[Federal Register Volume 62, Number 50 (Friday, March 14, 1997)]
[Rules and Regulations]
[Pages 12073-12081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6260]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 97-18]


Advances to Nonmembers

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board 
(Finance Board) is amending its regulation on Federal Home Loan Bank 
(FHLBank) advances to nonmembers. The rule establishes uniform 
eligibility requirements and review criteria for determining whether an 
entity may be certified as a nonmember mortgagee eligible to receive 
FHLBank advances and devolves responsibility for making that 
determination from the Finance Board to the FHLBanks. The Finance Board 
also is revising the definition of the term ``state housing finance 
agency'' (SHFA) to include all tribally designated housing entities 
(TDHEs). The rule is part of the Finance Board's continuing effort to 
devolve management and governance responsibilities to the FHLBanks and 
is consistent with the goals of the National Homeownership Strategy and 
the Regulatory Reinvention Initiative of the National Performance 
Review.

EFFECTIVE DATE: The final rule will become effective April 14, 1997.

FOR FURTHER INFORMATION CONTACT: Christine M. Freidel, Associate 
Director, Financial Management Division, Office of Policy, 202/408-
2976; Laura K. St. Claire, Financial Analyst, Financial Management 
Division, Office of Policy, 202/408-2811; or, Janice A. Kaye, Attorney-
Advisor, Office of General Counsel, 202/408-2505, Federal Housing 
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Section 10b of the Federal Home Loan Bank Act (Bank Act) 
establishes the requirements for access by nonmember mortgagees to 
FHLBank advances. See 12 U.S.C. 1430b. In order to be certified as a 
nonmember mortgagee, an entity must: (1) Be approved by the Department 
of Housing and Urban Development (HUD) as a ``mortgagee'' under title 
II of the National Housing Act; (2) be chartered under law and have 
succession; (3) be subject to the inspection and supervision of a 
governmental agency; and (4) lend its own funds as its principal 
activity in the mortgage field. Id. 1430b(a).
    Under section 10b(a) of the Bank Act, advances to nonmember 
mortgagees are not subject to the general collateral requirements of 
section 10(a) of the Bank Act. Id. Instead, a FHLBank may make advances 
to nonmember mortgagees only upon the security of mortgages insured by 
the Federal Housing Administration (FHA) of HUD under title II of the 
National Housing Act. Id. The amount of any advance may not exceed 90 
percent of the unpaid principal of the collateral pledged as security 
for the advance. Id.
    The Bank Act imposes less restrictive collateral requirements on 
certain advances to nonmember mortgagees that are SHFAs. Id. 1430b(b). 
Under section 10b(b) of the Bank Act, advances to SHFA nonmember 
mortgagees that facilitate mortgage lending to low- or moderate-income 
individuals and families (meeting the income requirements in section 
142(d) or 143(f) of the Internal Revenue Code, generally up to 115 
percent of the area median income) need not be secured by FHA-insured 
mortgage loans if the advances otherwise meet the requirements of 
section 10(a) of the Bank Act and any real estate collateral pledged to 
secure the advances is comprised of single- or multi-family residential 
mortgages. Id. 1430b(b), 1430(a); 26 U.S.C. 142(d), 143(f). Under 
section 10(a), the four categories of collateral are eligible to secure 
advances to members are: (1) Fully disbursed whole first mortgage loans 
on improved residential real property that are not more than 90 days 
delinquent or securities representing a whole interest in such 
mortgages; (2) securities issued, insured, or guaranteed by the United 
States government or any agency thereof; (3) deposits of a FHLBank; and 
(4) other real estate related collateral if such collateral has a 
readily ascertainable value and the FHLBank can perfect its interest 
therein.\1\
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    \1\ See 12 U.S.C. 1430(a)(1)-(4). Other acceptable real estate 
related collateral includes, but is not limited to: privately issued 
mortgage-backed securities other than those eligible under category 
1; second mortgage loans, including home equity loans; commercial 
real estate loans; and mortgage loan participations. See 12 CFR 
935.9(a)(4)(ii). The aggregate amount of outstanding advances 
secured by such collateral may not exceed 30 percent of a FHLBank 
member's GAAP capital. See 12 U.S.C. 1430(a)(4); 12 CFR 
935.9(a)(4)(iii).
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    In October 1996, the Finance Board published for comment a proposed 
rule that would transfer the authority to certify an entity as a 
nonmember mortgagee eligible to receive FHLBank advances from the 
Finance Board to the FHLBanks subject to uniform review criteria for 
determining compliance with statutory and regulatory eligibility 
requirements. See 61 FR 52727 (Oct. 8, 1996). The 60-day public comment 
period closed on December 9, 1996. See id. The Finance Board received a 
total of 12 comments in response to the proposed rule, 6 from FHLBanks, 
4 from trade associations, and 1 each from a certified SHFA nonmember 
mortgagee and a federal agency. All of the commenters generally 
supported the Finance Board's proposal. Specific comments are discussed 
in Part II of the Supplementary Information.

II. Analysis of Public Comments and the Final Rule

A. Definitions

    The final rule amends the definition of the term ``state housing 
finance agency'' that appears in Sec. 935.1 to include TDHEs \2\ 
established under both tribal and state law as SHFAs. This will permit 
every TDHE nonmember mortgagee that makes mortgage loans to low- and 
moderate-income members of the Indian community to take advantage of 
the more flexible collateral requirements for securing advances to SHFA 
nonmember mortgagees. See supra part I; 12 U.S.C. 1430b(b). Each of the 
eight commenters addressing this issue expressly supported inclusion of 
all TDHEs in the definition and it is being adopted as proposed. A 
trade association commenter suggested that entities other than SHFAs 
should not be

