44414 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

1Contracts that have been signed prior to the

effective date of these rules are invalid under the

pilot program.

producer milk, in product pounds,

during the month, combining all plants

of a single handler regulated under the

same Federal order.

(c) Forward contract means an

agreement covering the terms and

conditions for the sale of milk from a

producer defined in §§ 1001.12,

1005.12, 1006.12, 1007.12, 1030.12,

1032.12, 1033.12, 1124.12, 1126.12,

1131.12, and 1135.12, or a cooperative

association defined in § 1000.18, and a

handler defined in §1000.9 or 1135.9.

(d) Contract milk means the producer

milk covered by a forward contract.

(e) Disclosure statement means the

following statement which must be

signed by each producer entering into a

forward contract with a handler before

the market administrator will recognize

the terms and conditions provided in

such contract.

Disclosure Statement

I am voluntarily entering into a forward

contract with llll (handler’s name). I

have been given a copy of the contract and

I have received the USDA’s Pilot Program

Fact Sheet to which this disclosure statement

was attached. By signing this form, I

understand that I am forfeiting my right to

receive the order’s minimum prices for that

portion of my milk that is under forward

contract for the duration of the contract. I

also understand that my milk will be priced

in accordance with the terms and conditions

of the contract.

Printed Name: llllllllllllll

Signature: llllllllllllllll

Date: llllllllllllllllll

Address: llllllllllllllll

Producer No: llllllllllllll

(f) Other definitions. The definition of any

term in parts 1000–1135 of this chapter apply

to, and are hereby made a part of, this part.

Subpart B—Rules Governing Forward

Contracts

§ 1140.2 Rules governing forward

contracts.

(a) Any handler defined in §§ 1000.9

and 1135.9 may enter into forward

contracts with producers or cooperative

associations for the handler’s eligible

milk. Milk under forward contract in

compliance with these rules will be

exempt from the minimum payment

provisions that would apply to such

milk pursuant to §§ 1001.73, 1005.73,

1006.73, 1007.73, 1030.73, 1032.73,

1033.73, 1124.73, 1126.73, 1131.73 and

1135.73 for the period of time covered

by the contract.

(b) A forward contract with a

producer or cooperative association

participating for the first time in this

pilot program may not exceed 12

months. In no event shall a forward

contract executed pursuant to this part

extend beyond December 31, 2004.

(c) Forward contracts must be signed

and dated by the contracting handler

and producer (or cooperative

association) prior to the 1st day of the

1st month for which they are to be

effective and must be in the possession

of the market administrator by the 15th

day of that month.1 The disclosure

statement provided in § 1140.1(e) must

be signed on the same date as the

contract by each producer entering into

a forward contract under the pilot

program, and this signed disclosure

statement must be attached to each

contract submitted to the market

administrator.

(d) In the event that a handler’s

contract milk exceeds the handler’s

eligible milk for any month in which the

specified contract price(s) are below the

order’s minimum prices, the handler

must designate which producer milk

shall not be contract milk. If the handler

does not designate the suppliers of the

over-contracted milk, the market

administrator shall prorate the overcontracted milk to each producer and

cooperative association having a

forward contract with the handler.

(e) Payments for milk covered by a

forward contract must be made on or

before the dates applicable to payments

for milk that is not under forward

contract under the respective Federal

order.

(f) Handlers participating in the pilot

program will continue to be required to

file all reports that are currently

required under the respective marketing

orders and will continue to be required

to account to the pool for all milk they

receive at their respective order’s

minimum class prices.

(g) Nothing in this part shall impede

the contractual arrangements that exist

between a cooperative association and

its members.

Dated: July 13, 2000.

Kathleen A. Merrigan,

Administrator, Agricultural Marketing

Service.

[FR Doc. 00–18113 Filed 7–17–00; 8:45 am]

BILLING CODE 3410–02–P

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.

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 AttorneyAdvisor, (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

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 44415

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

1338 (Nov. 12, 1999).

2The Finance Board recently adopted an Interim

Final Rule that amended the Finance Board’s

Membership Regulation to implement the

Modernization Act amendments regarding

membership in the Bank System. See 65 FR 13866

(March 15, 2000). The Finance Board adopted the

Interim Final Rule as a Final Rule, with several

changes, at its June 23, 2000 Board meeting.

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 agribusiness 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).

