`[Federal Register Volume 63, Number 97 (Wednesday, May 20, 1998)]
[Rules and Regulations]
[Pages 27668-27674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13428]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 960

[No. 98-18]
RIN 3069-AA73


Amendment of Affordable Housing Program Regulation

AGENCY: Federal Housing Finance Board.

ACTION: Interim final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulation governing the operation of the Affordable Housing 
Program (AHP or Program) to make certain technical revisions to the 
regulation that would clarify Program requirements and improve the 
operation of the AHP.

EFFECTIVE DATE: The interim final rule shall be effective on June 19, 
1998. The Finance Board will accept written comments on this interim 
final rule on or before July 20, 1998.

ADDRESSES: Mail comments 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: Richard Tucker, Deputy Director, 
Compliance Assistance Division, Office of Policy, (202) 408-2848, or 
Sharon B. Like, Senior Attorney-Advisor, (202) 408-2930, or Roy S. 
Turner, Attorney-Advisor, (202) 408-2512, Office of General Counsel, 
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 
20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Section 10(j)(1) of the Federal Home Loan Bank Act (Act) requires 
each Federal Home Loan Bank (Bank) to establish a Program to subsidize 
the interest rate on advances to members of the Federal Home Loan Bank 
System (Bank System) engaged in lending for long-term, low- and 
moderate-income, owner-occupied and affordable rental housing at 
subsidized interest rates. See 12 U.S.C. 1430(j)(1). The Finance Board 
is required to promulgate regulations governing the Program. See id. 
The Finance Board's existing regulation governing the operation of the 
Program is set forth in part 960 of the Finance Board's regulations 
(AHP regulation). See 12 CFR part 960.
    On August 4, 1997, the Finance Board published a final rule 
adopting comprehensive revisions to the AHP regulation, which, among 
other changes, authorized the 12 Banks, rather than the Finance Board, 
to approve applications for AHP subsidies beginning January 1, 1998. 
See 62 FR 41812 (Aug. 4, 1997).
    In the course of implementing the changes to the Program under the 
recent revisions to the AHP regulation, the Banks and Finance Board 
staff have identified a number of technical issues whose resolution 
would clarify Program requirements and improve the effectiveness of the 
Program. The Finance Board previously published a list of Questions and 
Answers prepared by Finance Board staff in order to provide guidance on 
some of these issues. See 62 FR 66977 (Dec. 23, 1997). This interim 
final rule codifies portions of the Finance Board staff guidance 
contained in the Questions and Answers and addresses additional 
technical issues that have arisen in the course of implementing the 
1997 revisions to the AHP regulation. Although the interim final rule 
will become effective 30 days after publication in the Federal 
Register, the Finance Board requests comment on all aspects of the rule 
during a 60-day comment period.

II. Analysis of Interim Final Rule

A. Definitions--Section 960.1

1. Definition of ``Affordable''
    Under Sec. 960.5(b)(1) of the current AHP regulation, in order for 
rental housing to be eligible to be financed by an AHP subsidy, at 
least 20 percent of the units must be occupied by and affordable for 
very low-income households. See 12 CFR 960.1, 960.5(b)(1). Section 
960.1 of the current AHP regulation provides that ``affordable'' means 
that ``the rent charged to a household for a unit that is committed to 
be affordable in an AHP application does not exceed 30 percent of the 
income of a household of the maximum income and size expected, under 
the commitment made in the AHP application, to occupy the unit 
(assuming occupancy of 1.5 persons per bedroom or 1.0 person per unit 
without a separate bedroom).'' See id. Sec. 960.1 This definition is 
intended to make clear that the 30 percent-of-income limitation on rent 
applies to all units in a project which, according to the commitments 
made in the AHP application, are to be reserved for occupancy by 
households with incomes at or below 80 percent of the median income for 
the area. However, subsequent to the adoption of the definition, 
questions have arisen as to which units in a rental project are subject 
to the 30 percent-of-income limitation. The revised definition of 
``affordable'' is intended to clarify this issue. The interim final 
rule defines ``affordable'' to mean that ``the rent charged for a unit 
which is to be reserved for occupancy by a household with an income at 
or below 80 percent of the median income for the area, does not exceed 
30 percent of the income of a household of the maximum income and size 
expected, under the commitment made in the AHP application, to occupy 
the unit (assuming occupancy of 1.5 persons per bedroom or 1.0 person 
per unit without a separate bedroom).''