[[Page 12074]]

eligible for certification as nonmember mortgagees. However, because 
section 10b of the Bank Act clearly sets forth two classes of nonmember 
mortgagees, one composed of SHFAs and one composed of non-SHFAs, see 12 
U.S.C. 1430b, the suggestion would be contrary to the Bank Act and the 
Finance Board has not adopted it in the final rule.
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    \2\ Congress enacted the Native American Housing Assistance and 
Self Determination Act of 1996 in October 1996. See Pub. L. 104-330, 
101 Stat. 4016 (Oct. 26, 1996). The Act authorizes Indian tribes to 
establish TDHEs to run their housing programs. See id. sec. 
102(c)(4)(K), 110 Stat. 4025. TDHEs include all existing Indian 
Housing Authorities as well as other entities created by Indian 
tribes to provide assistance for affordable housing for tribal 
members. See id. sec. 4(21), 110 Stat 4021.
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    The Finance Board received two responses to a specific request for 
comments regarding the inclusion of other groups in the definition of 
SHFA. One commenter noted its belief that the definition as written is 
sufficiently broad to cover the Department of Hawaiian Homelands, a 
Hawaii state agency with responsibility for administering the Hawaiian 
Homes Commission Act on behalf of Native Hawaiians. Without additional 
detailed information, the Finance Board cannot determine whether a 
particular entity meets the requirements of the SHFA definition. Under 
the final rule, the Banks would make this determination at the time an 
entity applies for certification as a nonmember mortgagee. The other 
commenter suggested including certain nonprofit community development 
financial institutions (CDFIs) in the SHFA definition. The Finance 
Board based its definition of SHFA on the meaning given that term for 
purposes of other provisions in the Bank Act. As defined elsewhere in 
the Bank Act, the term SHFA requires the entity to be a government 
instrumentality. See id. 1441a(c)(9)(P), 1441a-1(1). Accordingly, the 
Finance Board's definition of SHFA requires an entity to be a 
government instrumentality. Since nonprofit CDFIs are not government 
instrumentalities, they cannot be certified as SHFA nonmember 
mortgagees. However, nonprofit CDFIs that meet the eligibility 
requirements currently may be certified as nonmember mortgagees.

B. Advances to the Savings Association Insurance Fund

    The Finance Board received no comments on Sec. 935.20 and is 
adopting the section as proposed. Section 935.20, which implements 
section 31(k) of the Bank Act, see id. 1431(k), provides that an 
FHLBank may make advances to the Federal Deposit Insurance Corporation 
for the use of the Savings Association Insurance Fund under certain 
circumstances and subject to specific conditions.

C. Scope

    Section 935.21 provides that advances to nonmember mortgagees 
generally are subject to subpart A of part 935, which governs advances 
to FHLBank members. See 12 CFR 935.1-935.19. A trade association 
commenter suggested that the final rule prevent the FHLBanks from 
applying requirements, terms, and conditions to nonmember mortgagees 
that are not also applied to members. The Finance Board believes that 
this provision should achieve that result. One exception to this 
general requirement relates to the non-qualified thrift lender (non-
QTL) provisions of the Finance Board's advances regulation. See id. 
Sec. 935.13. Since the statutory limit on aggregate FHLBank lending 
applies only to advances to non-QTL members, see 12 U.S.C. 1430(e)(2) 
(emphasis added), and nonmember mortgagees are not FHLBank members, 
advances to nonmember mortgagees need not be included in the aggregate 
limit on advances to non-QTLs. A trade association commenter strongly 
supported this provision as offering assurance that nonmember 
mortgagees would not limit non-QTL members' access to advances.

D. Nonmember Mortgagee Eligibility Requirements

1. Eligibility Criteria
    Section 935.22(a) authorizes the FHLBanks to make advances to an 
entity that is not a member of the FHLBank if the FHLBank certifies the 
entity as a nonmember mortgagee. Section 935.22(b) sets forth the 
eligibility requirements an entity must meet in order to be certified 
as a nonmember mortgagee. In addition to the four statutory eligibility 
criteria discussed in part 1 of the Supplementary Information, to 
ensure the safety and soundness of the FHLBanks, the Finance Board has 
incorporated a financial condition criterion that requires an 
applicant's financial condition to be such that an FHLBank may safely 
lend to it. This is the same financial condition criterion that applies 
currently to applicants for membership in an FHLBank. See id. 
1424(a)(2)(B); 12 CFR 933.6(a)(4). The Finance Board received no 
comments on these provisions and is adopting them without change from 
the proposal.
2. Review Criteria
    Section 935.22(c) establishes uniform review criteria the FHLBanks 
must apply to determine whether an applicant meets the eligibility 
requirements for certification as a nonmember mortgagee. If an 
applicant fulfills each criterion to the satisfaction of the FHLBank to 
which it has applied, it will be deemed to meet the eligibility 
requirements. Conversely, failure to fulfill each criterion to the 
satisfaction of the FHLBank will render the applicant ineligible, 
subject to appeal to the Finance Board, to be certified as a nonmember 
mortgagee.
    Under Sec. 935.22(c)(1), an applicant is deemed to meet the 
requirement 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 applicant is an approved 
FHA mortgagee.
    Under Sec. 935.22(c)(2), an applicant is deemed to meet the 
requirement that it be a chartered institution having succession if it 
provides evidence satisfactory to the FHLBank that it is a government 
agency, or is chartered under state, federal, local, tribal, or Alaska 
Native village law as a corporation or other entity that has rights, 
characteristics, and powers similar to those granted a corporation. An 
FHLBank commenter noted that satisfactory evidence, such as statutory 
and regulatory materials, is usually readily available to the FHLBanks, 
and therefore suggested that the final rule require an applicant to 
provide only a citation to, rather than copies of, appropriate 
documents. For that reason, and to reduce the paperwork burden imposed 
on nonmember mortgagee applicants, the Finance Board has deleted the 
requirement that an applicant provide ``documentary'' evidence in the 
final rule. Of course, if an FHLBank should require copies of statutes, 
regulations, or other relevant documents, it has authority to require 
their submission under Sec. 935.23(c)(1). See infra. In any case, an 
FHLBank must include copies of all documents upon which it relied in 
making its certification decision as part of the certification file 
required under Sec. 935.23(c)(3). See infra.
    Under Sec. 935.22(c)(3), an applicant is deemed to meet the 
requirement that it be subject to the inspection and supervision of 
some governmental agency if it provides evidence satisfactory to the 
FHLBank that, pursuant to statute or regulation, it is subject to the 
inspection and supervision of a federal, state, local, tribal, or 
Alaska Native village governmental agency. Satisfactory evidence 
generally consists of a citation to, or copies of, relevant statutory 
and regulatory materials. For the same reasons as discussed above for 
Sec. 935.22(c)(2), the Finance Board has deleted the requirement that 
an applicant provide ``documentary'' evidence in the final rule.
    In order to establish an appropriate standard for the FHLBanks to 
determine whether an applicant meets the