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 § 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 agribusiness 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 § 950.7(b)(1) also required

that, prior to accepting any such CFIeligible 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 § 950.7(b)(1) excluded loans

secured by real estate because these

types of loans were included in

proposed § 950.7(a)(4).

a. Types of CFI-eligible collateral—

Definitions of ‘‘small business loans,’’

‘‘small farm loans’’ and ‘‘small agribusiness loans’’. Proposed § 950.1

defined the terms ‘‘small business

44416 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

3FFIEC 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.

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.

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 CFIeligible 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

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 44417

serving as an appropriate method of

categorizing or defining small business

loans, small farm loans and small agribusiness 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 § 917.4 and the

new business activities requirements in

part 980 discussed below. Accordingly,

§ 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 § 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, § 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

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

§ 950.3, which sets forth the authorized

purposes of long-term Bank advances,

so their use in § 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 CFIeligible 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 nonmortgage, 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

§ 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 § 917.4

will minimize appropriately the Banks’

exposure to risk in accepting CFIeligible 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, § 602

(to be codified at 12 U.S.C. 1422(13)).

The proposed rule included a definition

of ‘‘CFI’’ in § 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

§ 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

44418 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

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 § 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 CFIeligible collateral from that member.

Proposed § 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 CFIeligible 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

§ 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

§ 950.7(b)(2)(i) of the final rule.

Proposed § 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, § 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

§ 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,

§ 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, § 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

§ § 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 § 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,

§ 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 § 950.7(a)(4)(i)(A) of the final

rule with respect to other real estaterelated collateral.

2. Cash or Deposits in a Bank

Current § 950.9 of the Advances

Regulation (redesignated as § 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, § 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,

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 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

§ 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 § 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 § § 980.4 and

980.5, the Bank was permitted to

commence acceptance of other realestate 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 estaterelated 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, § 980.1 of the final rule treats

a Bank’s acceptance of other real estaterelated collateral of any amount as a

new business activity, regardless of

whether the Bank has accepted such

collateral in the past, and § 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, § 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 §§ 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 § 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

§ 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

§ 950.7(b)(1)(i) with respect to CFIeligible 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.

44420 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

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

§ 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 § 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 nonCFI 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 § 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 § 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-bycase basis. In addition to the acceptance

of new or increased volumes of

collateral, proposed § 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 estaterelated collateral, proposed § 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

§ 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’’

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 44421

may be more broad than necessary.

Accordingly, the final rule revises the

definition of ‘‘new business activity’’ in

§ 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

§ 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

§ 980.4 is revised to permit a Bank to

commence accepting other real estaterelated collateral immediately upon

receipt by the Finance Board of a notice

of new business activity under § 980.3.

This change will enable Banks to accept

other real estate-related collateral

without undue delay as a result of the

§ 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-byloan 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 § 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 § 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, § 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 § 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 § 950.9(a)(4) was not

originally included in current

§ 950.9(a)(5)(i) because the dollar

amount of advances that could be

secured by other real estate-related

collateral was limited to 30 percent of

the member’s capital and the Finance

Board believed this limitation would

result in monitoring complexities that

would make the inclusion of other real

estate-related collateral in

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

16618 (April 6, 1999). As discussed

above, the Modernization Act amended

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

removing the 30 percent cap on other

real estate-related collateral. See

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

Since this impediment has been

eliminated, § 950.7(a)(5)(i) of the final

rule includes a reference to other real

estate-related collateral under

§ 950.7(a)(4).

2. Bank Restrictions on Eligible

Collateral

Section 9 of the Bank Act provides

that the Banks have discretion to deny,

or to approve with conditions, a request

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

confers on the Banks the authority to

determine whether collateral is

sufficient to fully secure an advance.

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

§ 950.9(b) of the Advances Regulation

grants a Bank the discretion to further

restrict the types of eligible collateral it

will accept as security for advances

based on the creditworthiness or

operations of the borrower, the quality

of the collateral, or other reasonable

criteria. 12 CFR 950.9(b). In the

SUPPLEMENTARY INFORMATION section of

the proposed rule, the Finance Board

stated that the discretionary authority

conferred on the Banks by current

§ 950.9(b) was unnecessary in light of

the Banks’ statutory authority, and

because the factors listed in current

§ 950.9(b) are ordinarily considered in

valuing collateral. Accordingly, the

proposed rule removed current

§ 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

44422 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

4The ‘‘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.

these comments, the provision has been

retained in § 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 § 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, § 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 coobligation 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 § 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, § 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 § § 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 § 950.7(f) of the

final rule, and consistent with the

proposed rule, the final rule amends

§ 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 § 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 readopt an advances or credit policy to

new § 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

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 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.

