Amendment to Long-term Advances Purpose Provision 
for CFI Members

    Section 10(a) of the Bank Act formerly provided that all long-term 
advances shall be made only for the purpose of providing funds for 
residential housing finance. See 12 U.S.C. 1430(a) (1994). This purpose 
is set forth in current Sec. 950.14(a), and is implemented by use of a 
proxy test set forth in current Sec. 950.14(b). 12 CFR 950.14(a), (b). 
Specifically, current Sec. 950.14(b)(1) provides that, before funding a 
long-term advance (i.e., an advance with a maturity greater than five 
years), a Bank shall determine that the principal amount of all long-
term advances currently held by the member does not exceed the total 
book value of the member's ``residential housing finance assets.'' 12 
CFR 950.1, 950.14(b)(1). ``Residential housing finance assets'' are 
defined in current Sec. 950.1 to mean any of the following: (1) Loans 
secured by residential real property; (2) mortgage-backed securities; 
(3) participations in loans secured by residential real property; (4) 
loans or investments financed by advances made pursuant to a CICA 
program; (5) loans secured by manufactured housing, regardless of 
whether such housing qualifies as residential real property; or (6) any 
loans or investments which the Finance Board, in its discretion, 
otherwise determines to be residential housing finance assets. 12 CFR 
950.1. Current Sec. 950.14(b)(1) requires a Bank to determine the total 
book value of the member's residential housing finance assets using the 
most recent Thrift Financial Report, Report of Condition and Income, or 
financial statement made available by the member. 12 CFR 950.14(b)(1). 
This proxy test was determined by the Finance Board to be an 
operationally feasible compliance monitoring mechanism for residential 
housing finance assets to implement the statutory requirement that 
long-term advances be only for residential housing finance purposes. 
See 57 FR 45338 (Oct. 1, 1992).
    The Modernization Act amended section 10(a) of the Bank Act to 
provide that a Bank may make long-term advances not only for the 
purpose of providing funds for residential housing finance, but also 
for the purpose of providing funds to any CFI for small businesses, 
small farms and small agri-businesses. See Modernization Act, section 
604(a)(3). Accordingly, consistent with the proposed rule, the final 
rule amends current Sec. 950.14 by adding this new purpose in 
redesignated Sec. 950.3. Section 950.3(a) of the final rule provides 
that a Bank shall make long-term advances only for the purpose of 
enabling any member to purchase or fund new or existing residential 
housing finance assets, which include, for CFI members, small business 
loans, small farm loans and small agri-business loans. Instead of the 
statutory terms ``small businesses,'' ``small farms'' and ``small agri-
businesses,'' Sec. 950.3 utilizes the terms ``small business loans,'' 
``small farm loans'' and ``small agri-business loans,'' which the 
Finance Board is defining for purposes of identifying the new types of 
collateral that Banks are authorized to accept from CFI members. See 
Modernization Act, section 604(a)(5)(C). As discussed in the 
SUPPLEMENTARY INFORMATION section of the proposed rule, the Finance 
Board believes that a single set of terms that would apply to both CFI-
eligible collateral and the new purposes for which Banks may make 
advances to CFI members will reduce confusion and otherwise provide an 
efficient means of implementing the new authorities conferred on the 
Banks in regard to their CFI members. Further, the Modernization Act 
provides that the terms ``small business,'' ``small farm'' and ``small 
agri-business'' shall have the meanings given to those terms by 
regulation of the Finance Board. See Modernization Act, section 
604(a)(7). Accordingly, the Finance Board is interpreting the statutory 
phrase ``providing funds to any community financial institution for 
small businesses, small farms, and small agri-businesses'' to mean 
making advances to CFI members for small business loans, small farm 
loans and small agri-business loans. Section 950.3(b)(1) of the final 
rule maintains the proxy test in its current form. However, revisions 
to certain definitions will have the effect of including small business 
loans, small farm loans and small agri-business loans in the 
denominator of the proxy test for CFI members.
    Specifically, as proposed, the final rule amends Sec. 900.1 by 
adding a new definition of ``community lending,'' which applies, 
wherever it appears, in all of the Finance Board's regulations. The 
term ``community lending'' currently is defined in Sec. 952.3 of the 
CICA Regulation as ``providing financing for economic development 
projects for targeted beneficiaries.'' 12 CFR 952.3. The definition of 
``community lending'' in Sec. 900.1 adds to that definition, ``and, for 
community financial institutions, purchasing or funding small business 
loans, small farm loans or small agri-business loans, as defined in 
Sec. 950.1 of this chapter.'' This addition to the definition 
implements changes made by the Modernization Act and supports the 
Finance Board's belief that CFI lending to small businesses, small 
farms and small agri-businesses is community lending. For purposes of 
the CICA and Community Support Regulations, the current definition of 
``community lending,'' redesignated in the final rule as ``targeted 
community lending,'' would continue to apply.
    Concurrently, the definition of ``residential housing finance 
assets'' is amended in the final rule to change the element that 
currently reads ``Loans or investments financed by advances made 
pursuant to a CICA program'' to ``Loans or investments qualifying under 
the definition of community lending in Sec. 900.1 of this chapter.''
    Thus, by operation of the revised definitions of ``residential 
housing finance assets'' and ``community lending,'' the proxy test 
calculation of the total book value of residential housing assets will 
include, for CFI members, small business loans, small farm loans and 
small agri-business loans. This result implements section 604(a)(5)(C) 
of the Modernization Act, which authorizes a Bank to make long-term 
advances to CFIs for the purpose of providing financing for small 
businesses, small farms and small agri-

[[Page 44424]]

businesses. See Modernization Act, section 604(a)(5)(C).
    Current Sec. 950.14(b)(1) of the Advances Regulation allows a Bank 
to determine the total book value of residential housing financial 
assets using the most recent Thrift Financial Report, Report of 
Condition and Income, or financial statement made available by the 
member. 12 CFR 950.14(b)(1). As proposed, Sec. 950.3(b)(1) of the final 
rule adds to this list ``other reliable documentation'' made available 
by the member. This revision is intended to give the Banks more 
flexibility in the form of documentation they may use in administering 
the proxy test, as long as the data supplied by the member is reliable.