[[Page 12075]]

inspection and supervision requirement, the Finance Board recast the 
illustrative examples in the proposal as standards for meeting the 
inspection and supervision requirements. The rule provides that an 
applicant will be deemed to meet the subject to inspection by a 
governmental agency requirement if there is a statutory or regulatory 
requirement that the applicant's books and records be audited or 
examined periodically by a governmental agency or an external auditor. 
This audit factor was listed as an example of inspection by a 
governmental agency in the proposed rule. The rule provides that an 
applicant will be deemed to meet the supervision by a governmental 
agency requirement if the governmental agency has statutory or 
regulatory authority to remove an applicant's officers or directors for 
malfeasance or misfeasance or otherwise exercise enforcement or 
administrative control over actions of the applicant. This removal 
factor was identified as an example of supervision by a governmental 
agency in the proposed rule.
    Three commenters addressed the inspection and supervision 
requirement. A trade association commenter asked the Finance Board to 
include expressly legislative audits to meet the inspection requirement 
and removal by the governor to meet the supervision requirement. To 
accomplish the same end, a FHLBank commenter suggested defining the 
term ``governmental agency'' broadly to include the legislature and the 
governor. In response to these comments and to afford greater 
flexibility, the Finance Board has added a definition of the term 
``governmental agency'' for purposes of this paragraph that includes 
the governor, legislature, and any other component of a federal, state, 
local, tribal, or Alaska Native village government with authority to 
act for or on behalf of that government. The third commenter asked 
whether a specific lender consortium that is examined jointly by 
federal and state financial institution regulators satisfies the 
supervision and inspection requirement. Without additional detailed 
information, the Finance Board cannot determine whether a particular 
entity meets the requirement. Under the final rule, the Banks would 
make this determination at the time an entity applies for certification 
as a nonmember mortgagee.
    Under Sec. 935.22(c)(4), an applicant is deemed to meet the 
mortgage activity requirement if it provides documentary evidence 
satisfactory to the FHLBank that it lends its own funds as its 
principal activity in the mortgage field. A financial statement that 
includes mortgage loan assets and their funding liabilities generally 
will provide adequate documentary evidence. Since this type of 
financial information is not readily available to the FHLBanks, the 
requirement for an applicant to submit documentation remains in the 
final rule. For purposes of this requirement, the Finance Board 
considers the purchase of whole mortgage loans tantamount to 
``lending'' an applicant's funds. In the case of a federal, state, 
local, tribal, or Alaska Native village government agency, the Finance 
Board considers appropriated funds to be an applicant's ``own funds.'' 
An applicant will be deemed to satisfy this requirement even though the 
majority of its operations are unrelated to mortgage lending if its 
mortgage activity conforms to the regulatory criteria. A trade 
association commenter expressly supported the provision, stating that 
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.
    Under Sec. 935.22(c)(5), an applicant is deemed to meet the 
financial condition requirement if the FHLBank determines that advances 
may be extended safely to the applicant. In order to make that 
determination, the final rule requires an applicant to submit its most 
recent regulatory audit or examination report and external audit 
report. The Finance Board added a requirement to submit these specific 
financial documents in the final rule because a FHLBank commenter 
pointed out that applicants for FHLBank membership generally must 
submit such documents as part of their membership application, see 12 
CFR 933.11, and that the information provided is often critical to 
analysis of an applicant's financial condition. The Bank also can 
require the applicant to submit additional documentary evidence, such 
as financial or other information.
3. State Housing Finance Agencies
    In addition to meeting the eligibility requirements in 
Sec. 935.22(b), any applicant seeking to take advantage of the more 
flexible collateral requirements for advances used to facilitate 
residential or commercial mortgage lending to certain low- and 
moderate-income families or individuals, must provide evidence 
satisfactory to the FHLBank that it is a SHFA as defined in Sec. 935.1. 
See supra part II(A). Under Sec. 935.22(d), satisfactory evidence 
generally consists of a copy of, or a citation to, the statutory and/or 
regulatory provisions outlining the applicant's structure and 
responsibilities. For the same reasons as discussed above for 
Sec. 935.22(c)(2), the Finance Board has deleted the requirement that 
an applicant provide ``documentary'' evidence in the final rule.

E. Nonmember Mortgagee Applications

1. Devolution
    As part of the Finance Board's continuing effort to devolve 
management and governance responsibilities to the FHLBanks, 
Sec. 935.23(a) authorizes the FHLBanks to approve or deny all 
applications for certification as a nonmember mortgagee, subject to the 
requirements of the Bank Act and Finance Board regulations. Although 
all six commenters addressing this issue expressly supported devolution 
of decision making authority to the FHLBanks, one trade association 
commenter suggested delaying devolution until the FHLBanks have some 
experience in administering the final rule. Since the basis for the 
review criteria in the final rule is the standards previously applied 
by the FHLBanks and the Finance Board, no delay in devolution is 
required.
    Four FHLBank commenters requested the authority to delegate 
application approvals to a committee of the FHLBank's board of 
directors, the FHLBank president, or a senior officer who reports 
directly to the president other than an officer responsible for 
business development. This would be consistent with the Finance Board's 
membership regulation and such authority is included in the final rule. 
See 12 CFR 933.3(a). Also consistent with the membership regulation, 
the final rule requires that only the FHLBanks' board of directors may 
deny certification as a nonmember mortgagee.
2. Application Process
    The remainder of Sec. 935.23 sets forth the procedures for 
submission and review of nonmember mortgagee applications. Section 
935.23(b) requires an applicant to submit an application that satisfies 
the requirements of the Bank Act and this subpart to the FHLBank of the 
district in which the applicant's principal place of business, as 
determined in accordance with 12 CFR 933.18, is located.
    To ensure expeditious action on applications for certification as a 
nonmember mortgagee, Sec. 935.23(c)(1) requires a FHLBank to act on an 
application within 60 calendar days of the date the FHLBank deems the 
application complete. To make certain that the time period provided for 
review