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,

§ 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

§ 950.14(a), and is implemented by use

of a proxy test set forth in current

§ 950.14(b). 12 CFR 950.14(a), (b).

Specifically, current § 950.14(b)(1)

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

maturity greater than five years), a Bank

shall determine that the principal

amount of all long-term advances

currently held by the member does not

exceed the total book value of the

member’s ‘‘residential housing finance

assets.’’ 12 CFR 950.1, 950.14(b)(1).

‘‘Residential housing finance assets’’ are

defined in current § 950.1 to mean any

of the following: (1) Loans secured by

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

loans secured by residential real

property; (4) loans or investments

financed by advances made pursuant to

a CICA program; (5) loans secured by

manufactured housing, regardless of

whether such housing qualifies as

residential real property; or (6) any

loans or investments which the Finance

Board, in its discretion, otherwise

determines to be residential housing

finance assets. 12 CFR 950.1. Current

§ 950.14(b)(1) requires a Bank to

determine the total book value of the

member’s residential housing finance

assets using the most recent Thrift

Financial Report, Report of Condition

and Income, or financial statement

made available by the member. 12 CFR

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

determined by the Finance Board to be

an operationally feasible compliance

monitoring mechanism for residential

housing finance assets to implement the

statutory requirement that long-term

advances be only for residential housing

finance purposes. See 57 FR 45338 (Oct.

1, 1992).

The Modernization Act amended

section 10(a) of the Bank Act to provide

that a Bank may make long-term

advances not only for the purpose of

providing funds for residential housing

finance, but also for the purpose of

providing funds to any CFI for small

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

section 604(a)(3). Accordingly,

consistent with the proposed rule, the

final rule amends current § 950.14 by

adding this new purpose in

redesignated § 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 agribusinesses,’’ § 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 agribusinesses’’ to mean making advances

to CFI members for small business

loans, small farm loans and small agribusiness 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 § 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 § 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 § 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 § 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

§ 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 longterm advances to CFIs for the purpose

of providing financing for small

businesses, small farms and small agriVerDate 11<MAY>2000 15:53 Jul 17, 2000 Jkt 190000 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 E:\FR\FM\18JYR1.SGM pfrm01 PsN: 18JYR1
44424 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

businesses. See Modernization Act,

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

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

Bank shall establish and charge a

prepayment fee pursuant to a specified

formula which sufficiently compensates

the Bank for providing a prepayment

option on an advance, and which acts

to make the Bank financially indifferent

to the borrower’s decision to repay the

advance prior to its maturity date. 12

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

not clearly indicate whether Banks must

consider the costs of associated options

and the administrative costs of funding

advances with such options in pricing

an advance. Further, because current

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

‘‘to take into account’’ the marginal cost

to the Bank of raising matching maturity

funds in the marketplace, and the

administrative and operating costs

associated with making such advances

to members, the current rule allows a

Bank to price an advance below its

marginal cost of funds, a practice the

Finance Board could find to be an

unsafe and unsound practice in some

circumstances and one the Finance

Board wishes to discourage.

Therefore, redesignated § 950.5(b)(1)

of the proposed rule 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 § 950.5(b) is

adopted without change in the final

rule.

Proposed § 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

§ 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

§ 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 § 950.6(d)(1) of the Advances

Regulation provides that a Bank that

offers a putable advance to a member

shall disclose in writing to such member

the type and nature of the risks

associated with putable advance

funding, and that such disclosure

should include detail sufficient to

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

A convertible advance is similar to a

putable advance in that it carries risks

associated with a triggering event,

usually a shift in a designated interest

rate index. Accordingly, redesignated

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

the current disclosure requirements for

putable advances applicable to

convertible advances as well. Current

§ 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

§ 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 § 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

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 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, § 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

§ 950.3(a), with the requirements for a

standby letter of credit policy from

current § 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, § 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; advancesrelated fees (including any schedules or

formulas pertaining to such fees);

standards and criteria for pricing

member products (including differential

pricing of advances pursuant to

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

pricing of standby letters of credit

(including any special pricing

provisions for standby letters of credit

that facilitate the financing of projects

that are eligible for any CICA programs

under part 952); the maintenance of

appropriate systems, procedures and

internal controls; and the maintenance

of appropriate operational and

personnel capacity.