E. Clarification of Other Advances Provisions in Current Regulation

1. Pricing
    The Finance Board proposed to clarify a provision of the Advances 
Regulation dealing with the pricing of advances. Current 
Sec. 950.6(b)(1) of the Advances Regulation requires each Bank to price 
its advances to members taking into account two factors: (1) The 
marginal cost to the Bank of raising matching maturity funds in the 
marketplace; and (2) the administrative and operating costs associated 
with making such advances to members. 12 CFR 950.6(b)(1). A separate 
provision, current Sec. 950.8(b)(1), provides that each Bank shall 
establish and charge a prepayment fee pursuant to a specified formula 
which sufficiently compensates the Bank for providing a prepayment 
option on an advance, and which acts to make the Bank financially 
indifferent to the borrower's decision to repay the advance prior to 
its maturity date. 12 CFR 950.8(b)(1). These provisions do not clearly 
indicate whether Banks must consider the costs of associated options 
and the administrative costs of funding advances with such options in 
pricing an advance. Further, because current Sec. 950.6(b)(1) merely 
requires the Bank ``to take into account'' the marginal cost to the 
Bank of raising matching maturity funds in the marketplace, and the 
administrative and operating costs associated with making such advances 
to members, the current rule allows a Bank to price an advance below 
its marginal cost of funds, a practice the Finance Board could find to 
be an unsafe and unsound practice in some circumstances and one the 
Finance Board wishes to discourage.
    Therefore, redesignated Sec. 950.5(b)(1) of the proposed rule 
prohibited a Bank from pricing an advance below the Bank's marginal 
cost of funds, including the cost of any embedded options, plus the 
administrative and operating costs associated with making the advance 
when funding an advance with similar maturity and options 
characteristics.
    Several Banks commented that the proposed prohibition on pricing 
advances below a Bank's marginal cost of funds was too restrictive in 
that it could prohibit Banks from passing on the benefits of lower 
costs to member borrowers. However, the Finance Board believes that the 
proposed exceptions, discussed below, provide the Banks with ample 
flexibility to pass on lower costs to borrowers for special purposes. 
Accordingly, the advance pricing prohibition in proposed Sec. 950.5(b) 
is adopted without change in the final rule.
    Proposed Sec. 950.5(b)(3)(i) provided that the advance pricing 
prohibition would not apply to a Bank's CICA programs. This was 
intended to provide the Banks with maximum flexibility in designing and 
offering AHP and other CICA programs. Proposed Sec. 950.5(b)(3)(ii) 
also provided that the advance pricing prohibition would not apply to 
any other advances that are volume limited and specifically approved by 
a Bank's board of directors. This exception was intended to allow a 
Bank to price targeted advances at below the cost of funds for some 
special purpose that does not meet all of the criteria for CICA 
advances. It was intended that the special purpose involve some social 
benefit, such as providing relief from a natural disaster. The proposed 
exception also would allow a Bank to conduct market testing of 
alternative pricing strategies for advances.
    The exceptions have been adopted in the final rule as proposed. In 
response to a Bank comment, the final rule substitutes the term 
``advances program'' for ``advances'' in Sec. 950.5(b)(3)(ii) to make 
clear that the exception for volume limited advances does not require a 
Bank's board of directors to approve each individual advance.

2. Putable and Convertible Advances Disclosure; Replacement Funding for 
Putable Advances

    Current Sec. 950.6(d)(1) of the Advances Regulation provides that a 
Bank that offers a putable advance to a member shall disclose in 
writing to such member the type and nature of the risks associated with 
putable advance funding, and that such disclosure should include detail 
sufficient to describe such risks. 12 CFR 950.6(d)(1). A convertible 
advance is similar to a putable advance in that it carries risks 
associated with a triggering event, usually a shift in a designated 
interest rate index. Accordingly, redesignated Sec. 950.5(d)(1) of the 
proposed rule made the current disclosure requirements for putable 
advances applicable to convertible advances as well. Current 
Sec. 950.6(d)(2) was not proposed to be revised because replacement 
funding is not an issue for convertible advances, as convertible 
advances involve only a change in the stated interest rate, not the 
repayment of funds.
    The Finance Board requested comment on whether there are other 
appropriate requirements for putable or convertible advances. A Bank 
commenter suggested that the final rule clarify that replacement 
funding for putable advances is subject to normal and customary safety 
and soundness considerations. The final rule adopts Sec. 950.5(d) as 
proposed except for a revision to paragraph (d)(2), in response to the 
Bank comment, to clarify that a member receiving replacement funding 
for putable advances must be able to satisfy the normal credit and 
collateral requirements of the Bank for such funding.

F. Other Technical Changes

1. Bank Housing Associates--Parts 900.1, 926
    As part of a continuing effort to revise and achieve consistency in 
regulatory nomenclature regarding nonmember borrowers, the proposed 
rule amended the text, where appropriate, to refer to nonmember 
borrowers who are eligible under section 10b of the Bank Act, 12 U.S.C. 
1430b, to obtain advances from the Banks, as ``associates.'' The 
definition of ``associate'' was recently added to 12 CFR 900.1, which 
contains definitions of terms that apply to all parts of the Finance 
Board's regulations. In response to a commenter's suggestion, the final 
rule replaces the term ``associates'' with the term ``housing 
associates,'' which the Finance Board has acknowledged represents a 
more accurate description of such borrowers. Consistent with this 
change, the final rule revises the title of subpart B to ``Advances to 
Housing Associates.'' Since the term ``housing associate'' is defined 
in Sec. 900.1, it is not defined in any of the individual parts 
addressed by this final rule.
    Eligibility requirements for housing associates, including 
application procedures and requirements for advances to housing 
associates, currently are contained in the Advances Regulation. See 12 
CFR 950.22, 950.23. For the sake of greater organizational clarity, 
consistent with the proposed

[[Page 44425]]

rule, the final rule sets forth the housing associate eligibility 
requirements and advances requirements in separate regulations, by 
moving the housing associate eligibility requirements to a new part 926 
under subpart B. No substantive changes have been made in subpart B.
2. Bank Member Products Policy--Section 917.4
    In its recently adopted final rule, ``Powers and Responsibilities 
of Bank Boards of Directors and Senior Management,'' the Finance Board 
consolidated all of the requirements for the Bank's board of directors' 
operational policies into one regulatory part, part 917, rather than 
have such requirements scattered throughout its regulations. See 65 FR 
25267 (May 1, 2000). As proposed, Sec. 917.4 of the final rule adds to 
that part a new requirement for adoption by a Bank's board of directors 
of a member products policy that would combine the requirements for an 
advances policy from current Sec. 950.3(a), with the requirements for a 
standby letter of credit policy from current Sec. 961.5(a), into one 
policy. The member products policy also addresses other products that 
the Banks may offer, such as acquired member assets.
    As proposed, Sec. 917.4(b) of the final rule requires a Bank's 
member products policy to address the following items: the credit 
underwriting criteria to be applied to advances (including renewals) 
and standby letters of credit; collateralization (including levels, 
valuation and discounts) for advances and standby letters of credit; 
advances-related fees (including any schedules or formulas pertaining 
to such fees); standards and criteria for pricing member products 
(including differential pricing of advances pursuant to 
Sec. 950.4(b)(2)); criteria regarding the pricing of standby letters of 
credit (including any special pricing provisions for standby letters of 
credit that facilitate the financing of projects that are eligible for 
any CICA programs under part 952); the maintenance of appropriate 
systems, procedures and internal controls; and the maintenance of 
appropriate operational and personnel capacity.
    A Bank's member products policy also must provide that, for any 
draw made by a beneficiary under a standby letter of credit, the member 
will be charged a processing fee calculated in accordance with 
Sec. 975.6(b).
    As proposed, Sec. 917.4(a)(2) of the final rule requires each 
Bank's board of directors to review the Bank's member products policy 
annually, amend the policy as appropriate, and re-adopt the policy, 
including interim amendments, not less often than every three years.
    References to the ``advances policy'' in other sections of the 
Finance Board's current regulations are changed in the final rule to 
references to the ``member products policy.''
    A few commenters questioned whether it was appropriate to include 
all of the information required by a Bank in a policy that may be 
distributed to members. Commenters also stated that policies governing 
member credit products should be separate and distinct from policies 
governing acquired member assets, that the regulation should 
accommodate policy differences among Banks from one year to the next, 
and that some of the member products policy requirements may already be 
covered in the regulatory requirements for the Banks' risk management 
policies.
    The final rule retains all of the member products policy 
requirements contained in the proposed rule because it is important 
that the Banks' boards consider and address all of these issues as they 
pertain to advances and other member products. By requiring that each 
Bank adopt its own member products policy, the Finance Board recognizes 
that such policies will differ among the Banks, as is currently the 
case with the Banks' advances policies. The Finance Board also 
recognizes that some provisions contained in the member products 
policies will apply only to certain products, and that a Bank may 
address different products separately in its policy as it sees fit. In 
addition, the member products policy requirement does not preclude a 
Bank from creating separate materials for distribution to members.
3. Bank Primary Credit Mission--Removal of Sec. 950.2
    In the Finance Board's recently adopted final rule on parts 900, 
917 and 940, the Finance Board revised part 940 to add a new definition 
of the mission of the Banks. See 65 FR 25267 (May 1, 2000). 
Accordingly, as proposed, the final rule removes existing Sec. 950.2 of 
the Advances Regulation, which states the primary credit mission of the 
Banks and how the Banks must fulfill such mission, as no longer 
necessary.
4. Community Support Requirements and Community Investment Cash Advance 
programs--Parts 944 and 952
    As discussed previously, the final rule amends part 944 and 
Sec. 952.3 by re-designating the term ``community lending'' as 
``targeted community lending,'' with no substantive change to the 
corresponding definition. This revision is intended to differentiate 
CICA community lending, which is targeted, from the broader term 
``community lending'' that the final rule adds to Sec. 900.1. The 
broader definition of ``community lending'' in Sec. 900.1 would 
include, for CFIs, purchasing or funding small business loans, small 
farm loans and small agri-business loans, as defined in Sec. 950.1 of 
this chapter.
5. Standby Letters of Credit--Part 961
    As proposed, the final rule amends part 961 to update cross-
references to reflect the reorganization of Finance Board regulations, 
change references from nonmember mortgagees to housing associates, and 
make other technical and conforming changes. The proposed rule amended 
Sec. 961.2(c)(2)(i) to allow standby letters of credit issued for a 
purpose described in Sec. 961.2(a)(1) or (2) to be secured by CFI-
eligible collateral, regardless of whether the applicant is a CFI. The 
final rule removes this provision because the loan-to-one-borrower 
approach to the definition of ``small business loans,'' ``small farm 
loans'' and ``small agribusiness loans'' adopted in the final rule does 
not apply to members that do not qualify as CFIs. The final rule 
retains the current provision in Sec. 961.2(c)(2)(ii) authorizing 
investment-grade obligations of state or local government units or 
agencies as additional collateral eligible to secure standby letters of 
credit issued for a purpose described in Sec. 961.2(a)(1) or (2).

