25718 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 935, and 970

[No. 98–16]

RIN 3069–AA75

Community Investment Cash Advance

Programs

AGENCY: Federal Housing Finance

Board.

ACTION: Proposed rule.

SUMMARY: The Federal Housing Finance

Board (Finance Board) is proposing a

rule establishing a general framework

under which the Federal Home Loan

Banks (Bank) may establish community

investment cash advance (CICA)

programs in addition to their Affordable

Housing Programs (AHP) and

Community Investment Programs (CIP).

The proposed rule does not require a

Bank to establish CICA programs. It is

intended to provide the Banks with an

outline of what the Finance Board has

determined will meet the statutory

requirement that CICA programs

support community investment.

The proposed rule is intended to

establish one set of general standards

governing all CICA programs, including

the Banks’ CIPs. The proposed rule,

however, does not apply to a Bank’s

AHP, which is governed specifically by

part 960 of the Finance Board’s

regulations. In addition to establishing a

general outline for CICA programs, the

proposed rule establishes standards for

two specific CICA programs a Bank may

establish: the Rural Development

Advances (RDA) and the Urban

Development Advances (UDA)

programs. The proposed standards for

the RDA and the UDA programs are

intended to create a safe harbor for

programs that the Finance Board would

consider to meet the statutory

requirement that CICA programs

support community investment. A Bank

will not be required to obtain prior

Finance Board approval of CICA

programs the Bank may create.

However, all such programs will be

subject to review through the

examination process to determine

whether they support what the Finance

Board considers to be community

investment financing.

DATES: Comments on this proposed rule

must be received in writing on or before

August 6, 1998.

ADDRESSES: Comments should be

mailed to: Elaine L. Baker, Secretary to

the Board, Federal Housing Finance

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

D.C. 20006. Comments will be available

for public inspection at this address.

FOR FURTHER INFORMATION CONTACT:

Charles E. McLean, Deputy Director,

Market Research, (202) 408–2537,

Stanley Newman, Associate Director,

Market Research, (202) 408–2812, or

Diane E. Dorius, Associate Director,

Program Development, (202) 408–2576,

Office of Policy; or Brandon B. Straus,

Senior Attorney-Advisor, (202) 408–

2589, Office of General Counsel, Federal

Housing Finance Board, 1777 F Street,

N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

The Banks currently have broad

authority under section 10(a) of the

Federal Home Loan Bank Act (Bank Act)

and part 935 of the Finance Board’s

regulations to make advances in support

of housing finance, including housing

for very low-, low- and moderateincome families. See 12 U.S.C. 1430(a);

12 CFR part 935. Furthermore, in the

Financial Institutions Reform, Recovery

and Enforcement Act of 1989 (FIRREA),

Congress required the Banks to create

two specific programs, the AHP and the

CIP, to provide advances in support of

unmet housing finance and economic

development credit needs. See Pub. L.

101–73, section 721, 103 Stat. 183 (Aug.

9, 1989).

The AHP is a subsidy program

through which the Banks support the

finance of affordable owner-occupied

and rental housing. See 12 U.S.C.

1430(j). The Finance Board first issued

implementing regulations for the AHP

in 1990. See 12 CFR Part 960.

The CIP is a program through which

the Banks provide advances to members

at cost to support the financing of

housing benefiting families with

incomes at or below 115 percent of the

area median income and economic

development activities benefiting

families with incomes at or below 80

percent of the area median income. See

12 U.S.C. 1430(i)(2). The Finance Board

previously has not promulgated

regulations implementing the CIP.

Section 10(j)(10) of the Bank Act

authorizes the Banks to establish CICA

programs in addition to the CIP and the

AHP to support ‘‘community

investment.’’ See id. section 1430(j)(10).

The Finance Board has not previously

promulgated regulations or other

specific guidance on what kinds of Bank

lending are permitted under this

authority.

Since the establishment of the Banks’

statutory authority to make advances for

community investment under FIRREA,

the Banks have provided relatively less

long-term credit for economic

development projects than for housing,

and all of the Banks’ economic

development lending has been done

under their CIP authority, as opposed to

their authority to establish other CICA

programs. In the past eight years, the

Banks have provided $18.1 billion in

CIP advances to finance 368,359

housing units. Only 25 percent of those

units have been multifamily or rental

units that often provide housing for

lower-income families and are usually

more difficult to finance than singlefamily owner-occupied housing. In

addition, only $751 million or 4 percent

of CIP advances have financed

economic development projects.

Furthermore, CIP advances are not

available to the Banks’ nonmember

borrowers. See id. section 1430(i)(1).

The Finance Board believes there is a

need for long-term financing for

economic development in urban and

rural areas that is not being met by

members using the CIP. The Banks can

help to meet this need through the

establishment of other CICA programs to

provide long-term financing for

economic development through both

members and nonmember borrowers.

Therefore, the Finance Board now is

proposing to establish standards

defining the kinds of housing and

economic development activities that

constitute ‘‘community investment’’

eligible to be financed by advances

under section 10(j)(10) of the Bank Act.

This proposed rule does not require a

Bank to establish a CICA program; it is

intended to provide the Banks with an

outline of what the Finance Board has

determined will meet the statutory

requirement for ‘‘community

investment’’ under section 10(j)(10). See

id. However, all such programs will be

subject to review through the

examination process to determine

whether they support what the Finance

Board considers to be community

investment financing, in compliance

with the statutory requirement.

The Finance Board specifically

requests comment on whether it should

establish CICA standards, in whole or in

part, in a form other than a regulation.

Would establishing such standards in

the form of a policy statement or

guidelines be a more effective means of

achieving the goal of promoting the

Banks’ support for community

investment financing, and if so, why?

The Finance Board is interested

particularly in the comments of the

potential users of CICA program

advances, i.e., members and nonmember

borrowers, as well as the potential end

users of CICA-financed credit products,

such as developers of housing and

commercial properties.
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules 25719

II. Analysis of Proposed Rule

A. Overview

The proposed rule adds a new Part

970 to the Finance Board’s regulations.

Part 970 establishes a framework for the

Banks to create CICA programs to

provide advances to members,

nonmember borrowers, or both, who in

turn use the advances to provide longterm financing for housing and

economic development projects that

benefit families with incomes at or

below a targeted income level, as

established by a Bank to address unmet

community investment credit needs.

Projects with unmet credit needs are

those for which financing is not

generally available, or is available at

lower levels or under less attractive

terms.