[[Page 12076]]

is not unduly restrictive, an application is deemed complete, thus 
triggering the 60-day time period, only after the FHLBank has obtained 
all required information and any other information it considers 
necessary to process the application. The rule permits the FHLBank to 
stop the 60-day period if it determines during the review process that 
additional information is necessary to process the application. The 
FHLBank must restart the 60-day time period where it stopped upon 
receiving the additional required information. The FHLBank must notify 
applicants in writing when the 60-day time period begins, stops, and 
starts again. One FHLBank commenter pointed out that under a parallel 
provision in the Finance Board's membership regulation, written notices 
are not required and requested similar treatment in this regulation. 
See 12 CFR 933.3(c). Written notice is necessary in order to provide an 
appropriate record for appellate and compliance review, therefore, the 
Finance Board is adopting the written notice requirement as proposed. 
Further, the Finance Board intends to clarify its membership regulation 
by including a written notice requirement in any future amendment.
    Section 935.23(c)(2) requires the board of directors of the 
FHLBank, a duly delegated committee of the FHLBank's board of 
directors, the FHLBank president, or a senior officer who reports 
directly to the FHLBank president other than an officer with 
responsibility for business development to approve, or the board of 
directors of the FHLBank to deny, each application for certification as 
a nonmember mortgagee by a written decision resolution that states the 
grounds for the decision. In the proposed rule, the FHLBanks could not 
delegate certification approvals. As stated above, see supra part 
II(E)(1), the final rule prohibits delegation only of certification 
denials. The FHLBank must provide a copy of the decision resolution to 
the applicant and the Finance Board within three business days of the 
date of the decision on an application.
    In order to provide an appropriate record for consideration of 
certification denial appeals and for determination by Finance Board 
examiners of a FHLBank's compliance with statutory and regulatory 
requirements, the Finance Board has added a new Sec. 935.23(c)(3) that 
requires a FHLBank to maintain a certification file for each applicant. 
At a minimum, the certification file must include all documents 
submitted by the applicant or otherwise obtained or generated by the 
FHLBank concerning the applicant, all documents the Bank relied upon in 
making its certification determination, including copies of statutes 
and regulations, and the decision resolution. The FHLBank must retain 
the certification file for at least three years after the date of its 
decision to approve or deny certification or the date the Finance Board 
resolves any appeal, whichever is later. The Finance Board's membership 
rule includes a similar recordkeeping requirement. See 12 CFR 933.2(c).
    To ensure that the FHLBanks apply the nonmember mortgagee 
eligibility requirements and review criteria uniformly and fairly and 
treat similarly situated applicants in a consistent manner, 
Sec. 935.23(c)(4) establishes a process by which applicants may appeal 
FHLBank certification denials to the Finance Board. This provision 
appeared at Sec. 935.23(c)(3) in the proposed rule. Within 90 calendar 
days of the date of a FHLBank's certification denial, an applicant may 
submit a written appeal to the Finance Board with a copy to the 
FHLBank. The appeal must include the FHLBank'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. The FHLBank whose action has been appealed must submit to the 
Finance Board a complete copy of the applicant's certification file as 
well as any relevant new materials it receives while the appeal is 
pending. The rule authorizes the Finance Board to request any 
additional information or supporting arguments it may require to decide 
the appeal. The Finance Board must make its decision within 90 calendar 
days of the date the applicant files an appeal.

F. Advances to Nonmember Mortgagees

    Section 935.24 establishes the terms and conditions under which a 
FHLBank may make advances to a nonmember mortgagee. Under 
Sec. 935.24(a), a FHLBank may lend only to a nonmember mortgagee whose 
principal place of business is located in the FHLBank's district.
1. Collateral Requirements in General
    Section 935.24(b) sets forth the collateral requirements for 
advances to nonmember mortgagees. Pursuant to section 10b(a) of the 
Bank Act, 12 U.S.C. 1430b(a), and Sec. 935.24(b)(1) of the final rule, 
a FHLBank may make advances to any nonmember mortgagee upon the 
security of FHA-insured mortgages, including securities representing a 
whole interest in a pool of FHA-insured mortgages, if the nonmember 
mortgagee provides evidence satisfactory to the FHLBank that the 
securities are backed solely by qualifying mortgages.
2. SHFA Collateral Requirements
    Section 935.24(b)(2) implements the less restrictive collateral 
requirements applicable to advances to a SHFA nonmember mortgagee, the 
proceeds of which will be used to facilitate mortgage lending that 
benefits certain low- and moderate-income individuals or families. See 
supra part I; 12 U.S.C. 1430b(b). Under Sec. 935.24(b)(2)(i), a FHLBank 
may secure qualifying advances with: the collateral described in 
Sec. 935.24(b)(1); collateral eligible under categories 1 or 2 of Bank 
Act section 10(a), 12 U.S.C. 1430(a)(1)-(2), as described in 12 CFR 
935.9(a)(1) or (2); or, collateral eligible under category 4 of Bank 
Act section 10(a), 12 U.S.C. 1430(a)(4), as described in 12 CFR 
935.9(a)(4), provided that such collateral is comprised of mortgage 
loans on one-to-four or multi-family residential property and the 
acceptance of such collateral will not increase the total amount of 
advances outstanding to the SHFA secured by such collateral beyond 30 
percent of its GAAP capital, as computed by the FHLBank. A FHLBank 
commenter recommended that the rule specifically include as acceptable 
collateral for SHFA advances, collateral pledged by a FHLBank member to 
secure its obligations under a standby letter of credit issued for the 
benefit of a FHLBank that makes a SHFA nonmember mortgagee advance. The 
current Finance Board regulation concerning collateral for advances 
does not address this type of collateral. See 12 CFR 935.9. The Finance 
Board plans to consider this issue as part of a future rulemaking 
concerning FHLBank advances.
    The proposed rule asserted that SHFA nonmember mortgagees would not 
have any Bank Act section 10(a) category 3 collateral available to 
secure FHLBank advances since a FHLBank may accept deposits only from 
FHLBank members, other FHLBanks, or other instrumentalities of the 
United States. See 12 U.S.C. 1430(a)(3), 1431(e)(1); 61 FR 52731. Three 
FHLBank commenters found this interpretation of the Bank Act overly 
restrictive. For the following reasons, the Finance Board agrees.\3\ 
Section 10b(b) of the Bank Act