III. Paperwork Reduction Act

    The final rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 33 U.S.C. 3501 et 
seq. Therefore, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.

IV. Regulatory Flexibility Act

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

List of Subjects in 12 CFR Parts 900, 917, 926, 944, 950, 952, 961 
and 980

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

    Accordingly, the Finance Board hereby amends title 12, chapter IX, 
parts

[[Page 44426]]

900, 917, 926, 944, 950, 952, 961 and 980, Code of Federal Regulations, 
as follows:

PART 900--GENERAL DEFINITIONS

    1. The authority citation for part 900 is revised to read as 
follows:

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

    2. Amend Sec. 900.1 by:
    a. Adding, in alphabetical order, definitions of ``appropriate 
regulator'', ``community financial institution'', ``community financial 
institution asset cap'', ``community lending'' and ``regulatory 
financial report''; and
    b. Removing the term ``Associate'' and, in its place, adding the 
term ``Housing associate'', to read as follows:


Sec. 900.1  Definitions applying to all regulations.

* * * * *
    Appropriate regulator means a regulatory entity listed in 
Sec. 925.8 of this chapter, as applicable.
* * * * *
    Community financial institution or CFI means an institution--
    (1) The deposits of which are insured under the Federal Deposit 
Insurance Act; and
    (2) That has, as of the date of the transaction at issue, less than 
the community financial institution asset cap in total assets, based on 
an average of total assets over three years, which shall be calculated 
by the Bank as follows:
    (i) For purposes of determining eligibility for membership under 
part 925 of this chapter, based on the average of total assets drawn 
from the institution's regulatory financial reports filed with its 
appropriate regulator for the most recent calendar quarter and the 
immediately preceding 11 calendar quarters; and
    (ii) For purposes of making advances under part 950 of this 
chapter:
    (A) The calculation shall be based on the average of total assets 
drawn from the institution's regulatory financial reports filed with 
its appropriate regulator for the three most recent calendar year-ends; 
and
    (B) The calculation shall be made annually and shall be effective 
April 1 of each year.
    Community financial institution asset cap means, for 2000, $500 
million. Beginning in 2001 and for subsequent years, the cap shall be 
adjusted annually by the Finance Board to reflect any percentage 
increase in the preceding year's Consumer Price Index (CPI) for all 
urban consumers, as published by the U.S. Department of Labor. Each 
year, as soon as practicable after the publication of the previous 
year's CPI, the Finance Board shall publish notice by Federal Register 
of the CPI-adjusted cap.
    Community lending means providing financing for economic 
development projects for targeted beneficiaries, and, for community 
financial institutions, purchasing or funding small business loans, 
small farm loans or small agri-business loans, as defined in Sec. 950.1 
of this chapter.
* * * * *
    Regulatory financial report means a financial report that an 
institution is required to file with its appropriate regulator on a 
specific periodic basis, including the quarterly call report for 
commercial banks, thrift financial report for savings associations, 
quarterly or semi-annual call report for credit unions, the National 
Association of Insurance Commissioners' annual or quarterly report for 
insurance companies, or other similar report, including such report 
maintained by the primary regulator on the computer on-line database.

PART 917--POWERS AND RESPONSIBILITIES OF BANK BOARDS OF DIRECTORS 
AND SENIOR MANAGEMENT

    3. The authority citation for part 917 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1427, 1432(a), 
1436(a), 1440.


    4. Add Sec. 917.4 to read as follows:


Sec. 917.4  Bank Member Products Policy.

    (a) Adoption and review of member products policy. (1) Adoption. 
Beginning November 15, 2000, each Bank's board of directors shall have 
in effect at all times a policy that addresses the Bank's management of 
products offered by the Bank to members and housing associates, 
including but not limited to advances, letters of credit and acquired 
member assets, consistent with the requirements of the Act, paragraph 
(b) of this section, and all applicable Finance Board regulations and 
policies.
    (2) Review and compliance. Each Bank's board of directors shall:
    (i) Review the Bank's member products policy annually;
    (ii) Amend the member products policy as appropriate; and
    (iii) Re-adopt the member products policy, including interim 
amendments, not less often than every three years.
    (b) Member products policy requirements. In addition to meeting any 
other requirements set forth in this chapter, each Bank's member 
products policy shall:
    (1) Address credit underwriting criteria to be applied in 
evaluating applications for advances, standby letters of credit, and 
renewals;
    (2) Address appropriate levels of collateralization, valuation of 
collateral and discounts applied to collateral values for advances and 
standby letters of credit;
    (3) Address advances-related fees to be charged by each Bank, 
including any schedules or formulas pertaining to such fees;
    (4) Address standards and criteria for pricing member products, 
including differential pricing of advances pursuant to Sec. 950.5(b)(2) 
of this chapter, and criteria regarding the pricing of standby letters 
of credit, including any special pricing provisions for standby letters 
of credit that facilitate the financing of projects that are eligible 
for any of the Banks' CICA programs under part 952 of this chapter;
    (5) Provide that, for any draw made by a beneficiary under a 
standby letter of credit, the member will be charged a processing fee 
calculated in accordance with the requirements of Sec. 975.6(b) of this 
chapter;
    (6) Address the maintenance of appropriate systems, procedures and 
internal controls; and
    (7) Address the maintenance of appropriate operational and 
personnel capacity.