A Bank’s member products policy

also must provide that, for any draw

made by a beneficiary under a standby

letter of credit, the member will be

charged a processing fee calculated in

accordance with § 975.6(b).

As proposed, § 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 § 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 § 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 § 952.3 by redesignating 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 § 900.1. The broader definition

of ‘‘community lending’’ in § 900.1

would include, for CFIs, purchasing or

funding small business loans, small

farm loans and small agri-business

loans, as defined in § 950.1 of this

chapter.

5. Standby Letters of Credit—Part 961

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 § 961.2(c)(2)(i) to allow

standby letters of credit issued for a

purpose described in § 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-oneborrower 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 § 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 § 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. § 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

44426 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

900, 917, 926, 944, 950, 952, 961 and

980, Code of Federal Regulations, as

follows:

PART 900—GENERAL DEFINITIONS

1. The authority citation for part 900

is revised to read as follows:

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

2. Amend § 900.1 by:

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:

§ 900.1 Definitions applying to all

regulations.

* * * * *

Appropriate regulator means a

regulatory entity listed in § 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 agribusiness loans, as defined in § 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 online 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 § 917.4 to read as follows:

§ 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 § 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 § 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.

§ 926.1 Definitions.

As used in this part:

Advance has the meaning set forth in

§ 950.1 of this chapter.

Governmental agency means the

governor, legislature, and any other

component of a federal, state, local,

tribal, or Alaskan native village

government with authority to act for or

on behalf of that government.

HUD means the Department of

Housing and Urban Development.

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 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.

§ 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.

§ 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

§ 926.4:

(1) The applicant is approved under

title II of the National Housing Act (12

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

(2) The applicant is a chartered

institution having succession;

(3) The applicant is subject to the

inspection and supervision of some

governmental agency;

(4) The principal activity of the

applicant in the mortgage field consists

of lending its own funds; and

(5) The financial condition of the

applicant is such that advances may be

safely made to it.

(b) State housing finance agencies. In

addition to meeting the requirements in

paragraph (a) of this section, any

applicant seeking access to advances as

a SHFA pursuant to § 950.17(b)(2) of

this chapter shall provide evidence

satisfactory to the Bank, such as a copy

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

regulations describing the applicant’s

structure and responsibilities, that the

applicant is a state housing finance

agency as defined in § 926.1.

§ 926.4 Satisfaction of eligibility

requirements.

(a) HUD approval requirement. An

applicant shall be deemed to meet the

requirement in section 10b(a) of the Act

and § 926.3(a)(1) that it be approved

under title II of the National Housing

Act if it submits a current HUD Yearly

Verification Report or other

documentation issued by HUD stating

that the Federal Housing Administration

of HUD has approved the applicant as

a mortgagee.

(b) Charter requirement. An applicant

shall be deemed to meet the

requirement in section 10b(a) of the Act

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

institution having succession if it

provides evidence satisfactory to the

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

the statutes and/or regulations under

which the applicant was created, that:

(1) The applicant is a government

agency; or

(2) The applicant is chartered under

state, federal, local, tribal, or Alaskan

Native village law as a corporation or

other entity that has rights,

characteristics, and powers under

applicable law similar to those granted

a corporation.

(c) Inspection and supervision

requirement. (1) An applicant shall be

deemed to meet the inspection and

supervision requirement in section

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

provides evidence satisfactory to the

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

relevant statutes and/or regulations,

that, pursuant to statute or regulation,

the applicant is subject to the inspection

and supervision of a federal, state, local,

tribal, or Alaskan native village

governmental agency.

(2) An applicant shall be deemed to

meet the inspection requirement if there

is a statutory or regulatory requirement

that the applicant be audited or

examined periodically by a

governmental agency or by an external

auditor.

(3) An applicant shall be deemed to

meet the supervision requirement if the

governmental agency has statutory or

regulatory authority to remove an

applicant’s officers or directors for cause

or otherwise exercise enforcement or

administrative control over actions of

the applicant.

(d) Mortgage activity requirement. An

applicant shall be deemed to meet the

mortgage activity requirement in section

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

provides documentary evidence

satisfactory to the Bank, such as a

financial statement or other financial

documents that include the applicant’s

mortgage loan assets and their funding

liabilities, that it lends its own funds as

its principal activity in the mortgage

field. For purposes of this paragraph,

lending funds includes, but is not

limited to, the purchase of whole

mortgage loans. In the case of a federal,

state, local, tribal, or Alaskan Native

village government agency,

appropriated funds shall be considered

an applicant’s own funds. An applicant

shall be deemed to satisfy this

requirement notwithstanding that the

majority of its operations are unrelated

to mortgage lending if its mortgage

activity conforms to this requirement.