B. Annual CICA Program Goals—

Section 970.3

Each Bank should undertake a

deliberate decision making process to

determine how much community

investment credit it intends to make

available each year, through its CIP and

other CICA programs, and the kinds of

projects to which that credit should be

directed. As discussed above, the

current focus of the Banks’ community

investment lending efforts has been

through volume lending under the CIP

in support of home mortgage loans, to

the relative exclusion of economic

development financing. The Banks’

concentration on funding large volumes

of CIP-eligible home mortgage loans

may have been encouraged by the CIP

target system established in the past by

the Finance Board, which was based on

a Bank’s average annual outstanding CIP

advances. The Finance Board wishes to

reverse this trend and to encourage the

Banks to shift their focus from the

overall volume of CIP advances to

maximizing the impact of individual

advances. Although the Bank Act does

not expressly state that a Bank may

establish limits on the amount of CIP

advances it makes, the Finance Board

believes that because the CIP is a noprofit program for the Banks, the supply

of CIP advances is necessarily limited.

Consequently, as discussed further

below, the proposed rule makes clear

each Bank’s authority to determine the

appropriate amount of CIP credit to

make available on an annual basis.

However, with the authority to limit the

amount of available CIP credit comes

the obligation to target how the

opportunity cost associated with CIP

advances is to be used most effectively

in relation to the kinds of CIP projects

the Bank funds.

As discussed above, the Banks

provide CIP advances to members at

cost. See id. Therefore, where a Bank

funds a member’s mortgage lending

with CIP advances, there is an

opportunity cost to the Bank to the

extent the Bank could have used regular

advances to fund the transaction. CIP

advances should be used to fund those

loans and projects where the

opportunity cost associated with the

advance makes the most difference to

the member or the project. The Banks

have ample authority to make regular

advances to support home mortgage

lending currently being undertaken by

members. To the extent that CIP

capacity is made available by

substituting regular advances funding,

where appropriate, for home mortgage

lending that is currently being funded

under the CIP, a Bank can redirect the

CIP to meeting unmet housing and

economic development credit needs.

In order to implement these concepts,

§ 970.3 of the proposed rule provides

that a Bank may establish an annual

budget for the cumulative discount the

Bank intends to make available under

its CIP and other CICA programs

(excluding AHP) the Bank may

establish. The budget should be based

upon the Bank’s projected annual totals

of CIP advances and other CICAs that

the Bank intends to make, and the

extent to which the Bank intends to

provide a pricing discount, if any, for

such other CICAs. A Bank also may

include pricing discounts the Bank

intends to offer for letters of credit in

support of targeted economic

development financing. In determining

projected annual totals for CIP and other

CICA program advances, a Bank should

take into account its earnings. If a Bank

establishes a budget for the cumulative

discount available under its CICA

programs, the Bank also should

establish standards for allocating the

discount among specific types of

eligible housing finance and economic

development activities. In the absence

of such a budget, the Bank must fund

requests from qualified members or

nonmember borrowers for any advances

that otherwise meet the requirements of

the Bank’s CIP or any other CICA

Program the Bank may create.

A Bank’s determination as to how

much CIP credit to make available

annually must be based upon the extent

to which the Bank intends to make

community investment credit available

under other CICA programs. In the case

of CIP advances, each Bank must

establish a strategy for providing CIP

advances to support financing for

housing and economic development

projects that is otherwise not generally

available, or is available at lower levels

or under less attractive terms. For

example, CIP advances could be

directed to housing projects designed to

improve the affordability of the housing

through lower downpayments, longer

term financing, and use of subsidies

from other sources, or projects involving

homebuyer counseling. A Bank’s

strategy may include the establishment

of partnerships with government and

private entities that provide funds to

projects in conjunction with CIP

advances and other CICAs in order to

further reduce the cost of such

financing. In developing its strategy, a

Bank must consult with urban and rural

economic development organizations in

the Bank’s District and the Bank’s

Advisory Council. The Finance Board

requests comments on how information

about a Bank’s CIP and other CICA

programs, including any projected

annual totals for advances under such

programs, could best be disseminated to

Bank members and nonmember

borrowers, as well as to other interested

members of the public.

C. Definitions—Section 970.4

1. Definition of Benefit

Under each CICA program, a Bank

may make advances to support housing

and economic development projects that

benefit families with incomes at or

below a certain targeted income level.

The proposed rule uses the same

definition of the term ‘‘benefit’’ for all

CICA programs. Section 970.4 of the

proposed rule defines ‘‘benefit’’ based

on whether the project is for economic

development or for housing, and on the

form of the housing, such as owneroccupied or rental. Specifically, an

economic development project is

deemed to benefit families with incomes

at or below a targeted income level if:

(1) The project is located in a

neighborhood in which more than 50

percent of the families have incomes at

or below the targeted income level; (2)

the project is located in a rural

Champion Community, or a rural

Empowerment Zone or rural Enterprise

Community, as designated by the

Secretary of Agriculture (in the case of

projects located in rural areas); (3) the

project is located in an urban Champion

Community, or an urban Empowerment

Zone or urban Enterprise Community,

as designated by the Secretary of HUD

(in the case of projects located in urban

areas); (4) the project is located in a

federally declared disaster area; (5) the

project involves property eligible for a

federal Brownfield Tax Credit; (6) the

project is located in an area affected by

a federal military base closing or

realignment; (7) the project is located in

an area identified as a designated
25720 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules

community under the Community

Adjustment and Investment Program,

which is a joint program of the federal

government and the North American

Development Bank established in

connection with the passage of the

North American Free Trade Agreement

(NAFTA) to promote economic

opportunities in communities that have

experienced job losses related to the

implementation of the NAFTA; (8) the

annual salaries for at least 75 percent of

the permanent full-and part-time jobs,

computed on a full-time equivalent

basis, created or retained by the project,

other than construction jobs, are at or

below the targeted income level; (9) the

project qualifies as a small business

concern, as defined under the Small

Business Act; or (10) more than 50

percent of the families who otherwise

benefit from (other than through

employment) or are provided services

by the project have incomes at or below

the targeted income level. The Finance

Board specifically requests comment on

whether measuring the salaries of jobs

created by a project is an effective way

to determine whether the project

benefits families with incomes at or

below a targeted level.

A housing project is deemed to

benefit families with incomes at or

below a targeted income level if the

project involves: (1) Owner-occupied

units, each of which is purchased or

owned by a family with an income at or

below the targeted income level; (2)

multi-unit, owner-occupied housing in

which more than 50 percent of the units

are owned or purchased by families

with incomes at or below the targeted

income level; (3) multifamily rental

housing where more than 50 percent of

the units in the project will be occupied

by, or the rents will be affordable to,

families with incomes at or below the

targeted income level; or (4)

manufactured housing parks where

either substantially all of the resident

families have incomes at or below the

targeted income level, or the project is

located in a neighborhood where more

than 50 percent of the families have

incomes at or below the targeted income

level.