    5. Revise the heading of subchapter D to read as follows:

SUBCHAPTER D--FEDERAL HOME LOAN BANK MEMBERS AND HOUSING ASSOCIATES

    6. In subchapter D, add a new part 926 to read as follows:

PART 926--FEDERAL HOME LOAN BANK HOUSING ASSOCIATES

Sec.
926.1   Definitions.
926.2   Bank authority to make advances to housing associates.
926.3   Housing associate eligibility requirements.
926.4   Satisfaction of eligibility requirements.
926.5   Housing associate application process.
926.6   Appeals.

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


Sec. 926.1  Definitions.

    As used in this part:
    Advance has the meaning set forth in Sec. 950.1 of this chapter.
    Governmental agency means the governor, legislature, and any other 
component of a federal, state, local, tribal, or Alaskan native village 
government with authority to act for or on behalf of that government.
    HUD means the Department of Housing and Urban Development.

[[Page 44427]]

    State housing finance agency or SHFA means:
    (1) A public agency, authority, or publicly sponsored corporation 
that serves as an instrumentality of any state or political subdivision 
of any state, and functions as a source of residential mortgage loan 
financing in that state; or
    (2) A legally established agency, authority, corporation, or 
organization that serves as an instrumentality of any Indian tribe, 
band, group, nation, community, or Alaskan Native village recognized by 
the United States or any state, and functions as a source of 
residential mortgage loan financing for the Indian or Alaskan Native 
community.


Sec. 926.2  Bank authority to make advances to housing associates.

    Subject to the provisions of the Act and part 950 of this chapter, 
a Bank may make advances to an entity that is not a member of the Bank 
if the Bank has certified the entity as a housing associate under the 
provisions of this part.


Sec. 926.3  Housing associate eligibility requirements.

    (a) General. A Bank may certify as a housing associate any 
applicant that meets the following requirements, as determined using 
the criteria set forth in Sec. 926.4:
    (1) The applicant is approved under title II of the National 
Housing Act (12 U.S.C. 1707, et seq.);
    (2) The applicant is a chartered institution having succession;
    (3) The applicant is subject to the inspection and supervision of 
some governmental agency;
    (4) The principal activity of the applicant in the mortgage field 
consists of lending its own funds; and
    (5) The financial condition of the applicant is such that advances 
may be safely made to it.
    (b) State housing finance agencies. In addition to meeting the 
requirements in paragraph (a) of this section, any applicant seeking 
access to advances as a SHFA pursuant to Sec. 950.17(b)(2) of this 
chapter shall provide evidence satisfactory to the Bank, such as a copy 
of, or a citation to, the statutes and/or regulations describing the 
applicant's structure and responsibilities, that the applicant is a 
state housing finance agency as defined in Sec. 926.1.


Sec. 926.4  Satisfaction of eligibility requirements.

    (a) HUD approval requirement. An applicant shall be deemed to meet 
the requirement in section 10b(a) of the Act and Sec. 926.3(a)(1) that 
it be approved under title II of the National Housing Act if it submits 
a current HUD Yearly Verification Report or other documentation issued 
by HUD stating that the Federal Housing Administration of HUD has 
approved the applicant as a mortgagee.
    (b) Charter requirement. An applicant shall be deemed to meet the 
requirement in section 10b(a) of the Act and Sec. 926.3(a)(2) that it 
be a chartered institution having succession if it provides evidence 
satisfactory to the Bank, such as a copy of, or a citation to, the 
statutes and/or regulations under which the applicant was created, 
that:
    (1) The applicant is a government agency; or
    (2) The applicant is chartered under state, federal, local, tribal, 
or Alaskan Native village law as a corporation or other entity that has 
rights, characteristics, and powers under applicable law similar to 
those granted a corporation.
    (c) Inspection and supervision requirement. (1) An applicant shall 
be deemed to meet the inspection and supervision requirement in section 
10b(a) of the Act and Sec. 926.3(a)(3) if it provides evidence 
satisfactory to the Bank, such as a copy of, or a citation to, relevant 
statutes and/or regulations, that, pursuant to statute or regulation, 
the applicant is subject to the inspection and supervision of a 
federal, state, local, tribal, or Alaskan native village governmental 
agency.
    (2) An applicant shall be deemed to meet the inspection requirement 
if there is a statutory or regulatory requirement that the applicant be 
audited or examined periodically by a governmental agency or by an 
external auditor.
    (3) An applicant shall be deemed to meet the supervision 
requirement if the governmental agency has statutory or regulatory 
authority to remove an applicant's officers or directors for cause or 
otherwise exercise enforcement or administrative control over actions 
of the applicant.
    (d) Mortgage activity requirement. An applicant shall be deemed to 
meet the mortgage activity requirement in section 10b(a) of the Act and 
Sec. 926.3(a)(4) if it provides documentary evidence satisfactory to 
the Bank, such as a financial statement or other financial documents 
that include the applicant's mortgage loan assets and their funding 
liabilities, that it lends its own funds as its principal activity in 
the mortgage field. For purposes of this paragraph, lending funds 
includes, but is not limited to, the purchase of whole mortgage loans. 
In the case of a federal, state, local, tribal, or Alaskan Native 
village government agency, appropriated funds shall be considered an 
applicant's own funds. An applicant shall be deemed to satisfy this 
requirement notwithstanding that the majority of its operations are 
unrelated to mortgage lending if its mortgage activity conforms to this 
requirement. An applicant that acts principally as a broker for others 
making mortgage loans, or whose principal activity is to make mortgage 
loans for the account of others, does not meet this requirement.
    (e) Financial condition requirement. An applicant shall be deemed 
to meet the financial condition requirement in Sec. 926.3(a)(5) if the 
Bank determines that advances may be safely made to the applicant. The 
applicant shall submit to the Bank copies of its most recent regulatory 
audit or examination report, or external audit report, and any other 
documentary evidence, such as financial or other information, that the 
Bank may require to make the determination.

(The Office of Management and Budget has approved the information 
collection contained in this section and assigned control number 
3069-0005 with an expiration date of November 30, 2002.)

Sec. 926.5  Housing associate application process.