[[Page 12077]]

authorizes the FHLBanks to accept collateral that meets the 
requirements of section 10(a) to secure qualifying advances to SHFA 
nonmember mortgagees. See 12 U.S.C. 1430b(b). Section 10(a) of the Bank 
Act includes specifically deposits in a FHLBank as acceptable 
collateral. See id. 1430(a). The Finance Board believes that there is 
statutory authority to allow SHFA nonmember mortgagees to secure 
qualifying advances with cash collateral in the form of FHLBank 
deposits. Accordingly, the Finance Board has added a new paragraph, 
Sec. 935.24(b)(2)(B), authorizing the FHLBanks to accept deposits in a 
FHLBank as security for SHFA nonmember mortgagee advances. Pursuant to 
the FHLBanks' incidental authority to do all things necessary to carry 
out the provisions of the Bank Act, see 12 U.S.C. 1431(a), (e)(1), and 
to facilitate acceptance of such collateral, the rule permits the 
FHLBanks to establish cash collateral accounts for SHFA nonmember 
mortgagees. This interpretation is consistent with the restriction on 
acceptance of deposits by the FHLBanks contained in section 11(e)(1) of 
the Bank Act, see id. 1431(e)(1), since the SHFA nonmember mortgagee 
will use the cash collateral account at the FHLBank only to secure 
advances and not to take advantage of FHLBank deposit programs, i.e., 
SHFA nonmember mortgagees will not be able to use a FHLBank as a 
substitute for a commercial bank.
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    \3\ The statement in the preamble to the proposed rule regarding 
acceptance of deposits from nonmember mortgagees was not meant to 
preclude a FHLBank from accepting deposits under section 11(e)(2) of 
the Bank Act for the purpose of providing correspondent banking 
services, provided that the nonmember mortgagee is an institution 
eligible to make application to become a FHLBank member. See 12 
U.S.C. 1431(e)(2).
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    If a SHFA nonmember mortgagee wishes to pledge other than FHA-
insured collateral, Sec. 935.24(b)(2)(ii) requires it to certify first 
in writing to the FHLBank that it will use the proceeds of the advance 
so secured to facilitate qualifying mortgage lending. The final rule 
clarifies that qualifying mortgage lending includes both residential 
and commercial mortgage lending. A trade association commenter 
expressly supported this provision because it will allow SHFA nonmember 
mortgagees to help small businesses and promote economic development 
efforts.
3. Terms and Conditions for Advances
    Section 935.24(c) outlines the terms and conditions for advances to 
nonmember mortgagees. Under Sec. 935.24(c)(1), a FHLBank may exercise 
its discretion to determine whether, and on what terms, it will make 
advances to nonmember mortgagees. Section 935.24(c)(2) addresses 
advance pricing. The provision in the proposed rule requiring the 
FHLBanks to apply pricing criteria other than cost and credit risk to 
nonmember mortgagee advances in the same manner as they apply those 
criteria to member advances was intended to make clear that the 
FHLBanks must treat all of their member and nonmember borrowers 
equally. One commenter thought the rule should expressly require the 
FHLBanks to price advances to SHFA nonmember mortgagees, given their 
public purpose, at the same rate as member advances. To ensure equal 
treatment, the final rule specifically applies the advance pricing 
requirements applicable to member advances to nonmember mortgagee 
advances. Accordingly, paragraph (c)(2)(i) requires a FHLBank to price 
advances to nonmember mortgagees in accordance with the requirements of 
Sec. 935.6(b), the advance pricing requirements for member advances. It 
provides that the term ``member'' as used in Sec. 935.6(b), also means 
``nonmember'' for purposes of this section. Paragraph (c)(2)(ii) of the 
final rule requires a FHLBank to apply the pricing criteria that appear 
in Sec. 935.6(b)(2), including credit and other risks of lending to a 
particular borrower and other reasonable differential pricing criteria, 
equally to all of its member and nonmember borrowers. The pricing 
criteria that appeared in the proposed rule are included in 
Sec. 935.6(b).
    The Finance Board proposed deleting the current requirement that 
nonmember mortgagee advances be priced to compensate a FHLBank for the 
lack of a capital stock investment in the FHLBank by the nonmember 
mortgagee. See 12 CFR 935.22(e)(2)(B)(ii); 61 FR 52731. The preamble to 
the proposed rule stated that such compensation was unnecessary since 
the additional earnings achieved through advances not supported by 
capital should enhance a FHLBank's return on equity. Seven commenters 
addressed this issue. Two commenters supported the proposal because the 
compensation mark-up strongly discourages nonmember mortgagees from 
using FHLBank advances. Four commenters recommended deletion of the 
requirement and replacement with a provision giving the FHLBanks 
discretion to adjust nonmember mortgagee advance prices by either 
requiring a compensating balance or including compensation for the lack 
of a capital stock investment as a reasonable pricing differential 
criteria in Sec. 935.24(c)(3)(iii). One commenter believed that the 
requirement should remain in the rule.
    The comments advocating a special mark-up on nonmember mortgagee 
advances generally highlighted three concerns. The first concern was 
that the added leverage associated with nonmember mortgagee advances 
creates additional risk for which members should be compensated. For 
the following reasons, the Finance Board finds this argument to be 
unpersuasive. In order for nonmember lending to have a material impact 
on a FHLBank's leverage, the amount of advances outstanding to 
nonmember mortgagees would have to increase significantly over current 
levels. For example, advances to nonmember mortgagees at the FHLBank 
with the largest volume of such advances outstanding at the end of 1996 
represented 0.1 percent of the FHLBank's total assets and 2 percent of 
its capital. In addition, fully secured nonmember mortgagee advances 
involve minimal credit risk. Therefore, the mark-up necessary to 
compensate members for any increased risk resulting from greater 
leverage would almost certainly be de minimis.
    The second concern expressed generally by commenters was that, 
depending upon the relationship between the return paid on FHLBank 
stock, a member's alternative investments, and the cost of debt, a 
nonmember mortgagee might have a financial advantage from FHLBank 
borrowings that would allow it to compete for mortgages with members. 
For the following reasons, the Finance Board finds this argument to be 
unpersuasive. On the basis of the strong growth in voluntary membership 
since 1990, it appears that FHLBank dividend rates generally exceed the 
alternative investment rates available to members. For example, the 
average FHLBank dividend rate in 1996 was 120 basis points over the 
average one-year Treasury security and, since fourth quarter 1989, only 
two FHLBanks on eight occasions have paid a quarterly dividend rate 
below the average federal funds rate. Accordingly, investing in FHLBank 
stock typically should not put a member at a competitive disadvantage 
relative to nonmember mortgagees.
    The third concern advanced by commenters in support of a 
compensation mark-up is that funding nonmember mortgagee advances may 
be more expensive to the extent that the cost of debt is higher than 
the mixture of debt and equity used to fund member advances. This 
argument also is unpersuasive. With few exceptions, FHLBank debt has 
been less expensive than equity, thus, advances funded solely with debt 
should be less expensive than those funded with a mix of equity and 
debt. In addition, under Sec. 935.24(c)(2)(i), the FHLBanks must price 
a nonmember mortgagee advance to cover the funding, operating, and