2. Forms of Financing

Section 10(i)(1) of the Bank Act

requires the Banks to establish a CIP to

provide funding for members, who in

turn, provide loans to finance CIPeligible activities. See id. section

1430(i)(1). Most of the Banks have

implemented this statutory requirement

by providing advances to members to

fund the origination of loans financing

CIP-eligible activities. The proposed

rule adopts a more expansive reading of

the meaning of the statutory language

authorizing CIP advances to be used by

members to ‘‘provide loans.’’ See id.

Specifically, the proposed rule

authorizes CIP advances and other CICA

advances to be used not only to fund

CICA-eligible loan originations but also

to purchase mortgage revenue bonds

(MRB) and mortgage-backed securities

(MBS) where all of the loans financed

by such bonds and all of the loans

backing such securities are CICAeligible loans. See proposed § 970.3

(definition of ‘‘providing financing’’).

The proposed rule also authorizes CICA

advances to be used by members to

create or maintain a secondary market

for loans, where all such loans are

CICA-eligible loans. The Finance Board

believes that these are additional means

of providing loans for the financing of

CICA-eligible activities, in accordance

with the intent of the statute, because

they create liquidity in the market for

CICA-eligible loans.

3. Income Limits

The Bank Act does not specifically

require the income limits for the CIP or

other CICA programs to be based on

median income data published by the

Department of Housing and Urban

Development (HUD). A ‘‘low-or

moderate-income household’’ is defined

in the Bank Act as a household with an

income of 80 percent or less of the area

median income. See 12 U.S.C.

1430(j)(13)(B). A ‘‘low-or moderateincome neighborhood’’ is defined as a

neighborhood in which 51 percent or

more of the households are low-or

moderate-income households. See id.

section 1430(j)(13)(C).

For purposes of the Banks’ AHPs, the

Finance Board permits each Bank to

choose among several median income

standards for owner-occupied and rental

projects. See 12 CFR 960.1. In the case

of owner-occupied projects, ‘‘area

median income’’ may be defined as: (1)

The median income for the area, as

published annually by HUD; (2) the

applicable median family income, as

determined under the mortgage revenue

bond program set forth in 26 U.S.C.

143(f) and published by a State agency

or instrumentality; (3) the median

income for the area, as published by the

United States Department of

Agriculture; or (4) the median income

for any definable geographic area, as

published by a federal, state, or local

government entity for purposes of that

entity’s housing programs, that has been

approved by the Board of Directors of

the Finance Board for use under the

AHP. See id. In the case of rental

projects, ‘‘area median income’’ may be

defined as: (1) the median income for

the area, as published annually by HUD;

or (2) the median income for any

definable geographic area, as published

by a federal, state, or local government

entity for purposes of that entity’s

housing programs, that has been

approved by the Board of Directors of

the Finance Board for use under the

AHP. See id. In order to provide

uniformity between the AHP and other

CICA programs, the proposed rule

permits a Bank, for purposes of its CICA

programs, to choose among the median

income standards identified in the AHP

regulation. The Finance Board

specifically requests comments on

defining income limits for CICA

programs based upon median income

data other than that published annually

by HUD.

D. Provisions Governing the CIP—

Section 970.5

As discussed above, the Finance

Board has not previously issued a

regulation governing the CIP. The Banks

currently operate their CIPs under the

applicable statutory provisions in

section 10(i) of the Bank Act. See 12

U.S.C. 1430(i). The Finance Board has

provided some interpretations of section

10(i) in instances where there is

ambiguity in the statutory provisions,

and in the absence of Finance Board

interpretations, the Banks have made

their own interpretations for purposes of

program implementation. This process

of experimentation among the Banks in

the context of the CIP, closely

monitored by the Finance Board, was

useful in the beginning of the program.

It also has resulted in inconsistencies

among the Banks in the implementation

of the program, and left many questions

unanswered. Consequently, the

proposed rule is intended to establish

one set of standards governing all CICA

programs, taking into account the

specific statutory requirements

governing the CIP, previous

interpretations, and other questions of

which the staff is aware.

1. Housing Projects

Section 10(i)(2)(A) and (B) of the Bank

Act authorize the Banks to finance: (1)

Home purchases by families whose

income does not exceed 115 percent of

median income for the area, and (2) the

purchase or rehabilitation of housing for

occupancy by families whose income

does not exceed 115 percent of median

income for the area. See id. sections

1430(i)(2)(A), (B). Section 970.5(b) of the

proposed rule implements this

provision by defining the following

housing activities that qualify for CIP

financing : (1) the purchase or

construction of owner-occupied housing
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules 25721

units; (2) the purchase or rehabilitation

of rental housing; (3) the purchase or

rehabilitation of manufactured housing

parks; and (4) the purchase or

rehabilitation of housing for the

homeless.

While manufactured housing parks

have aspects of both owner-occupied

and rental housing projects, they do not

fit clearly within the categories for

single-family or rental housing projects

described under the CIP provisions of

the Bank Act. Furthermore, ensuring

that the population of occupants in a

manufactured housing park meets the

relevant income eligibility requirements

for the CIP is more difficult than in the

context of financing other kinds of

housing. For instance, most occupants

of manufactured housing located in

such parks own their homes but rent the

space on which their homes are located.

Verification of income is not a usual

practice in the course of renting space

to the owner of a manufactured home.

Therefore, it is difficult to verify that the

resident families in a manufactured

housing park are income-eligible. Nonetheless, the Finance Board

believes that the financing of

manufactured housing parks should be

permitted under the CIP and other CICA

programs. Consequently, under § 970.4

of the proposed rule, a manufactured

housing park is deemed to benefit

families with targeted incomes if either:

(1) substantially all of the resident

families have incomes at or below the

targeted income level, or (2) the project

is located in a neighborhood where

more than 50 percent of the families

have incomes at or below the targeted

income level. The latter criterion is

intended as a proxy for the requirement

that each resident family is incomeeligible.

2. Economic Development Projects

Section 10(i)(2)(C) of the Bank Act

authorizes CIP funding to be used to

finance commercial and economic

development activities that benefit lowand moderate-income families or

activities that are located in low-and

moderate-income neighborhoods. See

id. § 1430(i)(2)(C). The proposed rule

implements this provision by defining

the kinds of economic development

activities that qualify for CIP financing. Section 970.4 of the proposed rule

defines ‘‘economic development

projects’’ as: (1) commercial,

manufacturing, social service, and

public facility projects and activities;

and (2) the construction or

rehabilitation of public or private

infrastructure, such as roads, utilities,

and sewers. In order to be CIP-eligible,

a loan must finance an economic

development project that benefits

families with incomes at or below 80

percent of the area median income. As

discussed above, an economic

development project is deemed to

benefit such families if it meets the

definition of ‘‘benefit’’ under § 970.4 of

the proposed rule.