[[Page 27669]]

2. Definitions of ``Low- or Moderate-Income Household'' and ``Very Low-
Income Household'' for Housing With Current Occupants
    Under Sec. 960.1 of the current AHP regulation, in the case of 
projects involving the purchase or rehabilitation of occupied rental 
housing, a household occupying such housing is deemed to be a ``very 
low-income household'' if, at the time the purchase or rehabilitation 
of the housing is completed, the household has an income at or below 50 
percent of the median income for the area. See id. This provision may 
make it difficult for the sponsor of such a project to commit to 
reserve a specific proportion of units for very low-income households 
because of the uncertainty as to how many of the current occupants will 
qualify as very low-income households at some future date when the 
project purchase or rehabilitation is completed. Consequently, the 
interim final rule provides that current occupants will be deemed to by 
very low-income households if they have incomes at or below 50 percent 
of the median income for the area at the time the application for AHP 
subsidy is submitted to the Bank. The interim final rule makes a 
parallel change to the definition of ``low- or moderate-income 
household'' in Sec. 960.1 of the current AHP regulation.
3. Definition of ``Owner-Occupied Unit'' as Including Two-to-Four 
Family Housing
    Section 960.1 of the current AHP regulation defines ``owner-
occupied unit'' as a unit in an ``owner-occupied project,'' which is 
defined as a project involving the purchase, construction, or 
rehabilitation of owner-occupied housing, including condominiums and 
cooperative housing, by or for very low- or low- or moderate-income 
households. See id. Sec. 960.1. The interim final clarifies that two-
to-four family owner-occupied housing consisting of one owner-occupied 
unit and one or more rental units constitutes a single owner-occupied 
unit for purposes of the AHP. The income eligibility and affordability 
requirements of the AHP regulation do not apply to the rental units in 
two-to-four family housing.
4. Definition of ``Rental Project'' as Including Overnight Shelters for 
Homeless Households
    Under Sec. 960.1 of the current AHP regulation, a ``rental 
project'' is defined to include ``transitional housing for homeless 
households.'' See id. The interim final rule clarifies that overnight 
shelters for homeless households also are considered rental housing 
under the AHP.

B. Terms of Advisory Council Members--Section 960.4(d)

    Section 960.4(d) of the current AHP regulation provides that a 
Bank's board of directors shall appoint Advisory Council members to 
serve for no more than three consecutive terms of three years each, and 
such terms shall be staggered to provide continuity in experience and 
service to the Advisory Council. See id. Sec. 960.4(d). The interim 
final rule restates this requirement to make clear that, as intended by 
the current AHP regulation, an Advisory Council member's individual 
term must be three years. The interim final rule also adds language to 
clarify that an Advisory Council member appointed to fill a vacancy 
shall be appointed for the unexpired term of his or her predecessor in 
office and that appointments for the unexpired term of a predecessor 
shall not count toward the three-term limit.