[[Page 12078]]

administrative costs associated with making the advance.
    After consideration of the comments, the Finance Board has 
determined that, given the current financial operations of the 
FHLBanks, there do not appear to be compelling economic circumstances 
to justify an additional compensation mark-up on nonmember mortgagee 
advances. Further, eliminating the mark-up should enhance the FHLBanks' 
statutory housing finance mission by providing more attractively priced 
funds to entities that specialize in affordable housing finance. 
Accordingly, the lack of a capital stock investment in a FHLBank by a 
nonmember borrower is not an acceptable other risk or differential 
pricing factor. If a FHLBank is able to show in a particular case that 
it will suffer financial hardship as a result of lending to a nonmember 
mortgagee, and is able to quantify the harm, it may request a 
regulatory waiver. See 61 FR 64613 (Dec. 6, 1996), codified at 12 CFR 
902.6.
    Two commenters asked the Finance Board to clarify whether a FHLBank 
is required or has discretion to allow a nonmember mortgagee to 
participate in a FHLBank's Community Investment Program (CIP). Both 
commenters thought that the FHLBanks should grant SHFA nonmember 
mortgagees access to advances at CIP rates. Section 10(i) of the Bank 
Act requires each FHLBank to ``establish a program to provide funding 
for members to undertake community-oriented mortgage lending.'' See id. 
1430(i)(1) (emphasis added). Since the final rule gives the FHLBanks 
discretion in pricing nonmember mortgagee advances, the FHLBanks could 
make advances at CIP rates available to nonmember mortgagees. However, 
because section 10(i)(1) requires establishment of a CIP only for 
members, the FHLBanks are not required to do so. The Finance Board 
plans to consider this issue as part of a future rulemaking concerning 
CIP advance programs.
    Section 935.24(c)(3) limits the principal amount of any advance 
made to a nonmember mortgagee to 90 percent of the unpaid principal of 
the mortgage loans or securities pledged as security for the advance. 
This limit does not apply to advances made to SHFA nonmember mortgagees 
for the purpose of facilitating qualifying low- and moderate-income 
mortgage lending. A trade association commented that a principal reason 
limiting nonmember borrowing is that most FHLBanks value nonmember 
mortgagee collateral at levels below the 90 percent limit. The Finance 
Board believes that the FHLBanks should develop the technical capacity 
to evaluate more precisely the risks of multi-family mortgages. This 
potentially will lower the over-collateralization factor assigned to 
such collateral.
4. Transaction Accounts
    A FHLBank commenter suggested that the rule be revised to include 
authority for the FHLBanks to establish transaction accounts with 
nonmember mortgagees in order to facilitate the funding of advances. 
Since the FHLBanks have incidental authority to establish limited 
purposes deposit accounts, see supra part II(F)(2), the Finance Board 
has added a new paragraph Sec. 935.24(d) to provide the suggested 
authorization.
5. Ineligibility
    Under certain circumstances certified nonmember mortgagees may 
become ineligible to receive FHLBank advances. Section 935.24(e)(1) 
requires a nonmember mortgagee that applies for an advance to agree 
first in writing that it will promptly notify the FHLBank of any change 
in its status as a nonmember mortgagee. Section 935.24(e)(2) permits a 
FHLBank, from time to time, to require a nonmember mortgagee to provide 
evidence that it continues to satisfy all of the statutory and 
regulatory eligibility requirements. If the FHLBank determines that the 
nonmember mortgagee no longer meets the eligibility requirements, 
Sec. 935.24(e)(3) prohibits the FHLBank from extending a new advance or 
renewing an existing advance until the entity provides evidence 
satisfactory to the FHLBank that it is in compliance with such 
requirements. The Finance Board received no comments regarding these 
provisions and is adopting them without change from the proposal.

III. Regulatory Flexibility Act

    The rule largely implements statutory requirements binding on all 
FHLBanks, nonmember mortgagee applicants, and certified nonmember 
mortgagees. The Finance Board is not at liberty to make adjustments in 
the requirements to accommodate small entities. The Finance Board has 
not imposed any additional regulatory requirements that will have a 
disproportionate impact on small entities. Thus, in accordance with the 
provisions of the Regulatory Flexibility Act, the Board of Directors of 
the Finance Board hereby certifies that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
5 U.S.C. 605(b).

IV. Paperwork Reduction Act

    As part of the notice of proposed rulemaking, the Finance Board 
published a request for comments concerning the collection of 
information contained in Secs. 935.22 through 935.24 of the proposed 
rule. See 61 FR 52731. The Finance Board received no comments regarding 
the collection of information. The Finance Board also submitted an 
analysis of the information collection to the Office of Management and 
Budget (OMB) for review in accordance with section 3507(d) of the 
Paperwork Reduction Act of 1995. See 44 U.S.C. 3507(d). OMB assigned a 
control number, 3069-0005, and approved the information collection 
without conditions with an expiration date of November 30, 1999. 
Potential respondents are not required to respond to the collection of 
information unless the regulation collecting the information displays a 
currently valid control number assigned by the OMB. See id. 3512(a). 
The final rule does not substantively or materially modify the approved 
information collection. The title, description of need and use, and a 
description of the information collection requirements in the final 
rule are discussed in parts I and II of the Supplementary Information.
    The following table discloses the estimated annual reporting and 
recordkeeping burden:


                                                                        
                                                                        
                                                                        
The estimated annual reporting and recordkeeping hour burden            
 is:                                                                    
  a. Number of respondents.....................................       10
  b. Total annual responses....................................       10
      Percentage collected electronically......................        0
  c. Total annual hours requested..............................      100
  d. Current OMB inventory.....................................      100
  e. Difference................................................        0
The estimated annual reporting and recordkeeping cost burden            
 is:                                                                    
  a. Total annualized capital/startup costs....................      $ 0
  b. Total annual costs (O&M)..................................        0
  c. Total annualized cost requested...........................    6,250
  d. Current OMB inventory.....................................    6,250
  e. Difference................................................        0
                                                                        

    Any comments concerning the information collection should be 
submitted to Elaine L. Baker, Executive Secretary, Federal Housing 
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006, and the 
Office of Information and Regulatory Affairs of the Office of 
Management and Budget, Attention: Desk Officer for Federal Housing 
Finance Board, Washington, D.C. 20503.