3. Use of CIP Advances for Refinancing

Section 970.5(d) clarifies that a

member may use CIP advances to

provide refinancing for owner-occupied

and rental housing projects provided

that the proceeds of any equity taken

out of such projects are used to

rehabilitate the projects or to preserve

affordability for current residents.

Where refinancing is done to preserve

affordability for current residents, there

is no requirement that continued

affordability be monitored subsequent to

the refinancing. The proposed rule also

provides that CIP advances may be used

to refinance economic development

projects. For economic development

projects, there is no limitation on the

use of the proceeds of any equity taken

out of the project.

4. Pricing of CIP Advances

Section 10(i)(1) of the Bank Act

provides that CIP advances shall be

priced at the cost of Bank consolidated

obligations of comparable maturities,

taking into account reasonable

administrative costs. See id. section

1430(i)(1). The statute does not define

reasonable administrative costs. Section

935.7 of the Finance Board’s regulation

on Bank Advances codifies the statutory

pricing requirement for CIP advances

without material change. See 12 CFR

935.7

A survey of the Banks’ CIP policies in

1996 indicated that the Banks have

adopted a variety of CIP pricing policies

under § 935.7 of the Advances

regulation. See id. Four Banks priced

CIP advances at their cost of funds, and

two Banks priced CIP advances at five

basis points over their cost of funds.

Two banks priced CIP advances 12 to 35

basis points below the price of regular

Bank advances, depending upon the

maturity of the advance. It is estimated

that, on average, CIP advances are

priced approximately 25 basis points

below the price of regular Bank

advances.

The proposed rule amends the

language of existing § 935.7 of the

Advances regulation by clarifying that

in pricing CIP advances, a Bank may

take into account only those

administrative costs necessary for the

operation of its CIP, not administrative

costs attributable to other Bank

operations. Furthermore, the price of

CIP advances shall be lower than the

price of advances of similar amounts,

maturities and terms made pursuant to

section 10(a) of the Bank Act. See 12

U.S.C. 1430(a). The proposed rule

moves the CIP pricing provision from

existing § 935.7 of the Advances

regulation to new § 970.5 of the CICA

regulation.

According to the 1996 survey of the

Banks’ CIP policies, four Banks varied

CIP pricing based on the kinds of

projects being financed and the income

levels of the households benefiting from

the project, for instance, projects that

benefit families with incomes at or

below 80 percent of the area median

income. One Bank provided lower

pricing for members that have been

assigned a rating of outstanding under

the Community Reinvestment Act. See

id. sections 2901 et seq. The Finance

Board requests comment on whether the

regulation should contain a list of

factors such as these that could be the

basis for deeper CIP discounts by the

Banks.

5. Pricing Pass-through

The statutory provisions governing

the CIP do not require members that

obtain CIP advances to pass on the

benefit of the pricing differential

between CIP advances and regular Bank

advances to the owners or occupants of

CIP-financed housing or businesses. The

1996 survey of the Banks’ CIP pricing

policies indicated that two Banks

specifically required such a passthrough and four Banks encouraged a

pass-through. Section 970.5(g) of the

proposed rule provides that a Bank may,

in its discretion, require members

receiving CIP advances to pass through

the benefit of the pricing differential of

the CIP advance to the member’s

borrower.

E. Provisions Governing Other CICA

Programs Established By A Bank—

Section 970.6 and Section 970.7

1. RDA and UDA Programs—Section

970.6

As discussed above, the RDA and

UDA programs are CICA programs a

Bank may establish to provide financing

for economic development projects in

rural or urban areas, respectively.

Section 970.6(a) of the proposed rule

authorizes each Bank to establish an

RDA program to provide advances to its

members, nonmember borrowers, or

both to finance economic development

projects in rural areas that benefit

families with incomes at or below 115

percent of the area median income.

Section 970.6(b) of the proposed rule

authorizes a Bank to establish a UDA

program to provide advances to its
25722 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules

members, nonmember borrowers, or

both to finance economic development

projects in urban areas that benefit

families with incomes at or below 100

percent of the area median income. As

discussed above, the proposed

standards for the RDA and the UDA are

intended to create safe harbor programs

that the Finance Board considers to

meet the statutory requirement that

CICA programs support ‘‘community

investment.’’ See id. section 1430(j)(10).

The RDA is intended to benefit a

population that is not targeted under the

CIP, which has an income eligibility

standard of 80 percent of area median

income for economic development

projects. See id. section 1430(i)(2)(C).

The UDA program, which is intended to

benefit families with incomes at or

below 100 percent of the area median

income, also is intended to reach a

population not targeted by the CIP. Due

to generally higher median incomes in

urban areas, this standard, although

numerically lower than the income

eligibility standard for the RDA

program, reaches families with higher

incomes.

In cases where a UDA or an RDA

project has a housing component, only

the economic development portion of

the project must be designed to benefit

families with targeted income levels.

The proposed rule permits the Banks

to price RDAs and UDAs either as

regular advances or at rates below the

price of regular advances of similar

amounts, maturities and terms.

Permitting the Banks to price UDAs and

RDAs as regular advances may provide

them with a financial incentive to make

such advances. The Banks have the

option to provide reduced pricing for

RDAs and UDAs in order to provide

members and nonmember borrowers

with a financial incentive to undertake

the kinds of financing described in the

RDA and UDA programs.

2. Other CICA Programs—Section 970.7

Section 970.7 of the proposed rule

establishes minimum requirements for

CICA programs a Bank may wish to

establish that do not conform to the

requirements of the RDA and UDA

programs. A Bank may establish such

other CICA programs to provide

advances to finance community

investment for economic development

and housing. Projects that involve a

combination of economic development

and housing must meet the appropriate

targeting standards for the economic

development and housing components

of such projects, respectively.

a. Economic Development Projects.

Under proposed § 970.7(b), a Bank may

establish a CICA program to provide

financing for economic development

projects benefiting families with

incomes at or below a level established

by the Bank to address unmet economic

development credit needs.

b. Housing projects. Under proposed

§ 970.7(c), a Bank may establish a CICA

program to provide financing for

housing projects involving the

acquisition, construction, rehabilitation,

or refinancing of owner-occupied and

rental housing, as well as manufactured

housing parks and housing for the

homeless. In the case of refinancing, the

refinancing must be necessary to

preserve affordability for the current

residents of a rental housing project or

the current owners of owner-occupied

housing.