C. Minimum Eligibility Standards For AHP Projects--Section 960.5

1. Fair Housing Compliance--Sec. 960.5(b)(9)
    Section 960.5(b)(9) of the interim final rule clarifies the 
requirement in the current AHP regulation that projects, as proposed, 
must comply with applicable fair housing law requirements and 
demonstrate how the project will be affirmatively marketed in order to 
be eligible to receive AHP funds. See id. Sec. 960.5(b)(9). The interim 
final rule is intended to clarify that compliance with any applicable 
fair housing laws includes compliance with applicable federal and state 
laws on housing accessibility for the disabled, as well as affirmative 
marketing requirements under the Fair Housing Act, as they relate to 
disabled persons.
    There are a number of federal and state fair housing laws relating 
to persons with disabilities that may apply to AHP projects, depending 
upon: the type of housing or housing design (single-family, 
multifamily, homeless shelters, buildings with or without elevators, or 
mixed use buildings); whether the project involves acquisition, 
rehabilitation or new construction; and whether the project involves 
federal or state funds. Given the number of different laws governing 
fair housing and accessibility requirements for the disabled, it is 
recommended that the appropriate enforcing agencies be consulted for 
clarification on any specific issue relating to compliance.
2. District Eligibility Requirements--Section 960.5(b)(10)
    Section 960.5(b)(10)(i) of the current AHP regulation authorizes a 
Bank, after consultation with its Advisory Council, to establish one or 
more of the following additional eligibility requirements for AHP 
applications: (1) A requirement that the amount of subsidy requested 
for the project does not exceed limits established by the Bank as to 
the maximum amount of AHP subsidy available per member each year; or 
per member, per project, or per project unit in a single funding 
period; (2) a requirement that the project is located in the Bank's 
District; or (3) a requirement that the member submitting the 
application has made use of a credit product offered by the Bank, other 
than AHP or Community Investment Program (CIP) credit products, within 
the previous 12 months. See id. Sec. 960.5(b)(10)(i). Section 
960.5(b)(10)(ii) further provides that District eligibility 
requirements must apply equally to all members. See id. 
Sec. 960.5(b)(10)(ii).
    Several of the Banks would like to have the option to make the use 
of a minimum amount of Bank credit products a prerequisite for applying 
for large amounts of AHP subsidy. Under Sec. 960.5(b)(10)(i)(C) of the 
current AHP regulation, which authorizes the Banks to condition the 
availability of AHP subsidy upon a member's use of ``a'' credit 
product, this option is not now available. See id. 
Sec. 960.5(b)(10)(i)(C). Further, these Banks have proposed that the 
required level of credit product usage be linked to a member's asset 
size. For example, a Bank proposes to allow all members to have access 
to up to $50,000 of AHP subsidy per year, but require members wishing 
to apply for more than $50,000 to have outstanding average daily 
balances of Bank credit products in an amount equal to at least 1.5 
percent of the member's total assets. In support of this kind of 
requirement, the Banks have argued that because AHP subsidies are 
derived from a Bank's earnings, fairness requires that availability of 
subsidies be linked to the extent to which a member contributes to the 
Bank's earnings through the purchase of other Bank credit products. 
These Banks argue that a member's use of a single Bank credit product 
does not make a meaningful contribution to Bank earnings.
    Accordingly, the interim final rule revises the language of 
Sec. 960.5(b)(10)(i)(C) of the current AHP regulation to permit a Bank 
to establish a requirement that a member submitting an AHP application 
has made use of a minimum amount of a credit product

[[Page 27670]]

offered by the Bank, other than AHP or CIP credit products, within the 
previous 12 months, provided that such a minimum threshold for credit 
product usage established by a Bank shall not exceed 1.5 percent of a 
member's total assets, and all members shall have access to some amount 
of AHP subsidy, as determined by the Bank, regardless of whether they 
meet the Bank's minimum threshold for credit product usage.
    Section 960.5(b)(10)(ii) of the current AHP regulation provides 
that ``District eligibility requirements must apply equally to all 
members.'' See id. Sec. 960.5(b)(10)(ii). The interim final rule 
revises this language to clarify that ``[a]ny limit on the amount of 
AHP subsidy available per member must result in equal amounts of AHP 
subsidy available to all members.'' This requirement is intended to 
ensure that such limits are not structured or applied in a 
discriminatory manner.