[[Page 12079]]

List of Subjects in 12 CFR Part 935

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.
    Accordingly, the Board of Directors of the Federal Housing Finance 
Board hereby amends part 935, chapter IX, title 12 of the Code of 
Federal Regulations, as follows:

PART 935--ADVANCES

    1. The authority citation for part 935 is revised to read as 
follows:

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

    2. Section 935.1 is amended by revising the definition of ``State 
housing finance agency'' to read as follows:


Sec. 935.1   Definitions.

* * * * *
    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 Alaska Native village recognized by 
the United States or any state, and functions as a source of 
residential mortgage loan financing for the Indian or Alaska Native 
community.
* * * * *
    3. Subpart B is revised to read as follows:

Subpart B--Advances to Nonmembers

Sec.
935.20  Advances to the Savings Association Insurance Fund.
935.21  Scope.
935.22  Nonmember mortgagee eligibility requirements.
935.23  Nonmember mortgagee application process.
935.24  Advances to nonmember mortgagees.

Subpart B--Advances to Nonmembers


Sec. 935.20   Advances to the Savings Association Insurance Fund.

    (a) Authority. Upon receipt of a written request from the FDIC, a 
Bank may make advances to the FDIC for the use of the 
SavingsAssociation Insurance Fund. The Bank shall provide a copy of 
such request to the Board.
    (b) Requirements. Advances to the FDIC for the use of the Savings 
Association Insurance Fund shall:
    (1) Bear a rate of interest not less than the Bank's marginal cost 
of funds, taking into account the maturities involved and reasonable 
administrative costs;
    (2) Have a maturity acceptable to the Bank;
    (3) Be subject to any prepayment, commitment, or other appropriate 
fees of the Bank; and
    (4) Be adequately secured by collateral acceptable to the Bank.


Sec. 935.21  Scope.

    With the exception of Sec. 935.13, and except as otherwise provided 
in Sec. 935.20 and Sec. 935.24, the requirements of subpart A of this 
part apply to this subpart.


Sec. 935.22  Nonmember mortgagee eligibility requirements.

    (a) Authority. Subject to the provisions of the Act and this 
subpart, 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 nonmember mortgagee.
    (b) Eligibility requirements. A Bank may certify as a nonmember 
mortgagee any applicant that meets the following requirements:
    (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.
    (c) Satisfaction of eligibility requirements--(1) HUD approval 
requirement. An applicant shall be deemed to meet the requirement in 
section 10b(a) of the Act and paragraph (b)(1) of this section 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.
    (2) Charter requirement. An applicant shall be deemed to meet the 
requirement in section 10b(a) of the Act and paragraph (b)(2) of this 
section 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:
    (i) The applicant is a government agency; or
    (ii) The applicant is chartered under state, federal, local, 
tribal, or Alaska Native village law as a corporation or other entity 
that has rights, characteristics, and powers under applicable law 
similar to those granted a corporation.
    (3) Inspection and supervision requirement. An applicant shall be 
deemed to meet the inspection and supervision requirement in section 
10b(a) of the Act and paragraph (b)(3) of this section 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 Alaska native village 
governmental agency. 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. 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. For purposes of 
this paragraph (c)(3), the term ``governmental agency'' includes the 
governor, legislature, and any other component of a federal, state, 
local, tribal, or Alaska native village government with authority to 
act for or on behalf of that government.
    (4) Mortgage activity requirement. An applicant shall be deemed to 
meet the mortgage activity requirement in section 10b(a) of the Act and 
paragraph (b)(4) of this section 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. Lending funds includes, but 
is not limited to, the purchase of whole mortgage loans. In the case of 
a federal, state, local, tribal, or Alaska 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.
    (5) Financial condition requirement. An applicant shall be deemed 
to meet the financial condition requirement in

[[Page 12080]]

paragraph (b)(5) of this section 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.
    (d) State housing finance agencies. In addition to meeting the 
requirements in paragraph (b) of this section, any applicant seeking 
access to advances as a SHFA pursuant to Sec. 935.24(b)(2) shall 
provide evidence satisfactory to the Bank, such as a copy of, or a 
citation to, the statutes and/or regulations describing the applicant's 
structure and responsibilities, that the applicant is a state housing 
finance agency as defined in Sec. 935.1.
    (e) Ineligibility. Except as otherwise provided in this subpart, if 
an applicant does not satisfy the requirements of this subpart, the 
applicant is ineligible to be certified as a nonmember mortgagee.

(The Office of Management and Budget approved the information 
collection requirements contained in this section and assigned 
control number 3069-0005 with an expiration date of November 30, 
1999)


Sec. 935.23  Nonmember mortgagee application process.