    (a) Authority. The Banks are authorized to approve or deny all 
applications for certification as a housing associate, subject to the 
requirements of the Act and this part. A Bank may delegate the 
authority to approve applications for certification as a housing 
associate only to a committee of the Bank's board of directors, the 
Bank president, or a senior officer who reports directly to the Bank 
president other than an officer with responsibility for business 
development.
    (b) Application requirements. An applicant for certification as a 
housing associate shall submit an application that satisfies the 
requirements of the Act and this part to the Bank of the district in 
which the applicant's principal place of business, as determined in 
accordance with part 925 of this chapter, is located.
    (c) Bank decision process. (1) Action on applications. A Bank shall 
approve or deny an application for certification as a housing associate 
within 60 calendar days of the date the Bank deems the application to 
be complete. A Bank shall deem an application complete, and so notify 
the applicant in writing, when it has obtained all of the information 
required by this part and any other information it deems necessary to 
process the application. If a Bank determines during the review process 
that additional information is

[[Page 44428]]

necessary to process the application, the Bank may deem the application 
incomplete and stop the 60-day time period by providing written notice 
to the applicant. When the Bank receives the additional information, it 
shall again deem the application complete, so notify the applicant in 
writing, and resume the 60-day time period where it stopped.
    (2) Decision on applications. The Bank or a duly delegated 
committee of the Bank's board of directors, the Bank president, or a 
senior officer who reports directly to the Bank president other than an 
officer with responsibility for business development shall approve, or 
the board of directors of a Bank shall deny, each application for 
certification as a housing associate by a written decision resolution 
stating the grounds for the decision. Within three business days of a 
Bank's decision on an application, the Bank shall provide the applicant 
and the Finance Board with a copy of the Bank's decision resolution.
    (3) File. The Bank shall maintain a certification file for each 
applicant for at least three years after the date the Bank decides 
whether to approve or deny certification or the date the Finance Board 
resolves any appeal, whichever is later. At a minimum, the 
certification file shall include all documents submitted by the 
applicant or otherwise obtained or generated by the Bank concerning the 
applicant, all documents the Bank relied upon in making its 
determination regarding certification, including copies of statutes and 
regulations, and the decision resolution.

(The Office of Management and Budget has approved the information 
collection contained in this section and assigned control number 
3069-0005 with an expiration date of November 30, 2002.)

Sec. 926.6  Appeals.

    (a) General. Within 90 calendar days of the date of a Bank's 
decision to deny an application for certification as a housing 
associate, the applicant may submit a written appeal to the Finance 
Board that includes the Bank's decision resolution and a statement of 
the basis for the appeal with sufficient facts, information, analysis, 
and explanation to support the applicant's position. Appeals shall be 
sent to the Federal Housing Finance Board, 1777 F Street, NW, 
Washington, DC 20006, with a copy to the Bank.
    (b) Record for appeal. Upon receiving a copy of an appeal, the Bank 
whose action has been appealed shall provide to the Finance Board a 
complete copy of the applicant's certification file maintained by the 
Bank under Sec. 926.5(c)(3). Until the Finance Board resolves the 
appeal, the Bank shall promptly provide to the Finance Board any 
relevant new materials it receives. The Finance Board may request 
additional information or further supporting arguments from the 
applicant, the Bank, or any other party that the Finance Board deems 
appropriate.
    (c) Deciding appeals. Within 90 calendar days of the date an 
applicant files an appeal with the Finance Board, the Finance Board 
shall consider the record for appeal described in paragraph (b) of this 
section and resolve the appeal based on the requirements of the Act and 
this part.

(The Office of Management and Budget has approved the information 
collection contained in this section and assigned control number 
3069-0005 with an expiration date of November 30, 2002.)

PART 944--COMMUNITY SUPPORT REQUIREMENTS

    7. The authority citation for part 944 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3)(B), 1422b(a)(1), 1429, and 
1430.


    8. Amend part 944 by removing the term ``community lending'' 
wherever it appears, and, in its place, adding the term ``targeted 
community lending''.


Sec. 944.6  [Amended]

    9. Amend Sec. 944.6(b)(2) by removing the term ``nonmember 
borrowers'' and, in its place, adding the term ``housing associates''.

PART 950--ADVANCES

    10. The authority citation for part 950 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430, 
1430b and 1431.

    11. The table of contents for part 950 is revised to read as 
follows:

Subpart A--Advances to Members

Sec.
950.1   Definitions.
950.2   Authorization and application for advances; obligation to 
repay advances.
950.3   Purpose of long-term advances; Proxy text.
950.4   Limitations on access to advances.
950.5   Terms and conditions for advances.
950.6   Fees.
950.7   Collateral.
950.8   Banks as secured creditors.
950.9   Pledged collateral; verification.
950.10   Collateral valuation; appraisals.
950.11   Capital stock requirements; unilateral redemption of excess 
stock.
950.12   Intradistrict transfer of advances.
950.13   Special advances to savings associations.
950.14   Advances to the Savings Association Insurance Fund.
950.15   Liquidation of advances upon termination of membership.
Subpart B--Advances to Housing Associates
950.16   Scope.
950.17   Advances to housing associates.


    12. Amend Sec. 950.1 by:
    a. Adding, in alphabetical order, a definition of ``affiliate'';
    b. Adding, in alphabetical order, a definition of ``cash 
equivalents'';
    c. Removing the definitions of ``Actual thrift investment 
percentage'' or ``ATIP'', ``combination business or farm property'', 
``Non-Qualified Thrift Lender member'', ``Qualified Thrift Lender'' or 
``QTL'', and ``Qualified Thrift Lender test'' or ``QTL test'';
    d. Amending the definition of ``Community Investment Cash Advance'' 
or ``CICA'' by removing the term ``community lending'', and, in its 
place, adding the term ``targeted community lending'';
    e. Revising paragraph (4) of the definition of ``residential 
housing finance assets'';
    f. Amending the definition of ``residential real property'' by 
removing paragraph (1)(v); and
    g. Adding, in alphabetical order, definitions of ``small agri-
business loans'', ``small business loans'', and ``small farm loans'', 
to read as follows:


Sec. 950.1  Definitions.

* * * * *
    Affiliate means any business entity that controls, is controlled 
by, or is under common control with, a member.
* * * * *
    Cash equivalents means investments that--
    (1) Are readily convertible into known amounts of cash;
    (2) Have a remaining maturity of 90 days or less at the acquisition 
date; and
    (3) Are held for liquidity purposes.
* * * * *
    Residential housing finance assets means any of the following:
* * * * *
    (4) Loans or investments qualifying under the definition of 
``community lending'' in Sec. 900.1 of this chapter;
* * * * *
    Small agri-business loans means loans to finance agricultural 
production and other loans to farmers that are within the legal lending 
limit of the reporting CFI member, and that are reported on either: 
Schedule RC-C, Part I, item 3 of the Report of Condition and Income 
filed by insured commercial banks and FDIC-supervised savings banks; or

[[Page 44429]]

Schedule SC300, SC303 or SC306 of the Thrift Financial Report filed by 
savings associations (or equivalent successor schedules).
    Small business loans means commercial and industrial loans that are 
within the legal lending limit of the reporting CFI member and that are 
reported on either: Schedule RC-C, Part I, item 1.e or Schedule RC-C, 
Part I, item 4 of the Report of Condition and Income filed by insured 
commercial banks and FDIC-supervised savings banks; or Schedule SC300, 
SC303 or SC306 of the Thrift Financial Report filed by savings 
associations (or equivalent successor schedules)
    Small farm loans means loans secured primarily by farmland that are 
within the legal lending limit of the reporting CFI member, and that 
are reported on either: Schedule RC-C, Part I, item 1.a. or 1.b. of the 
Report of Condition and Income filed by insured commercial banks and 
FDIC-supervised savings banks; or Schedule SC260 of the Thrift 
Financial Report filed by savings associations (or equivalent successor 
schedules).
* * * * *


Sec. 950.2  [Removed]

    13. Remove Sec. 950.2.


Sec. 950.3  [Removed]

    14. Remove Sec. 950.3.


Sec. 950.4  [Redesignated as Sec. 950.2]

    15. Section 950.4 is redesignated as Sec. 950.2.


Sec. 950.14  [Redesignated as Sec. 950.3]

    16. Section 950.14 is redesignated as Sec. 950.3, and the heading 
and paragraphs (a) and (b)(1) are revised to read as follows:
* * * * *


Sec. 950.3  Purpose of long-term advances; Proxy test.