D. Procedure for Approval of Applications for Funding--Section 960.6

1. Instructions for the Competitive Scoring Process--Section 
960.6(b)(4)(ii) and (iii)
    The interim final rule adds specific references to the targeting 
and subsidy-per-unit scoring criteria to clarify the cross references 
in Secs. 960.6(b)(4)(ii) and (iii) of the current AHP regulation. See 
id. Secs. 960.6(b)(4)(ii), (iii).
2. Scoring Criterion on Use of Donated Government-Owned or Other 
Properties--Section 960.6(b)(4)(iv)(A)
    Under Sec. 960.6(b)(4)(iv)(A) of the current AHP regulation, an 
application may receive points if it involves the creation of housing 
using a significant proportion of units or land donated or conveyed for 
a nominal price by the federal government or any agency or 
instrumentality thereof, or by any other party. See id. 
Sec. 960.6(b)(4)(iv)(A). Questions have arisen as to what should be 
considered a ``nominal price.'' The interim final rule adds language to 
Sec. 960.6(b)(4)(iv)(A) clarifying that a nominal price is a small, 
negligible amount, most often one dollar, and may be accompanied by 
modest expenses related to the conveyance of the property.
3. Targeting Score for Owner-Occupied Projects--Section 
960.6(b)(4)(iv)(C)(2)
    The first sentence of Sec. 960.6(b)(4)(iv)(C)(2) of the current AHP 
regulation provides that applications for owner-occupied projects shall 
be awarded points based on the percentage of units in the project to be 
provided to households with incomes at or below 80 percent of the 
median income for the area. See id. Sec. 960.6(b)(4)(iv)(C)(2). The 
wording of this sentence creates the erroneous implication that an AHP 
owner-occupied project may contain one or more units for households 
with incomes above 80 percent of the median income for the area. Under 
the Act, AHP subsidies may be used only to finance owner-occupied 
housing for households with incomes at or below 80 percent of the 
median income for the area. See 12 U.S.C. 1430(j)(2)(A). Consequently, 
the interim final rule deletes the first sentence of 
Sec. 960.6(b)(4)(iv)(C)(2) of the current AHP regulation. Applications 
for owner-occupied projects shall be awarded points based on a 
declining scale, with projects having the highest percentage of units 
targeted to households with the lowest percentage of median income for 
the area awarded the highest number of points.
4. Scoring Criterion for Housing for Homeless Households--Section 960.6 
(b)(4)(iv)(D)
    Under Sec. 960.6(b)(4)(iv)(D) of the current AHP regulation, an 
application may receive points if it involves ``[t]he creation of 
transitional housing, excluding overnight shelters, for homeless 
households permitting a minimum of six months occupancy, or the 
creation of rental housing reserving at least 20 percent of the units 
for homeless households.'' Id. Sec. 960.6(b)(4)(iv)(D). The interim 
final rule restates this provision in order to clarify the language. No 
substantive change is intended. The revised language omits the express 
exclusion of overnight shelters contained in the current language, 
because it is clear that overnight shelters do not come within the 
category of housing permitting a minimum of six months occupancy.
5. Scoring Criterion for Economic Diversity--Section 
960.6(b)(4)(iv)(F)(8)
    Under Sec. 960.6(b)(4)(iv)(F)(8) of the current AHP regulation, 
applications for AHP subsidy may receive points for meeting the 
``Economic Diversity'' scoring criterion if they involve the creation 
of housing that either: (1) is part of a strategy to end isolation of 
very low-income households by providing economic diversity through 
mixed-income housing in low- or moderate-income neighborhoods, or (2) 
provides very low- or low- or moderate-income households with housing 
opportunities in areas where the median household income exceeds 80 
percent of the median income for the area. Id. 
Sec. 960.6(b)(4)(iv)(F)(8).
    One of the Banks has pointed out an ambiguity in the second 
alternative described above, which makes that alternative unworkable. 
Specifically, assuming the word ``area'' refers to the same area each 
time it appears in the following phrase, it will always be the case 
that a project provides ``housing opportunities in areas where the 
median household income exceeds 80 percent of the median income for the 
area,'' because the median income for an area, by definition, always 
exceeds 80 percent of the median income for that area.
    The general intent of the second alternative requirement in the 
``Economic Diversity'' criterion is to promote housing opportunities 
for very low- and low- or moderate-income households in areas that are 
wealthier relative to the surrounding areas. Therefore, the interim 
final rule revises the second alternative to provide that applications 
may receive points for ``Economic Diversity'' if they involve the 
creation of housing that provides very low- or low- or moderate-income 
households with housing opportunities in neighborhoods or cities where 
the median income exceeds the median income for the larger area--such 
as the city, county, or Primary Metropolitan Statistical Area--in which 
the neighborhood or city is located.
6. Scoring Criterion for Community Involvement--Section 
960.6(b)(4)(iv)(F)(10)
    Under Sec. 960.6(b)(4)(iv)(F)(10) of the current AHP regulation, an 
application for AHP subsidy may receive points for meeting the 
``Community Involvement'' scoring criterion if it shows demonstrated 
support for the AHP project by local government, community 
organizations, or individuals, other than as project sponsors, through 
the commitment by such entities or individuals of donated goods and 
services, or volunteer labor. Id. Sec. 960.6 (b)(4)(iv)(F)(10). Several 
of the Banks have requested clarification of what constitutes a donated 
good or service from a local government. For example, local governments 
may provide support to housing projects in the form of property tax 
deferment or abatement, zoning changes or variances, infrastructure 
improvements, or fee waivers. Each of these forms of local government 
initiatives constitutes the kind of non-cash support for the project 
that merits scoring credit under the ``Community Involvement'' 
criterion. Therefore, the interim final rule specifies that these items 
and any similar types of non-cash support for a project by local 
government are to be