As in the case of economic

development projects, the Bank must

establish an income eligibility level at or

below a level targeted to address unmet

housing credit needs. Proposed

§ 97076(c)(2) makes clear that the

financing of predevelopment costs for

eligible housing also is permitted.

c. Pricing of other CICA program

advances. As under the provisions

governing the RDA and UDA programs,

§ 970.7(f) of the proposed rule permits

the Banks to price other CICA advances

either as regular advances or below

regular advances.

d. Prior Finance Board approval not

required. As discussed above, a Bank is

not required to obtain prior Finance

Board approval of a CICA program it

establishes under § 970.7. However,

such programs will be subject to review

through the examination process to

determine whether they support what

the Finance Board considers to be

community investment financing, in

compliance with the Bank Act.

F. Limits on Access to CICA Advances—

Section 970.8

Section 7(j) of the Bank Act provides

that the board of directors of each Bank

shall administer the affairs of the Bank

fairly and impartially and without

discrimination in favor of or against any

member borrower. See 12 U.S.C. 1427(j).

Section 970.8 of the proposed rule is

intended to make clear that any

limitations established by a Bank upon

members’ or nonmember borrowers’

access to CIP or other CICA advances

must comply with the statutory

nondiscrimination requirement in

section 7(j) of the Bank Act.

G. Conforming Amendments to the

Finance Board’s Advances Regulation

The proposed rule makes conforming

amendments to the Advances regulation

in order to make clear that a Bank may

make long-term advances for the

purpose of financing lending and

investment activities that meet the

requirements of a CICA Program,

including economic development

activities. Specifically, the proposed

rule amends the existing definition of

‘‘residential housing finance assets’’ in

§ 935.1 of the Advances regulation to

include loans or investments financed

by CICA Program advances. The

proposed rule also revises several

existing provisions of the Advances

regulation on the use of long-term

advances under the CIP in order to make

clear that these provisions apply to all

CICA Programs, not just the CIP. See id.

§§ 935.13, 935.14. In addition, the

proposed rule replaces the existing

definition of ‘‘Community Investment

Program’’ with a new definition of

‘‘Community Investment Cash Advance

Program,’’ which, as discussed above,

includes the CIP.

III. Regulatory Flexibility Act

The proposed rule applies only to the

Banks, which do not come within the

meaning of ‘‘small entities,’’ as defined

in the Regulatory Flexibility Act (RFA).

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

accordance with section 605(b) of the

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

Board hereby certifies that this proposed

rule, if promulgated as a final rule, will

not have a significant economic impact

on a substantial number of small

entities.

List of Subjects

12 CFR Part 935

Credit, Federal home loan banks,

Reporting and recordkeeping

requirements.

12 CFR Part 970

Credit, Federal home loan banks,

Housing.

Accordingly, chapter IX, title 12, Code

of Federal Regulations, is hereby

proposed to be amended, as set forth

below:

Subchapter B—Federal Home Loan Bank

System

PART 935—ADVANCES

1. The authority citation for Part 935

continues 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

adding in alphabetical order the

following definition of ‘‘Community

Investment Cash Advance Program’’, by

removing the definition of ‘‘Community

Investment Program’’, and in the

definition of ‘‘Residential housing
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules 25723

finance assets’’ by republishing the

introductory text and in paragraph (4),

to read as follows:

§ 935.1 Definitions.

* * * * *

Community Investment Cash Advance

Program or CICA Program has the same

meaning as in part 970 of this chapter.

* * * * *

Residential housing finance assets

means any of the following:

* * * * *

(4) Loans or investments financed by

advances made pursuant to a CICA

program;

* * * * *

§ 935.7 [Removed and reserved]

3. Section 935.7 is removed and

reserved.

4. Section 935.13 is amended by

revising paragraph (a)(5) to read as

follows:

§ 935.13 Restrictions on advances to

members that are not qualified thrift

lenders.

(a) * * *

(5) The requirements of paragraph

(a)(2) of this section shall not apply to

applications from non-savings

association members for CICA Program

advances.

* * * * *

5. Section 935.14 is amended by

revising paragraph (b)(2) to read as

follows:

§ 935.14 Limitations on long-term

advances.

* * * * *

(b) * * *

(2) Applications for CICA Program

advances are exempt from the

requirements of paragraph (b)(1) of this

section.

6. Subchapter F, consisting of part

970, is added to chapter IX to read as

follows:

Subchapter F—Community Investment

PART 970—Community Investment

Cash Advance Programs

Sec.

970.1 Scope.

970.2 Purpose.

970.3 Annual CICA Program goals.

970.4 Definitions.

960.5 Community Investment Program.

970.6 Rural and Urban Development

Advances Programs.

970.7 Other Community Investment Cash

Advance programs.

970.8 Limits on access to CICA Program

advances.

970.9 Reporting.

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

§ 970.1 Scope.

Sections 10(i) and (j) of the Act

require the Banks to establish an

Affordable Housing Program (AHP) and

a Community Investment Program (CIP).

(See 12 U.S.C. 1430(j), (i)). Section

10(j)(10) of the Act authorizes the Banks

to establish community investment cash

advance (CICA) programs in addition to

the AHP and the CIP. (See 12 U.S.C.

1430(j)(10)). This part establishes

requirements for a Bank’s CIP and for

other CICA programs established by a

Bank. The requirements of this part do

not apply to a Bank’s AHP, which is

governed specifically by part 960 of this

chapter.

§ 970.2 Purpose.

The purpose of this part is to identify

targeted community investment

activities the Banks may support

through the establishment of CICA

programs under section 10(j)(10) of the

Act. (12 U.S.C. 1430(j)(10). Advances

made under a CICA program are to be

used in support of financing for housing

and economic development activities

that benefit income-targeted families.

This part establishes the general

framework under which a Bank may

create CICA programs in support of

community investment financing. This

part establishes regulations for advances

made under a Bank’s statutorily

mandated CIP. This part also sets forth

standards governing other CICA

programs a Bank may establish,

including two specific CICA programs a

Bank may establish: Rural Development

Advances (RDA) and Urban

Development Advances (UDA)

programs.

§ 970.3 Annual CICA Program goals.