    (a) A Bank shall make long-term advances only for the purpose of 
enabling any member to purchase or fund new or existing residential 
housing finance assets, which include, for CFI members, small business 
loans, small farm loans and small agri-business loans.
    (b)(1) Prior to approving an application for a long-term advance, a 
Bank shall determine that the principal amount of all long-term 
advances currently held by the member does not exceed the total book 
value of residential housing finance assets held by such member. The 
Bank shall determine the total book value of such residential housing 
finance assets, using the most recent Thrift Financial Report, Report 
of Condition and Income, financial statement or other reliable 
documentation made available by the member.
* * * * *


Sec. 950.5  [Redesignated as Sec. 950.4]

    17. Section 950.5 is redesignated as Sec. 950.4.


Sec. 950.6  [Redesignated as Sec. 950.5]

    18. Section 950.6 is redesignated as Sec. 950.5, and paragraphs 
(b)(1), (b)(2)(ii), (b)(3), (d)(1) and (d)(2) are revised to read as 
follows:


Sec. 950.5  Terms and conditions for advances.

* * * * *
    (b) Advance pricing. (1) General. A Bank shall not price its 
advances to members below:
    (i) The marginal cost to the Bank of raising matching term and 
maturity funds in the marketplace, including embedded options; and
    (ii) The administrative and operating costs associated with making 
such advances to members.
    (2) * * *
    (ii) Each Bank shall include in its member products policy required 
by Sec. 917.4 of this chapter, standards and criteria for such 
differential pricing and shall apply such standards and criteria 
consistently and without discrimination to all members applying for 
advances.
    (3) Exceptions. The advance pricing policies contained in paragraph 
(b)(1) of this section shall not apply in the case of:
    (i) A Bank's CICA programs; and
    (ii) Any other advances programs that are volume limited and 
specifically approved by the Bank's board of directors.
* * * * *
    (d) Putable or convertible advances. (1) Disclosure. A Bank that 
offers a putable or convertible advance to a member shall disclose in 
writing to such member the type and nature of the risks associated with 
putable or convertible advance funding. The disclosure should include 
detail sufficient to describe such risks.
    (2) Replacement funding for putable advances. If a Bank terminates 
a putable advance prior to the stated maturity date of such advance, 
the Bank shall offer to provide replacement funding to the member, 
provided the member is able to satisfy the normal credit and collateral 
requirements of the Bank for the replacement funding requested.
* * * * *


Sec. 950.8  [Redesignated as Sec. 950.6]

    19. Section 950.8 is redesignated as Sec. 950.6, and paragraphs (a) 
and (b)(1) are revised to read as follows:


Sec. 950.6  Fees.

    (a) Fees in member products policy. All fees charged by each Bank 
and any schedules or formulas pertaining to such fees shall be included 
in the Bank's member products policy required by Sec. 917.4 of this 
chapter. Any such fee schedules or formulas shall be applied 
consistently and without discrimination to all members.
    (b) Prepayment fees. (1) Except where an advance product contains a 
prepayment option, each Bank shall establish and charge a prepayment 
fee pursuant to a specified formula which makes the Bank financially 
indifferent to the borrower's decision to repay the advance prior to 
its maturity date.
* * * * *

    20. Amend Sec. 950.9 by:


Sec. 950.9  [Redesignated as Sec. 950.7]

    a. Redesignating Sec. 950.9 as Sec. 950.7;
    b. Revising paragraphs (a) introductory text, (a)(3), (a)(4), and 
(a)(5);
    c. Redesignating paragraphs (b), (c), (d) and (e) as paragraphs 
(c), (d), (e) and (f) respectively;
    d. Revising newly designated paragraphs (c) and (d); and
    e. Adding paragraphs (b) and (g), to read as follows:


Sec. 950.7  Collateral.

    (a) Eligible security for advances to all members. At the time of 
origination or renewal of an advance, each Bank shall obtain from the 
borrowing member or, in accordance with paragraph (g) of this section, 
an affiliate of the borrowing member, and thereafter maintain, a 
security interest in collateral that meets the requirements of one or 
more of the following categories:
* * * * *
    (3) Cash or deposits. Cash or deposits in a Bank.
    (4) Other real estate-related collateral. (i) Other real estate-
related collateral provided that:
    (A) Such collateral has a readily ascertainable value, can be 
reliably discounted to account for liquidation and other risks, and can 
be liquidated in due course; and
    (B) The Bank can perfect a security interest in such collateral.
    (ii) Eligible other real estate-related collateral may include, but 
is not limited to:
    (A) Privately issued mortgage-backed securities not otherwise 
eligible under paragraph (a)(1)(ii) of this section;

[[Page 44430]]

    (B) Second mortgage loans, including home equity loans;
    (C) Commercial real estate loans; and
    (D) Mortgage loan participations.
    (5) Securities representing equity interests in eligible advances 
collateral. Any security the ownership of which represents an undivided 
equity interest in underlying assets, all of which qualify either as:
    (i) Eligible collateral under paragraphs (a)(1), (2), (3) or (4) of 
this section; or
    (ii) Cash equivalents.
    (b) Additional collateral eligible as security for advances to CFI 
members or their affiliates. (1) General. Subject to the requirements 
set forth in part 980 of this chapter, a Bank is authorized to accept 
from CFI members or their affiliates as security for advances small 
business loans, small farm loans or small agri-business loans fully 
secured by collateral other than real estate, or securities 
representing a whole interest in such loans, provided that:
    (i) Such collateral has a readily ascertainable value, can be 
reliably discounted to account for liquidation and other risks, and can 
be liquidated in due course; and
    (ii) The Bank can perfect a security interest in such collateral.
    (2) Change in CFI status. If a Bank determines, as of April 1 of 
each year, that a member that has previously qualified as a CFI no 
longer qualifies as a CFI, and the member has total advances 
outstanding that exceed the amount that can be fully secured by 
collateral under paragraph (a) of this section, the Bank may:
    (i) Permit the advances of such member to run to their stated 
maturities; and
    (ii) Renew such member's advances to mature no later than March 31 
of the following year; provided that the total of the member's advances 
under paragraphs (b)(2)(i) and (ii) of this section shall be fully 
secured by collateral set forth in paragraphs (a) and (b) of this 
section.
    (c) Bank restrictions on eligible advances collateral. A Bank at 
its discretion may further restrict the types of eligible collateral 
acceptable to the Bank as security for an advance, based upon the 
creditworthiness or operations of the borrower, the quality of the 
collateral, or other reasonable criteria.
    (d) Additional advances collateral. The provisions of paragraph (a) 
of this section shall not affect the ability of any Bank to take such 
steps as it deems necessary to protect its secured position on 
outstanding advances, including requiring additional collateral, 
whether or not such additional collateral conforms to the requirements 
for eligible collateral in paragraphs (a) or (b) of this section or 
section 10 of the Act (12 U.S.C. 1430).
* * * * *
    (g) Pledge of advances collateral by affiliates. Assets held by an 
affiliate of a member that are eligible as collateral under paragraphs 
(a) or (b) of this section may be used to secure advances to that 
member only if:
    (1) The collateral is pledged to secure either:
    (i) The member's obligation to repay advances; or
    (ii) A surety or other agreement under which the affiliate has 
assumed, along with the member, a primary obligation to repay advances 
made to the member; and
    (2) The Bank obtains and maintains a legally enforceable security 
interest pursuant to which the Bank's legal rights and privileges with 
respect to the collateral are functionally equivalent in all material 
respects to those that the Bank would possess if the member were to 
pledge the same collateral directly, and such functional equivalence is 
supported by adequate documentation.