An applicant that acts principally as a

broker for others making mortgage

loans, or whose principal activity is to

make mortgage loans for the account of

others, does not meet this requirement.

(e) Financial condition requirement.

An applicant shall be deemed to meet

the financial condition requirement in

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

advances may be safely made to the

applicant. The applicant shall submit to

the Bank copies of its most recent

regulatory audit or examination report,

or external audit report, and any other

documentary evidence, such as

financial or other information, that the

Bank may require to make the

determination.

(The Office of Management and Budget has

approved the information collection

contained in this section and assigned

control number 3069–0005 with an

expiration date of November 30, 2002.)

§ 926.5 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

44428 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

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.)

§ 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

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

resolves the appeal, the Bank shall

promptly provide to the Finance Board

any relevant new materials it receives.

The Finance Board may request

additional information or further

supporting arguments from the

applicant, the Bank, or any other party

that the Finance Board deems

appropriate.

(c) Deciding appeals. Within 90

calendar days of the date an applicant

files an appeal with the Finance Board,

the Finance Board shall consider the

record for appeal described in paragraph

(b) of this section and resolve the appeal

based on the requirements of the Act

and this part.

(The Office of Management and Budget has

approved the information collection

contained in this section and assigned

control number 3069–0005 with an

expiration date of November 30, 2002.)

PART 944—COMMUNITY SUPPORT

REQUIREMENTS

7. The authority citation for part 944

continues to read as follows:

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

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

8. Amend part 944 by removing the

term ‘‘community lending’’ wherever it

appears, and, in its place, adding the

term ‘‘targeted community lending’’.

§ 944.6 [Amended]

9. Amend § 944.6(b)(2) by removing

the term ‘‘nonmember borrowers’’ and,

in its place, adding the term ‘‘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 § 950.1 by:

a. Adding, in alphabetical order, a

definition of ‘‘affiliate’’;

b. Adding, in alphabetical order, a

definition of ‘‘cash equivalents’’;

c. Removing the definitions of

‘‘Actual thrift investment percentage’’ or

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

property’’, ‘‘Non-Qualified Thrift Lender

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

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

test’’ or ‘‘QTL test’’;

d. Amending the definition of

‘‘Community Investment Cash

Advance’’ or ‘‘CICA’’ by removing the

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

place, adding the term ‘‘targeted

community lending’’;

e. Revising paragraph (4) of the

definition of ‘‘residential housing

finance assets’’;

f. Amending the definition of

‘‘residential real property’’ by removing

paragraph (1)(v); and

g. Adding, in alphabetical order,

definitions of ‘‘small agri-business

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

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

§ 950.1 Definitions.

* * * * *

Affiliate means any business entity

that controls, is controlled by, or is

under common control with, a member.

* * * * *

Cash equivalents means investments

that—

(1) Are readily convertible into known

amounts of cash;

(2) Have a remaining maturity of 90

days or less at the acquisition date; and

(3) Are held for liquidity purposes.

* * * * *

Residential housing finance assets

means any of the following:

* * * * *

(4) Loans or investments qualifying

under the definition of ‘‘community

lending’’ in § 900.1 of this chapter;

* * * * *

Small agri-business loans means loans

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

Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 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).

* * * * *

§ 950.2 [Removed]

13. Remove § 950.2.

§ 950.3 [Removed]

14. Remove § 950.3.

§ 950.4 [Redesignated as § 950.2]

15. Section 950.4 is redesignated as

§ 950.2.

§ 950.14 [Redesignated as § 950.3]

16. Section 950.14 is redesignated as

§ 950.3, and the heading and paragraphs

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

follows:

* * * * *

§ 950.3 Purpose of long-term advances;

Proxy test.

(a) A Bank shall make long-term

advances only for the purpose of

enabling any member to purchase or

fund new or existing residential housing

finance assets, which include, for CFI

members, small business loans, small

farm loans and small agri-business

loans.

(b)(1) Prior to approving an

application for a long-term advance, a

Bank shall determine that the principal

amount of all long-term advances

currently held by the member does not

exceed the total book value of

residential housing finance assets held

by such member. The Bank shall

determine the total book value of such

residential housing finance assets, using

the most recent Thrift Financial Report,

Report of Condition and Income,

financial statement or other reliable

documentation made available by the

member.