A Bank may establish an annual

budget for the cumulative discount the

Bank intends to make available under

its CIP and other CICA programs

(excluding AHP) the Bank may

establish. The budget should be based

upon the Bank’s projected annual totals

of CIP advances and other CICAs that

the Bank intends to make, and the

extent to which the Bank intends to

provide a pricing discount, if any, for

such other CICAs. A Bank also may

include pricing discounts the Bank

intends to offer for letters of credit in

support of targeted economic

development financing. In determining

projected annual totals for CIP and other

CICA program advances, a Bank should

take into account its earnings. If a Bank

establishes a budget for the cumulative

discount available under its CICA

programs, the Bank also should

establish standards for allocating the

discount among specific types of

eligible housing finance and economic

development activities. In the absence

of such a budget, the Bank must fund

must fund requests from qualified

members or nonmember borrowers for

any advances that otherwise meet the

requirements of the Bank’s CIP or any

other CICA Program the Bank may

create. Each Bank shall establish a

strategy for providing CIP advances to

support financing for housing and

economic development projects that is

otherwise not generally available, or is

available at lower levels or under less

attractive terms. A Bank’s strategy may

include the establishment of

partnerships with government and

private entities that provide funds to

projects in conjunction with CIP and

other CICA advances in order to further

reduce the cost of such financing. In

developing its strategy, a Bank must

consult with urban and rural economic

development organizations in the

Bank’s District and with the Bank’s

Advisory Council.

§ 970.4 Definitions.

As used in this part:

Act means the Federal Home Loan

Bank Act, as amended (12 U.S.C. 1421

et seq.).

Advance means a loan to a member

from a Bank that is:

(1) Provided pursuant to a written

agreement;

(2) Supported by a note or other

written evidence of the borrower’s

obligation; and

(3) Fully secured by collateral in

accordance with the Act and part 935 of

this chapter.

AHP means the Affordable Housing

Program, the CICA Program mandated

by section 10(j) of the Act (12 U.S.C.

1430(j)) and part 960 of this chapter.

Bank means a Federal Home Loan

Bank established under the authority of

the Act.

Benefit. (1) Economic development

projects. An economic development

project is deemed to benefit families

with incomes at or below a targeted

income level if:

(i) The project is located in a

neighborhood in which more than 50

percent of the families have incomes at

or below the targeted income level;

(ii) The project is located in a rural

Champion Community, or a rural

Empowerment Zone or rural Enterprise

Community, as designated by the

Secretary of Agriculture (in the case of

projects located in rural areas);

(iii) The project is located in an urban

Champion Community, or an urban

Empowerment Zone or urban Enterprise

Community, as designated by the
25724 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules

Secretary of HUD (in the case of projects

located in urban areas);

(iv) The project is located in a

federally declared disaster area;

(v) The project involves property

eligible for a federal Brownfield Tax

Credit;

(vi) The project is located in an area

affected by a federal military base

closing or realignment;

(vii) The project is located in an area

identified as a designated community

under the Community Adjustment and

Investment Program;

(viii) The annual salaries for at least

75 percent of the permanent full-and

part-time jobs, computed on a full-time

equivalent basis, created or retained by

the project, other than construction jobs,

are at or below the targeted income

level;

(ix) The project qualifies as a small

business; or

(x) More than 50 percent of the

families who otherwise benefit from

(other than through employment) or are

provided services by the project have

incomes at or below the targeted income

level.

(2) Housing projects. A housing

project is deemed to benefit families

with incomes at or below a targeted

income level if the project involves:

(i) Owner-occupied units, each of

which is purchased or owned by a

family with an income at or below the

targeted income level;

(ii) Multi-unit, owner-occupied

housing in which more than 50 percent

of the units are owned or purchased by

families with incomes at or below the

targeted income level;

(iii) Rental housing where more than

50 percent of the units in the project are

occupied by, or the rents are affordable

to, families with incomes at or below

the targeted income level; or

(iv) Manufactured housing parks

where:

(A) Substantially all of the resident

families have incomes at or below the

targeted income level; or

(B) The project is located in a

neighborhood where more than 50

percent of the families have incomes at

or below the targeted income level.

Board of Directors means the Board of

Directors of the Finance Board.

Champion Community means a

community which developed a strategic

plan and applied for designation by

either the Secretary of HUD or the

Secretary of Agriculture as an

Empowerment Zone or Enterprise

Community, but was designated a

Champion Community.

CICA or Community Investment Cash

Advance means an advance made

pursuant to a CICA program.

CICA Program or Community

Investment Cash Advance program

means:

(1) A Bank’s AHP;

(2) A Bank’s CIP;

(3) A Bank’s RDA program;

(4) A Bank’s UDA program; and

(5) Any other cash advance program

established by a Bank that meets the

requirements of § 970.6.

CIP means a Bank’s Community

Investment Program, the CICA Program

mandated by section 10(i) of the Act (12

U.S.C. 1430(i)).

Community investment means

housing finance and economic

development projects that benefit

families with incomes at or below a

targeted income level.

Economic development projects

means:

(1) Commercial, manufacturing, social

service, and public facility projects and

activities; and

(2) The construction or rehabilitation

of public or private infrastructure, such

as roads, utilities, and sewers.

Family means one or more persons

living in the same dwelling unit.

Finance Board means the agency

established as the Federal Housing

Finance Board.

HUD means the Department of

Housing and Urban Development.

Median income for the area. (1)

Owner-occupied housing projects and

economic development projects. For

purposes of owner-occupied housing

projects and economic development

projects, median income for the area

means one or more of the following, as

determined by the Bank:

(i) The median income for the area, as

published annually by HUD;

(ii) The applicable median family

income, as determined under 26 U.S.C.

143(f) (Mortgage Revenue Bonds) and

published by a State agency or

instrumentality;

(iii) The median income for the area,

as published by the United States

Department of Agriculture; or

(iv) The median income for any

definable geographic area, as published

by a federal, state, or local government

entity for purposes of that entity’s

housing programs, and approved by the

Board of Directors, at the request of a

Bank, for use under the Bank’s CICA

programs.

(2) Rental housing projects. For

purposes of rental projects, median

income for the area means:

(i) The median income for the area, as

published annually by HUD; or

(ii) The median income for any

definable geographic area, as published

by a federal, state, or local government

entity for purposes of that entity’s

housing programs, and approved by the

Board of Directors, at the request of a

Bank, for use under the Bank’s CICA

programs.

(3) Procedure for approval. Requests

for approval of median income

standards shall receive prompt

consideration by the Board of Directors.

Member means an institution that has

been approved for membership in a

Bank and has purchased capital stock in

the Bank in accordance with §§ 933.20

and 933.24 of this chapter.

Neighborhood means:

(1) A census tract or block numbering

area;

(2) A unit of local government with a

population of 25,000 or less;

(3) A rural county;

(4) A trust or restricted Indian land,

Native Hawaiian Home Land, or

Alaskan Native Village; or

(5) A geographic location designated

in comprehensive plans, ordinance, or

other local documents as a

neighborhood, village, or similar

geographic designation that is within

the boundary of but does not encompass

the entire area of a unit of general local

government.

Nonmember borrower means an entity

certified as a nonmember mortgagee

pursuant to § 935.22(b) of this chapter.