Sec. 950.10  [Redesignated as Sec. 950.8]

    21. Section 950.10 is redesignated as Sec. 950.8.


Sec. 950.11  [Redesignated as Sec. 950.9]

    22. Section 950.11 is redesignated as Sec. 950.9.


Sec. 950.12  [Redesignated as Sec. 950.10]

    23. Section 950.12 is redesignated as Sec. 950.10, and is revised 
to read as follows:


Sec. 950.10  Collateral valuation; appraisals.

    (a) Collateral valuation. Each Bank shall determine the value of 
collateral securing the Bank's advances in accordance with the 
collateral valuation procedures set forth in the Bank's member products 
policy established pursuant to Sec. 917.4 of this chapter.
    (b) Fair application of procedures. Each Bank shall apply the 
collateral valuation procedures consistently and fairly to all 
borrowing members, and the valuation ascribed to any item of collateral 
by the Bank shall be conclusive as between the Bank and the member.
    (c) Appraisals. A Bank may require a member to obtain an appraisal 
of any item of collateral, and to perform such other investigations of 
collateral as the Bank deems necessary and proper.


Sec. 950.15  [Redesignated as Sec. 950.11]

    24. Section 950.15 is redesignated as Sec. 950.11.


Sec. 950.17  [Redesignated as Sec. 950.12]

    25. Section 950.17 is redesignated as Sec. 950.12.


Sec. 950.18  [Redesignated as Sec. 950.13]

    26. Section 950.18 is redesignated as Sec. 950.13.


Sec. 950.20  [Redesignated as Sec. 950.14]

    27. Section 950.20 is redesignated as Sec. 950.14 and transferred 
to subpart A.


Sec. 950.19  [Redesignated as Sec. 950.15]

    28. Section 950.19 is redesignated as Sec. 950.15.
    29. The heading of Subpart B is revised to read as follows:

Subpart B--Advances to Housing Associates


Sec. 150.21  [Redesignated as Sec. 950.16]

    30. Section 950.21 is redesignated as Sec. 950.16, and is revised 
to read as follows:


Sec. 950.16  Scope.

    Except as otherwise provided in Sec. Sec. 950.14 and 950.17, the 
requirements of subpart A apply to this subpart.


Sec. 950.22  [Removed]


Sec. 950.23  [Removed]

    31. Sections 950.22 and 950.23 are removed.


Sec. 950.24  [Redesignated as Sec. 950.17]

    32. Section 950.24 is redesignated as Sec. 950.17, and is amended 
by:
    a. Revising the section heading;
    b. Removing the words ``nonmember mortgagee'' and ``nonmember 
mortgagees'', wherever they appear, and, in their place, adding the 
words ``housing associate'' and ``housing associates'', respectively; 
and
    c. In paragraph (b)(2)(i) introductory text, removing the term 
``Sec. 950.22(d)'', and, in its place, adding the term 
``Sec. 926.3(b)'';
    d. In paragraph (b)(2)(i)(B), removing the terms 
``Sec. 950.9(a)(3)'' and ``Sec. 950.22(d)'', and in their place, adding 
the terms ``Sec. 950.7(a)(3)'' and ``Sec. 926.3(b),'' respectively; and
    e. Revising paragraph (b)(2)(i)(C), to read as follows:


Sec. 950.17  Advances to housing associates.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (C) The other real estate-related collateral described in 
Sec. 950.7(a)(4), provided that such collateral is comprised of 
mortgage loans on one-to-

[[Page 44431]]

four family or multifamily residential property.
* * * * *

PART 952--COMMUNITY INVESTMENT CASH ADVANCE PROGRAMS

    33. The authority citation for part 952 continues to read as 
follows:

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


Sec. 952.3  [Amended]

    34. Amend Sec. 952.3 by removing the definition of ``nonmember 
borrower''.
    35. Amend part 952 by:
    a. Removing the term ``community lending'', wherever it appears, 
and, in its place, adding the term ``targeted community lending''; and
    b. Removing the terms ``nonmember borrower'' and ``nonmember 
borrowers'', wherever they appear, and, in their place, adding the 
terms ``housing associate borrower'' and ``housing associate 
borrowers'', respectively.

PART 961--STANDBY LETTERS OF CREDIT

    36. The authority citation for part 961 continues to read as 
follows:

    Authority: 12 U.S.C. 1422b, 1429, 1430, 1430b, 1431.


    37. Amend Sec. 961.1 by:
    a. Removing the definition of ``community lending'';
    b. Removing the definition of ``nonmember mortgagee'';
    c. Removing the definition of ``nonmember SHFA'';
    d. Adding the definition of ``SHFA associate''; and
    e. Removing the definition of ``small business'', to read as 
follows:


Sec. 961.1  Definitions.

* * * * *
    SHFA associate means a housing associate that is a ``state housing 
finance agency,'' as that term is defined in Sec. 926.1 of this 
chapter, and that has met the requirements of Sec. 926.3(b) of this 
chapter.
* * * * *

    38. Amend part 961 by:
    a. Removing the terms ``nonmember mortgagee'' and ``nonmember 
mortgagees'', wherever they appear, and, in their place, adding the 
terms ``housing associate'' and ``housing associates'', respectively; 
and
    b. Removing the terms ``nonmember SHFA'' and ``nonmember SHFAs'', 
wherever they appear, and, in their place, adding the terms ``SHFA 
associate'' and ``SHFA associates'', respectively.

    39. Amend Sec. 961.2 by revising paragraphs (a)(2), (c)(1), and 
(c)(2), to read as follows:


Sec. 961.2  Standby letters of credit on behalf of members.

    (a) * * *
    (2) To assist members in facilitating community lending;
* * * * *
    (c) Eligible collateral. (1) Any standby letter of credit issued or 
confirmed on behalf of a member may be secured in accordance with the 
requirements for advances under Sec. 950.7 of this chapter.
    (2) A standby letter of credit issued or confirmed on behalf of a 
member for a purpose described in paragraphs (a)(1) or (a)(2) of this 
section may, in addition to the collateral described in paragraph 
(c)(1) of this section, be secured by obligations of state or local 
government units or agencies rated as investment grade by an NRSRO.

    40. Amend Sec. 961.3 by:
    a. In the introductory text of paragraph (a), removing the term 
``Sec. Sec. 950.24(b)(1)(i) or (ii)'' and, in its place, adding the 
term ``Sec. Sec. 950.17(b)(1)(i) or (ii)'';
    b. Revising paragraph (a)(2); and
    c. In paragraph (b), removing the term ``950.24(b)(2)(i)(A), (B) or 
(C)'' and, in its place, adding the term ``950.17(b)(2)(i)(A), (B) or 
(C)'', to read as follows:


Sec. 961.3  Standby letters of credit on behalf of housing associates.