    (a) Authority. The Banks are authorized to approve or deny all 
applications for certification as a nonmember mortgagee, subject to the 
requirements of the Act and this subpart. A Bank may delegate the 
authority to approve applications for certification as a nonmember 
mortgagee 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 
nonmember mortgagee shall submit an application that satisfies the 
requirements of the Act and this subpart to the Bank of the district in 
which the applicant's principal place of business, as determined in 
accordance with part 933 of this chapter, is located.
    (c) Application process--(1) Action on applications. A Bank shall 
approve or deny an application for certification as a nonmember 
mortgagee 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 subpart and any other information it deems 
necessary to process the application. If a Bank determines during the 
review process that additional information is necessary to process the 
application, the Bank may deem the application incomplete and stop the 
60-day time period by providing written notice to the applicant. When 
the Bank receives the additional information, it shall again deem the 
application complete, so notify the applicant in writing, and resume 
the 60-day time period where it stopped.
    (2) Decision on applications. The Bank or a duly delegated 
committee of the Bank's board of directors, the Bank president, or a 
senior officer who reports directly to the Bank president other than an 
officer with responsibility for business development shall approve, or 
the board of directors of a Bank shall deny, each application for 
certification as a nonmember mortgagee 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 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 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.
    (4) Appeals. Within 90 calendar days of the date of a Bank's 
decision to deny an application for certification as a nonmember 
mortgagee, the applicant may submit a written appeal to the 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, N.W., Washington 
D.C. 20006, with a copy to the Bank.
    (i) Record for appeal. Upon receiving a copy of an appeal, the Bank 
whose action has been appealed shall provide to the Board a complete 
copy of the applicant's certification file maintained by the Bank under 
paragraph (c)(3) of this section. Until the Board resolves the appeal, 
the Bank shall promptly provide to the Board any relevant new materials 
it receives. The Board may request additional information or further 
supporting arguments from the applicant, the Bank, or any other party 
that the Board deems appropriate.
    (ii) Deciding appeals. Within 90 calendar days of the date an 
applicant files an appeal with the Board, the Board shall consider the 
record for appeal described in paragraph (c)(4)(i) of this section and 
resolve the appeal based on the requirements of the Act and this 
subpart.

(The Office of Management and Budget approved the information 
collection requirements contained in this section and assigned 
control number 3069-0005 with an expiration date of November 30, 
1999)


Sec. 935.24  Advances to nonmember mortgagees.

    (a) Authority. Subject to the provisions of the Act and this 
subpart, a Bank may make advances only to a nonmember mortgagee whose 
principal place of business, as determined in accordance with part 933 
of this chapter, is located in the Bank's district.
    (b) Collateral requirements--(1) Advances to nonmember mortgagees. 
A Bank may make an advance to any nonmember mortgagee upon the security 
of the following collateral:
    (i) Mortgage loans insured by the Federal Housing Administration of 
HUD under title II of the National Housing Act; or
    (ii) Securities representing a whole interest in the principal and 
interest payments due on a pool of mortgage loans insured by the 
Federal Housing Administration of HUD under title II of the National 
Housing Act. A Bank may only accept as collateral the securities 
described in this paragraph (b)(1)(ii) if the nonmember mortgagee 
provides evidence that such securities are backed solely by mortgages 
of the type described in paragraph (b)(1)(i) of this section.
    (2) Certain advances to SHFAs. (i) In addition to the collateral 
described in paragraph (b)(1) of this section, a Bank may make an 
advance to a nonmember mortgagee that has satisfied the requirements of 
Sec. 935.22(d) for the purpose of facilitating residential or 
commercial mortgage lending that benefits individuals or families 
meeting the income requirements in section 142(d) or 143(f) of the 
Internal Revenue Code (26 U.S.C. 142(d) or 143(f)) upon the security of 
the following collateral:
    (A) The collateral described in Sec. 935.9(a)(1) or (2).
    (B) The collateral described in Sec. 935.9(a)(3). Solely for the 
purpose of facilitating acceptance of such collateral, a Bank may 
establish a cash collateral account for a nonmember

[[Page 12081]]

mortgagee that has satisfied the requirements of Sec. 935.22(d).
    (C) The real estate related collateral described in 
Sec. 935.9(a)(4), provided that such collateral is comprised of 
mortgage loans on one-to-four family or multifamily residential 
property and the acceptance of such collateral will not increase the 
total amount of advances outstanding to the SHFA secured by such 
collateral beyond 30 percent of its GAAP capital, as computed by the 
Bank.
    (ii) Prior to making an advance pursuant to this paragraph (b)(2), 
a Bank shall obtain a written certification from the nonmember 
mortgagee that it shall use the proceeds of the advance for the 
purposes described in paragraph (b)(2)(i) of this section.
    (c) Terms and conditions--(1) General. Subject to the provisions of 
this paragraph (c), a Bank, in its discretion, shall determine whether, 
and on what terms, it will make advances to a nonmember mortgagee.
    (2) Advance pricing. (i) A Bank shall price advances to nonmember 
mortgagees in accordance with the requirements for pricing advances to 
members set forth in Sec. 935.6(b). Wherever the term ``member'' 
appears in Sec. 935.6(b), the term shall be construed also to mean 
``nonmember mortgagee.''
    (ii) A Bank shall apply the pricing criteria identified in 
Sec. 936.5(b)(2) equally to all of its member and nonmember mortgagee 
borrowers.
    (3) Limit on advances. The principal amount of any advance made to 
a nonmember mortgagee may not exceed 90 percent of the unpaid principal 
of the mortgage loans or securities pledged as security for the 
advance. This limit does not apply to an advance made to a nonmember 
mortgagee under paragraph (b)(2) of this section.
    (d) Transaction accounts. Solely for the purpose of facilitating 
the making of advances to a nonmember mortgagee, a Bank may establish a 
transaction account for each nonmember mortgagee.
    (e) Loss of eligibility--(1) Notification of status changes. A Bank 
shall require a nonmember mortgagee that applies for an advance to 
agree in writing that it will promptly inform the Bank of any change in 
its status as a nonmember mortgagee.
    (2) Verification of eligibility. A Bank may, from time to time, 
require a nonmember mortgagee to provide evidence that it continues to 
satisfy all of the eligibility requirements of the Act and this 
subpart.
    (3) Loss of eligibility. A Bank shall not extend a new advance or 
renew an existing advance to a nonmember mortgagee that no longer meets 
the eligibility requirements of the Act and this subpart until the 
entity has provided evidence satisfactory to the Bank that it is in 
compliance with such requirements.

(The Office of Management and Budget approved the information 
collection requirements contained in this section and assigned 
control number 3069-0005 with an expiration date of November 30, 
1999)

    By the Board of Directors of the Federal Housing Finance Board.

    Dated: February 19, 1997.
Bruce A. Morrison,
Chairperson.
[FR Doc. 97-6260 Filed 3-13-97; 8:45 am]
BILLING CODE 6725-01-P