Provide financing means:

(1) Originating loans;

(2) Purchasing mortgage revenue

bonds or mortgage-backed securities,

where all of the loans financed by such

bonds and all of the loans backing such

securities meet the eligibility

requirements of the program under

which the member or nonmember

borrower receives an advance; and

(3) Creating or maintaining a

secondary market for loans, where all

such loans are mortgage loans meeting

the eligibility requirements of the

program under which the member or

nonmember borrower receives an

advance.

RDA or Rural Development Advance

means an advance made pursuant to an

RDA program.

RDA program or Rural Development

Advance program means a program

established by a Bank meeting the

requirements of § 970.6(a).

Rural area means:

(1) A unit of general local government

or an unincorporated place outside a

Metropolitan Statistical Area (MSA), as

defined by the U.S. Bureau of the

Census, that has a population of less

than 30,000; or

(2) A trust or restricted Indian land,

Native Hawaiian Home Land, or

Alaskan Native Village.

Small business means a ‘‘small

business concern,’’ as that term is
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules 25725

defined by section 3(a) of the Small

Business Act (15 U.S.C. 632(a)) and

implemented by the Small Business

Administration under 13 CFR part 121,

or any successor provisions.

UDA or Urban Development Advance

means an advance made pursuant to a

UDA program.

UDA program or Urban Development

Advance program means a program

established by a Bank meeting the

requirements of § 970.6(b).

Urban area means a unit of general

local government or an unincorporated

place that is:

(1) Within an MSA; or

(2) Outside an MSA and has a

population of more than 30,000.

§ 970.5 Community Investment Program.

(a) In general. Each Bank shall

establish a CIP to make advances to its

members to provide financing, as

defined in § 970.4, for eligible

community investment projects.

(Nonmember borrowers are not eligible

to receive CIP advances.)

(b) Housing projects. A Bank may

provide CIP advances to finance the

following kinds of housing projects,

provided that such projects benefit

families with incomes at or below 115

percent of the median income for the

area of a family of four:

(1) The purchase or construction of

owner-occupied housing units;

(2) The purchase or rehabilitation of

rental housing;

(3) The purchase or rehabilitation of

manufactured housing parks; and

(4) The purchase or rehabilitation of

housing for the homeless.

(c) Economic development projects. A

Bank may provide CIP advances to

finance economic development projects

that benefit families with incomes at or

below 80 percent of the median income

for the area of a family of four.

(d) Refinancing. A Bank may provide

CIP advances to refinance:

(1) Economic development projects

described in paragraph (c) of this

section; and

(2) Owner-occupied and multifamily

housing and manufactured housing

parks described in paragraphs (b)(1)

through (b)(4) of this section, provided

that the equity proceeds of the

refinancing are used to rehabilitate the

projects or to preserve affordability for

current residents.

(e) Mixed-use projects. If a project

involves a combination of eligible

housing finance and economic

development activities, the economic

development and housing components

of the project must benefit families at

the appropriate income levels.

(f) Pricing of CIP advances—(1) In

general. Each Bank shall price its CIP

advances as provided in § 935.6 of this

chapter, provided that the cost of such

advances shall not exceed, and may be

lower than, the Bank’s cost of issuing

consolidated obligations of comparable

maturity, taking into account reasonable

administrative costs. In pricing CIP

advances, a Bank may take into account

only those administrative costs

necessary for the operation of its CIP.

(2) Pricing differential. The price of

CIP advances shall be lower than the

price of advances of similar amounts,

maturities and terms made pursuant to

section 10(a) of the Act.

(g) Pricing pass-through. A Bank may

require members receiving CIP advances

to pass through the benefit of the pricing

differential of the CIP advance to the

member’s borrower.

§ 970.6 Rural and Urban Development

Advances Programs.

(a) RDA program. Each Bank may

establish an RDA program to provide

advances to its members, nonmember

borrowers, or both to provide financing,

as defined in § 970.4, for economic

development projects in rural areas that

benefit families with incomes at or

below 115 percent of the median

income for the area of a family of four.

(b) UDA program. Each Bank may

establish a UDA program to provide

advances to its members, nonmember

borrowers, or both to provide financing,

as defined in § 970.4, for economic

development projects in urban areas

that benefit families with incomes at or

below 100 percent of the median

income for the area of a family of four.

(c) Mixed-use projects. If an economic

development project financed by a UDA

or an RDA involves the financing of

housing, only the economic

development portion of the project must

be designed to benefit families with

targeted income levels.

(d) Pricing of UDAs and RDAs—(1)

Advances to members. A Bank shall

price UDAs and RDAs to members as

provided in § 935.6 of this chapter, and

may price such advances at rates below

the price of advances of similar

amounts, maturities and terms made

pursuant to section 10(a) of the Act. (12

U.S.C. 1430(a)).

(2) Advances to nonmember

borrowers. A Bank shall price UDAs and

RDAs to nonmember borrowers as

provided in § 935.24 of this chapter and

may price such advances at rates below

the price of advances of similar

amounts, maturities and terms made

pursuant to section 10b of the Act. (12

U.S.C. 1430b).

§ 970.7 Other Community Investment Cash

Advance programs.

(a) In general. Each Bank may

establish CICA programs in addition to

those described in §§ 970.5 and 970.6, to

provide advances to its members,

nonmember borrowers, or both to

finance community investment.

(b) Economic development projects. A

Bank may make a CICA to a member or

nonmember borrower to provide

financing, as defined in § 970.4, for

economic development projects that

benefit families with incomes at or

below a targeted income level, as

established by the Bank to address

unmet economic development credit

needs. Projects with unmet economic

development credit needs are those

economic development projects for

which financing is not generally

available, or is available at lower levels

or under less attractive terms.

(c) Housing projects. A Bank may

make a CICA to a member or

nonmember borrower to provide

financing, as defined in § 970.4, for the

following kinds of housing projects,

provided such projects benefit families

with incomes at or below a targeted

income level, as established by the Bank

to address unmet housing credit needs.

Projects with unmet housing credit

needs are those housing projects for

which financing is not generally

available, or is available at lower levels

or under less attractive terms:

(1) The acquisition, construction,

rehabilitation, or refinancing of:

(i) Owner-occupied housing units;

(ii) Multi-unit, owner-occupied

housing;

(iii) Rental housing;

(iv) Manufactured housing parks; and

(v) Housing for the homeless; or

(2) The financing of predevelopment

costs for housing described in paragraph

(c)(1) of this section.

(d) Limit on refinancing. Where a

member or nonmember borrower uses a

CICA for the purpose of refinancing

housing, the refinancing must be

necessary to preserve affordability for

the current residents of a multifamily

rental housing project or the current

owners of owner-occupied housing.