[[Page 27671]]

considered under the ``Community Involvement'' criterion.

E. Modifications of Applications--Sections 960.7 and 960.9

    Sections 960.7 and 960.9 of the current AHP regulation govern 
modifications to approved AHP applications prior to and subsequent to 
project completion, respectively. See id. Sec. Sec. 960.7, 960.9. Each 
of these sections provides that as a threshold requirement for the 
approval of a modification, it must be shown that ``there is or will be 
a change in the project that materially affects the facts under which 
the application was originally scored and approved under the Bank's 
competitive application program * * * .'' See id. Sec. Sec. 960.7(a), 
960.9. A number of the Banks have requested clarification of what 
constitutes a ``material change'' affecting the facts under which the 
application was originally scored and approved. Accordingly, the 
interim final rule revises Sec. Sec. 960.7 and 960.9 of the current AHP 
regulation by replacing the ``material change'' requirement with 
language clarifying that a modification is triggered where there is or 
will be a change to a project that would change the score that the 
project application received in the funding period in which it was 
originally scored and approved, had the changed facts been operative at 
that time.

F. Use of Repaid Subsidies--Section 960.12(e)

    Under Secs. 960.12(a) and (b) of the current AHP regulation, which 
set forth the requirements for the recovery of AHP subsidy in cases of 
noncompliance with AHP requirements, interest on AHP subsidies must be 
recovered, where appropriate. See id. Sec. 960.12(a), (b). Section 
960.12(e) of the current AHP regulation provides that amounts repaid to 
a Bank as a result of noncompliance with AHP requirements shall be made 
available for other AHP-eligible projects. See id. Sec. 960.12(e). The 
interim final rule clarifies that any recovered interest on such 
amounts also must be made available for other AHP-eligible projects.