* * * * *

§ 950.5 [Redesignated as § 950.4]

17. Section 950.5 is redesignated as

§ 950.4.

§ 950.6 [Redesignated as § 950.5]

18. Section 950.6 is redesignated as

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

(b)(3), (d)(1) and (d)(2) are revised to

read as follows:

§ 950.5 Terms and conditions for

advances.

* * * * *

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

Bank shall not price its advances to

members below:

(i) The marginal cost to the Bank of

raising matching term and maturity

funds in the marketplace, including

embedded options; and

(ii) The administrative and operating

costs associated with making such

advances to members.

(2) * * *

(ii) Each Bank shall include in its

member products policy required by

§ 917.4 of this chapter, standards and

criteria for such differential pricing and

shall apply such standards and criteria

consistently and without discrimination

to all members applying for advances.

(3) Exceptions. The advance pricing

policies contained in paragraph (b)(1) of

this section shall not apply in the case

of:

(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.

* * * * *

§ 950.8 [Redesignated as § 950.6]

19. Section 950.8 is redesignated as

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

revised to read as follows:

§ 950.6 Fees.

(a) Fees in member products policy.

All fees charged by each Bank and any

schedules or formulas pertaining to

such fees shall be included in the

Bank’s member products policy

required by § 917.4 of this chapter. Any

such fee schedules or formulas shall be

applied consistently and without

discrimination to all members.

(b) Prepayment fees. (1) Except where

an advance product contains a

prepayment option, each Bank shall

establish and charge a prepayment fee

pursuant to a specified formula which

makes the Bank financially indifferent

to the borrower’s decision to repay the

advance prior to its maturity date.

* * * * *

20. Amend § 950.9 by:

§ 950.9 [Redesignated as § 950.7]

a. Redesignating § 950.9 as § 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:

§ 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;

44430 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

(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.

§ 950.10 [Redesignated as § 950.8]

21. Section 950.10 is redesignated as

§ 950.8.

§ 950.11 [Redesignated as § 950.9]

22. Section 950.11 is redesignated as

§ 950.9.

§ 950.12 [Redesignated as § 950.10]

23. Section 950.12 is redesignated as

§ 950.10, and is revised to read as

follows:

§ 950.10 Collateral valuation; appraisals.

(a) Collateral valuation. Each Bank

shall determine the value of collateral

securing the Bank’s advances in

accordance with the collateral valuation

procedures set forth in the Bank’s

member products policy established

pursuant to § 917.4 of this chapter.

(b) Fair application of procedures.

Each Bank shall apply the collateral

valuation procedures consistently and

fairly to all borrowing members, and the

valuation ascribed to any item of

collateral by the Bank shall be

conclusive as between the Bank and the

member.

(c) Appraisals. A Bank may require a

member to obtain an appraisal of any

item of collateral, and to perform such

other investigations of collateral as the

Bank deems necessary and proper.

§ 950.15 [Redesignated as § 950.11]

24. Section 950.15 is redesignated as

§ 950.11.

§ 950.17 [Redesignated as § 950.12]

25. Section 950.17 is redesignated as

§ 950.12.

§ 950.18 [Redesignated as § 950.13]

26. Section 950.18 is redesignated as

§ 950.13.

§ 950.20 [Redesignated as § 950.14]

27. Section 950.20 is redesignated as

§ 950.14 and transferred to subpart A.

§ 950.19 [Redesignated as § 950.15]

28. Section 950.19 is redesignated as

§ 950.15.

29. The heading of Subpart B is

revised to read as follows:

Subpart B—Advances to Housing

Associates

§ 150.21 [Redesignated as § 950.16]

30. Section 950.21 is redesignated as

§ 950.16, and is revised to read as

follows:

§ 950.16 Scope.

Except as otherwise provided in

§ § 950.14 and 950.17, the requirements

of subpart A apply to this subpart.

§ 950.22 [Removed]

§ 950.23 [Removed]

31. Sections 950.22 and 950.23 are

removed.

§ 950.24 [Redesignated as § 950.17]

32. Section 950.24 is redesignated as

§ 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 ‘‘§ 950.22(d)’’,

and, in its place, adding the term

‘‘§ 926.3(b)’’;

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

the terms ‘‘§ 950.9(a)(3)’’ and

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

the terms ‘‘§ 950.7(a)(3)’’ and

‘‘§ 926.3(b),’’ respectively; and

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

read as follows:

§ 950.17 Advances to housing associates.