(e) Mixed-use projects. If a project

involves a combination of eligible

housing finance and economic

development activities, the economic

development and housing components

of the project must benefit families at

the appropriate targeted income levels.

(f) Pricing of other CICA program

advances.—(1) Advances to members. A

Bank shall price advances to members

made under a CICA program established

pursuant to this section as provided in

§ 935.6 of this chapter, and may price
25726 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed Rules

such advances at rates below the price

of advances of similar amounts,

maturities, and terms made pursuant to

section 10(a) of the Act. (12 U.S.C.

1430(a)).

(2) Advances to nonmember

borrowers. A Bank shall price advances

to nonmember borrowers made under a

CICA program established pursuant to

this section as provided in § 935.24 of

this chapter, and may price such

advances at rates below the price of

advances of similar amounts, maturities,

and terms made pursuant to section 10b

of the Act. (12 U.S.C. 1430b).

§ 970.8 Limits on access to CICA program

advances.

Any limit established by a Bank upon

members’ or nonmember borrowers’

access to CICA advances shall not

discriminate in favor of or against any

member.

§ 970.9 Reporting.

(a) CICA policies. Each Bank shall

submit to the Finance Board annually a

copy of the policies governing the

Bank’s CICA programs.

(b) Quarterly reports. Each Bank shall

report quarterly to the Finance Board on

the Bank’s use of CICAs.

Dated: April 22, 1998.

By the Board of Directors of the Federal

Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 98–11951 Filed 5–7–98; 8:45 am]

BILLING CODE 6725–01–P

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 938

[No. 98–17]

RIN 3069–AA61

Federal Home Loan Bank Standby

Letters of Credit

AGENCY: Federal Housing Finance

Board.

ACTION: Proposed Rule.

SUMMARY: The Federal Housing Finance

Board is proposing to codify its existing

policies on Federal Home Loan Bank

(FHLBank) standby letters of credit into

the form of a regulation and to amend

these policies to allow for broader use

of these products by FHLBank members

and eligible nonmember mortgagees.

The proposed rule also would eliminate

some of the restrictions currently

imposed on issuance of standby letters

of credit by FHLBanks that limit the

usefulness of these products to members

and eligible nonmember mortgagees.

DATES: Comments are due on or before

August 6, 1998.

ADDRESSES: Mail comments to Elaine L.

Baker, Executive Secretary, Federal

Housing Finance Board, 1777 F Street,

N.W., Washington D.C. 20006.

Comments will be available for

inspection at this address.

FOR FURTHER INFORMATION CONTACT:

Diane E. Dorius, Associate Director,

Program Development, Office of Policy,

(202) 408–2576; or Eric M. Raudenbush,

Attorney-Advisor, Office of General

Counsel, (202) 408–2932, Federal

Housing Finance Board, 1777 F Street,

N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

The FHLBanks have been permitted to

engage in standby letter of credit (LOC)

transactions since 1983, when the

predecessor agency to the Federal

Housing Finance Board (Finance Board),

the former Federal Home Loan Bank

Board (FHLBB), first adopted its Policy

Guidelines for Issuance of FHLBank

Standby Letters of Credit (FHLBB

Guidelines). Underlying this policy was

a 1983 FHLBB legal opinion which

concluded that FHLBank issuance of

standby LOCs on behalf of members is

permissible under the FHLBanks’

authority to make secured advances, set

forth in section 10 of the Bank Act, 12

U.S.C. 1430, because a FHLBank

standby LOC is the functional

equivalent of an advance in that it

involves an extension of credit by the

FHLBank to its member. Because the

FHLBB considered the authority to issue

standby LOCs to derive from the

authority to make secured advances, the

1983 FHLBB Guidelines, and the 1985

and 1989 revisions thereto, applied the

statutory and regulatory requirements

pertaining to advances to standby LOC

transactions. The substance of the

FHLBB Guidelines was maintained

when the Finance Board (created by the

Financial Institutions Reform, Recovery,

and Enforcement Act of 1989, Pub. L.

No. 101–73, 103 Stat. 412 (1989), to

succeed the FHLBB as regulator of the

FHLBanks) adopted its first standby

LOC policy in 1991.

FHLBank participation in standby

LOC transactions currently is governed

by the Finance Board’s Interim Policy

Guidelines for FHLBank Standby Letters

of Credit (Interim Guidelines), which

were adopted in 1993. The Interim

Guidelines permit FHLBanks to issue or

confirm standby LOCs on behalf of

members to facilitate: the purchase of,

or commitment to purchase mortgage

loans; the collateralization of public

unit deposits; the collateralization of

Internal Revenue Code (IRC) Section

936 deposits (deposits made in Puerto

Rican financial institutions by

corporations operating in Puerto Rico);

interest rate swaps and other

transactions that assist a member’s

asset/liability management; transactions

that promote home financing, housing

activity, or members’ involvement in

commercial and economic development

activities that benefit low-and moderateincome families or activities that are

located in low-and moderate-income

neighborhoods (community

development); and tax-exempt bonds or

notes designed to promote housing or

the financing of community

development. In addition, the Interim

Guidelines permit FHLBanks to issue

LOCs on behalf of nonmember

mortgagees eligible to obtain advances

under section 10b of the Bank Act, 12

U.S.C. 1430b, for transactions that

promote home financing, housing

activity, and community development.

Because the Finance Board retained

the substance of the FHLBB Guidelines

and, by implication, the 1983 FHLBB

legal analysis, the Interim Guidelines

continued to impose upon LOCs all of

the regulatory requirements and

restrictions that apply to advances. For

example, the Interim Guidelines require

that LOCs: be fully secured with

collateral eligible to secure advances

under § 935.9(a) of the Finance Board’s

regulations, 12 CFR 935.9(a); be counted

in the calculation of a member’s

FHLBank stock-to-advances ratio; be

issued only for housing finance

purposes if they have a term to maturity

in excess of five years, or are issued on

behalf of non-qualified thrift lender

(non-QTL) members; and be included in

the calculation of the limitation on

advances to non-QTL members set forth

in § 935.13 of the regulations, id.

§ 935.13, if issued on behalf of non-QTL

members. In addition, the Interim

Guidelines limit LOCs and

confirmations used for purposes other

than interest rate swap transactions to

terms of ten years or less and prohibit

use of LOC confirmations solely to

promote a member’s LOC program or to

increase a member’s profitability from

this fee-based service.

As part of an ongoing effort to

determine both how FHLBank standby

LOCs might be made more useful to

member institutions and nonmember

mortgagees and how to encourage

greater use of LOCs in carrying out the

housing and community investment

mission of the FHLBank System, the

Finance Board recently undertook a

survey of the FHLBanks to determine

the uses of standby LOCs and the needs

of the FHLBanks in issuing standby