    (a) * * *
    (2) To assist housing associates in facilitating community lending;
* * * * *


Sec. 961.4  [Amended]

    41. Amend Sec. 961.4 by removing the term 
``Secs. 950.24(b)(2)(i)(B), 950.24(d), or 965.2(a)(2)'' in paragraph 
(a)(1) and, in its place, adding the term 
``Sec. Sec. 950.17(b)(2)(i)(B), 950.17(d), or 969.2''.

    42. Amend Sec. 961.5 by:
    a. Revising paragraph (a); and
    b. In paragraph (b)(2), removing the reference to 
``Sec. Sec. 950.9(b), 950.9(d), 950.9(e), 950.10, 950.11 and 950.12'', 
and, in its place, adding a reference to Sec. Sec. 950.7(d), 950.7(e), 
950.8, 950.9 and 950.10'', to read as follows:


Sec. 961.5  Additional provisions applying to all standby letters of 
credit.

    (a) Requirements. Each standby letter of credit issued or confirmed 
by a Bank shall:
    (1) Contain a specific expiration date, or be for a specific term; 
and
    (2) Require approval in advance by the Bank of any transfer of the 
standby letter of credit from the original beneficiary to another 
person or entity.
* * * * *

    43. In subchapter J, add a new part 980 to read as follows:

PART 980--NEW BUSINESS ACTIVITIES

Sec.
980.1   Definitions.
980.2   Limitation on Bank authority to undertake new business 
activities.
980.3   New business activity notice requirement.
980.4   Commencement of new business activities.
980.5   Notice by the Finance Board.
980.6   Finance Board consent.
980.7   Examinations; requests for additional information.

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1431(a), 1432(a).


Sec. 980.1  Definitions.

    As used in this part:
    New business activity means any business activity undertaken, 
transacted, conducted, or engaged in by a Bank that has not been 
previously undertaken, transacted, conducted, or engaged in by that 
Bank, or was previously undertaken, transacted, conducted, or engaged 
in under materially different terms and conditions, such that it:
    (1) Involves the acceptance of collateral enumerated under 
Sec. 950.7(a)(4) of this chapter;
    (2) Involves the acceptance of classes of collateral enumerated 
under Sec. 950.7(b) of this chapter for the first time;
    (3) Entails risks not previously and regularly managed by that 
Bank, its members, or both, as appropriate; or
    (4) Involves operations not previously undertaken by that Bank.


Sec. 980.2  Limitation on Bank authority to undertake new business 
activities.

    No Bank shall undertake any new business activity except in 
accordance with the procedures set forth in this part.


Sec. 980.3  New business activity notice requirement.

    At least sixty days prior to undertaking a new business activity, 
except as provided in Sec. 980.4(b), a Bank shall submit to the Finance 
Board a written notice containing the following information:
    (a) General requirements. Except as provided in paragraph (b) of 
this section, a Bank's notice of new business activity shall include:
    (1) An opinion of counsel citing the statutory, regulatory, or 
other legal authority for the new business activity;

[[Page 44432]]

    (2) A good faith estimate of the anticipated dollar volume of the 
activity over the short-and long-term;
    (3) A full description of:
    (i) The purpose and operation of the proposed activity;
    (ii) The market targeted by the activity;
    (iii) The delivery system for the activity;
    (iv) The effect of the activity on the housing, or relevant 
community lending, market; and
    (4) A demonstration of the Bank's capacity, through staff, or 
contractors employed by the Bank, sufficiency of experience and 
expertise, to safely administer and manage the risks associated with 
the new activity;
    (5) An assessment of the risks associated with the activity, 
including the Bank's ability to manage these risks and the Bank's 
ability to manage the risks associated with increasing volumes of the 
new activity; and
    (6) The criteria that the Bank will use to determine the 
eligibility of its members or housing associates to participate in the 
new activity.
    (b) New collateral activities. If a proposed new business activity 
relates to the acceptance of collateral under Sec. 950.7 of this 
chapter, a Bank's notice of new business activity shall include:
    (1) A description of the classes or amounts of collateral proposed 
to be accepted by the Bank;
    (2) A copy of the Bank's member products policy, adopted pursuant 
to Sec. 917.4 of this chapter;
    (3) A copy of the Bank's procedures for determining the value of 
the collateral in question, established pursuant to Sec. 950.10 of this 
chapter; and
    (4) A demonstration of the Bank's capacity, personnel, technology, 
experience and expertise to value, discount and manage the risks 
associated with the collateral in question.


Sec. 980.4  Commencement of new business activities.

    A Bank may commence a new business activity:
    (a) Sixty days after receipt by the Finance Board of the notice of 
new business activity under Sec. 980.3, if the Finance Board has not 
issued to the Bank a notice as described in Sec. 980.5(a)(1) through 
(4);
    (b) In the case of the acceptance of collateral enumerated under 
Sec. 950.7(a)(4) of this chapter, immediately upon receipt by the 
Finance Board of a notice of new business activity under Sec. 980.3; or
    (c) Immediately upon issuance by the Finance Board of a letter of 
approval under Sec. 980.6.


Sec. 980.5  Notice by the Finance Board.

    (a) Issuance. Within sixty days after receipt of a notice of new 
business activity under Sec. 980.3, the Finance Board may issue to a 
Bank a notice that:
    (1) Disapproves the new business activity;
    (2) Instructs the Bank not to commence the new business pending 
further consideration by the Finance Board;
    (3) Declares an intent to examine the Bank;
    (4) Requests additional information including but not limited to 
the requests listed in Sec. 980.7;
    (5) Establishes conditions for the Finance Board's approval of the 
new business activity, including but not limited to the conditions 
listed in Sec. 980.7; or
    (6) Contains other instructions or information that the Finance 
Board deems appropriate under the circumstances.
    (b) Effect. Following receipt of a notice issued pursuant to 
paragraph (a) of this section, a Bank may not undertake any new 
business activity that is the subject of the notice until the Bank has 
received the Finance Board's consent pursuant to Sec. 980.6.


Sec. 980.6  Finance Board consent.

    The Finance Board may at any time provide consent for a Bank to 
undertake a particular new business activity and setting forth the 
terms and conditions that apply to the activity, with which the Bank 
shall comply if the Bank undertakes the activity in question.


Sec. 980.7  Examinations; requests for additional information.

    (a) General. Nothing in this part shall limit in any manner the 
right of the Finance Board to conduct any examination of any Bank.
    (b) Requests for additional information and conditions for 
approval. With respect to a new business activity, nothing in this part 
shall limit the right of the Finance Board at any time to:
    (1) Request further information from a Bank concerning a new 
business activity; and
    (2) Require a Bank to comply with certain conditions in order to 
undertake, or continue to undertake, the new business activity in 
question, including but not limited to:
    (i) Successful completion of pre- or post-implementation safety and 
soundness examinations;
    (ii) Demonstration by the Bank of adequate operational capacity, 
including the existence of appropriate policies, procedures and 
controls;
    (iii) Demonstration by the Bank of its ability to manage the risks 
associated with accepting increasing volumes of particular collateral, 
or holding increasing volumes of particular assets, including the 
Bank's capacity reliably to value, discount and market the collateral 
or assets for liquidation;
    (iv) Demonstration by the Bank that the new business activity is 
consistent with the housing finance and community lending mission of 
the Banks and the cooperative nature of the Bank System; and
    (v) Finance Board review of any contracts or agreements between the 
Bank and its members or housing associates.

    Dated: June 29, 2000.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-17133 Filed 7-17-00; 8:45 am]
BILLING CODE 6725-01-P