* * * * *

(b) * * *

(2) * * *

(i) * * *

(C) The other real estate-related

collateral described in § 950.7(a)(4),

provided that such collateral is

comprised of mortgage loans on one-toVerDate 11<MAY>2000 15:53 Jul 17, 2000 Jkt 190000 PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 E:\FR\FM\18JYR1.SGM pfrm01 PsN: 18JYR1
Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations 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.

§ 952.3 [Amended]

34. Amend § 952.3 by removing the

definition of ‘‘nonmember borrower’’.

35. Amend part 952 by:

a. Removing the term ‘‘community

lending’’, wherever it appears, and, in

its place, adding the term ‘‘targeted

community lending’’; and

b. Removing the terms ‘‘nonmember

borrower’’ and ‘‘nonmember

borrowers’’, wherever they appear, and,

in their place, adding the terms

‘‘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 § 961.1 by:

a. Removing the definition of

‘‘community lending’’;

b. Removing the definition of

‘‘nonmember mortgagee’’;

c. Removing the definition of

‘‘nonmember SHFA’’;

d. Adding the definition of ‘‘SHFA

associate’’; and

e. Removing the definition of ‘‘small

business’’, to read as follows:

§ 961.1 Definitions.

* * * * *

SHFA associate means a housing

associate that is a ‘‘state housing finance

agency,’’ as that term is defined in

§ 926.1 of this chapter, and that has met

the requirements of § 926.3(b) of this

chapter.

* * * * *

38. Amend part 961 by:

a. Removing the terms ‘‘nonmember

mortgagee’’ and ‘‘nonmember

mortgagees’’, wherever they appear,

and, in their place, adding the terms

‘‘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 § 961.2 by revising

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

read as follows:

§ 961.2 Standby letters of credit on behalf

of members.

(a) * * *

(2) To assist members in facilitating

community lending;

* * * * *

(c) Eligible collateral. (1) Any standby

letter of credit issued or confirmed on

behalf of a member may be secured in

accordance with the requirements for

advances under § 950.7 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 § 961.3 by:

a. In the introductory text of

paragraph (a), removing the term

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

place, adding the term

‘‘§ § 950.17(b)(1)(i) or (ii)’’;

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

c. In paragraph (b), removing the term

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

place, adding the term

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

as follows:

§ 961.3 Standby letters of credit on behalf

of housing associates.

(a) * * *

(2) To assist housing associates in

facilitating community lending;

* * * * *

§ 961.4 [Amended]

41. Amend § 961.4 by removing the

term ‘‘§§ 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

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

969.2’’.

42. Amend § 961.5 by:

a. Revising paragraph (a); and

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

reference to ‘‘§ § 950.9(b), 950.9(d),

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

and, in its place, adding a reference to

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

950.10’’, to read as follows:

§ 961.5 Additional provisions applying to

all standby letters of credit.

(a) Requirements. Each standby letter

of credit issued or confirmed by a Bank

shall:

(1) Contain a specific expiration date,

or be for a specific term; and

(2) Require approval in advance by

the Bank of any transfer of the standby

letter of credit from the original

beneficiary to another person or entity.

* * * * *

43. In subchapter J, add a new part

980 to read as follows:

PART 980—NEW BUSINESS

ACTIVITIES

Sec.

980.1 Definitions.

980.2 Limitation on Bank authority to

undertake new business activities.

980.3 New business activity notice

requirement.

980.4 Commencement of new business

activities.

980.5 Notice by the Finance Board.

980.6 Finance Board consent.

980.7 Examinations; requests for additional

information.

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

1431(a), 1432(a).

§ 980.1 Definitions.

As used in this part:

New business activity means any

business activity undertaken,

transacted, conducted, or engaged in by

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

§ 950.7(a)(4) of this chapter;

(2) Involves the acceptance of classes

of collateral enumerated under

§ 950.7(b) of this chapter for the first

time;

(3) Entails risks not previously and

regularly managed by that Bank, its

members, or both, as appropriate; or

(4) Involves operations not previously

undertaken by that Bank.

§ 980.2 Limitation on Bank authority to

undertake new business activities.

No Bank shall undertake any new

business activity except in accordance

with the procedures set forth in this

part.

§ 980.3 New business activity notice

requirement.

At least sixty days prior to

undertaking a new business activity,

except as provided in § 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;

44432 Federal Register / Vol. 65, No. 138 / Tuesday, July 18, 2000 / Rules and Regulations

(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

§ 950.7 of this chapter, a Bank’s notice

of new business activity shall include:

(1) A description of the classes or

amounts of collateral proposed to be

accepted by the Bank;

(2) A copy of the Bank’s member

products policy, adopted pursuant to

§ 917.4 of this chapter;

(3) A copy of the Bank’s procedures

for determining the value of the

collateral in question, established

pursuant to § 950.10 of this chapter; and

(4) A demonstration of the Bank’s

capacity, personnel, technology,

experience and expertise to value,

discount and manage the risks

associated with the collateral in

question.

§ 980.4 Commencement of new business

activities.

A Bank may commence a new

business activity:

(a) Sixty days after receipt by the

Finance Board of the notice of new

business activity under § 980.3, if the

Finance Board has not issued to the

Bank a notice as described in

§ 980.5(a)(1) through (4);

(b) In the case of the acceptance of

collateral enumerated under

§ 950.7(a)(4) of this chapter,

immediately upon receipt by the

Finance Board of a notice of new

business activity under § 980.3; or

(c) Immediately upon issuance by the

Finance Board of a letter of approval

under § 980.6.

§ 980.5 Notice by the Finance Board.

(a) Issuance. Within sixty days after

receipt of a notice of new business

activity under § 980.3, the Finance

Board may issue to a Bank a notice that:

(1) Disapproves the new business

activity;

(2) Instructs the Bank not to

commence the new business pending

further consideration by the Finance

Board;

(3) Declares an intent to examine the

Bank;

(4) Requests additional information

including but not limited to the requests

listed in § 980.7;

(5) Establishes conditions for the

Finance Board’s approval of the new

business activity, including but not

limited to the conditions listed in

§ 980.7; or

(6) Contains other instructions or

information that the Finance Board

deems appropriate under the

circumstances.

(b) Effect. Following receipt of a

notice issued pursuant to paragraph (a)

of this section, a Bank may not

undertake any new business activity

that is the subject of the notice until the

Bank has received the Finance Board’s

consent pursuant to § 980.6.

§ 980.6 Finance Board consent.

The Finance Board may at any time

provide consent for a Bank to undertake

a particular new business activity and

setting forth the terms and conditions

that apply to the activity, with which

the Bank shall comply if the Bank

undertakes the activity in question.

§ 980.7 Examinations; requests for

additional information.

(a) General. Nothing in this part shall

limit in any manner the right of the

Finance Board to conduct any

examination of any Bank.

(b) Requests for additional

information and conditions for

approval. With respect to a new

business activity, nothing in this part

shall limit the right of the Finance

Board at any time to:

(1) Request further information from a

Bank concerning a new business

activity; and

(2) Require a Bank to comply with

certain conditions in order to undertake,

or continue to undertake, the new

business activity in question, including

but not limited to:

(i) Successful completion of pre- or

post-implementation safety and

soundness examinations;

(ii) Demonstration by the Bank of

adequate operational capacity,

including the existence of appropriate

policies, procedures and controls;

(iii) Demonstration by the Bank of its

ability to manage the risks associated

with accepting increasing volumes of

particular collateral, or holding

increasing volumes of particular assets,

including the Bank’s capacity reliably to

value, discount and market the

collateral or assets for liquidation;

(iv) Demonstration by the Bank that

the new business activity is consistent

with the housing finance and

community lending mission of the

Banks and the cooperative nature of the

Bank System; and

(v) Finance Board review of any

contracts or agreements between the

Bank and its members or 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

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 99–NM–66–AD; Amendment

39–11799; AD 2000–12–21]

RIN 2120–AA64

Airworthiness Directives; Boeing

Model 747–400 Series Airplanes

Equipped with Pratt & Whitney PW4000

Series Engines

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule; correction.

SUMMARY: This document corrects

information in an existing airworthiness

directive (AD) that applies to certain

Boeing Model 747–400 series airplanes.

That AD currently requires installation

of a modification of the thrust reverser

control and indication system and

wiring on each engine; and repetitive

functional tests of that installation to

detect discrepancies, and repair, if

necessary. This document publishes

Appendix 1, which was referenced in,

but inadvertently omitted from, the

existing AD. Appendix 1 describes

procedures for a functional test to detect

discrepancies of the additional locking

system on each engine thrust reverser.

This correction is necessary to ensure

that operators have the procedures

necessary to perform the required

functional test.

DATES: Effective July 28, 2000.