G. Agreements--Section 960.13

1. Retention Agreements for Owner-Occupied Units Constructed or 
Rehabilitated With AHP-Assisted Financing--Sections 960.13(c)(4) and 
(d)(1)
    Section 960.13(c)(4) of the current AHP regulation sets forth the 
required elements for retention agreements for AHP-assisted owner-
occupied units financed by a loan from the proceeds of a subsidized 
advance. See id. Sec. 960.13(c)(4). Specifically, it requires such 
units to be subject to a deed restriction or other legally enforceable 
retention agreement or mechanism requiring that: (1) the Bank or its 
designee is to be given notice of any sale or refinancing of the unit 
occurring prior to the end of the retention period; and (2) in the case 
of a refinancing prior to the end of the retention period, the full 
amount of the interest rate subsidy received by the owner, based on the 
pro rata portion of the interest rate subsidy imputed to the subsidized 
advance during the period the owner occupied the unit prior to 
refinancing, shall be repaid to the Bank from any net gain realized 
upon the refinancing, unless the unit continues to be subject to a deed 
restriction or other legally enforceable retention agreement or 
mechanism for the remainder of the 5-year retention period. See id.
    The retention agreement described in Sec. 960.13(c)(4) is intended 
to be used in situations where a member uses the proceeds of a 
subsidized advance to provide permanent financing for the purchase of 
individual units. Because each permanent loan is funded by a subsidized 
advance, the permanent loan incorporates some level of interest rate 
subsidy that the household purchasing a unit benefits from during the 
term of the loan. Thus, there is a direct link between the subsidized 
advance and the permanent financing for the unit.
    Section 960.13(c)(4) does not address the situation where a member 
uses a subsidized advance to finance a loan to a housing developer to 
build or rehabilitate owner-occupied units, which then are purchased by 
households with permanent financing from another source. In this 
situation, the purchaser essentially receives a pro rata portion of the 
interest rate subsidy in the construction or rehabilitation loan in the 
form of a lump-sum reduction in the purchase price resulting from the 
subsidized financing. The amount of the reduction in the purchase price 
can be determined by spreading the total value of the AHP subsidy 
across all the units financed by the construction or rehabilitation 
loan, and apportioning the subsidy on a pro rata basis based upon the 
relative prices of the units. In effect, the units are financed with 
AHP subsidy in a similar manner to units purchased by homebuyers who 
receive a direct subsidy in the form of downpayment assistance.
    Under Sec. 960.13(d)(1) of the current AHP regulation, where a 
purchaser uses a direct subsidy in the form of downpayment assistance 
to purchase a unit, the unit must be subject to a deed restriction or 
other legally enforceable retention agreement or mechanism requiring 
that: (1) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period; (2) in the case of a sale prior to the end of the retention 
period, an amount equal to a pro rata share of the direct subsidy, 
reduced for every year the seller owned the unit, shall be repaid to 
the Bank from any net gain realized upon the sale of the unit after 
deduction for sales expenses, unless the purchaser is a low-or 
moderate-income household; and (3) in the case of a refinancing prior 
to the end of the retention period, an amount equal to a pro rata share 
of the direct subsidy, reduced for every year the occupying household 
has owned the unit, shall be repaid to the Bank from any net gain 
realized upon the refinancing, unless the unit continues to be subject 
to a deed restriction or other legally enforceable retention agreement 
or mechanism for the remainder of the retention period. See id. 
Sec. 960.13(d)(1).
    In sum, the AHP interest rate subsidy in a construction or 
rehabilitation loan can be viewed as the functional equivalent of a 
lump-sum reduction in the ultimate purchase prices of all the units 
financed by such loan. This is similar to the situation where units are 
purchased by homebuyers who receive a direct subsidy in the form of 
downpayment assistance. Therefore, the Finance Board proposes to add a 
new paragraph (c)(4)(ii) to Sec. 960.13(c)(4) of the current AHP 
regulation requiring owner-occupied units financed by AHP-subsidized 
construction or rehabilitation loans to be subject to retention 
agreements similar to those required by Sec. 960.13(d)(1) for owner-
occupied units financed by a direct subsidy.
    The interim final rule also revises the language of 
Sec. 960.13(d)(1) to address situations parallel to those discussed 
above, but which involve an AHP direct subsidy. For example, in some 
situations, a housing developer may receive the proceeds of a direct 
subsidy to finance the construction or rehabilitation of owner-occupied 
units, which then are purchased by households with permanent financing 
from another source. As in the case where such units are constructed or 
rehabilitated with an AHP-subsidized loan, the purchasers of the units 
essentially receive a pro rata portion of the direct subsidy used to 
finance the construction or rehabilitation of the units, in the form of 
a lump-sum reduction in the units' purchase price. The interim final 
rule is intended to make clear that, although the purchasers

[[Page 27672]]

of the units do not directly receive the proceeds of the direct 
subsidy, the units must be subject to AHP retention/recapture 
mechanisms.
2. Termination of AHP Income-Eligibility and Affordability Restrictions 
After Foreclosure--Sections 960.13(c)(5)(iv) and (d)(2)(iv)
    Under Secs. 960.13(c)(5)(iv) and (d)(2)(iv) of the current AHP 
regulation, a retention agreement for an AHP rental project must 
incorporate a provision providing that the income-eligibility and 
affordability restrictions applicable to the project may terminate upon 
foreclosure or transfer in lieu of foreclosure. See id. 
Secs. 960.13(c)(5)(iv), (d)(2)(iv). The purpose of this provision is to 
ensure that in cases where an AHP project goes into foreclosure, the 
AHP income-eligibility and affordability restrictions do not impede 
transfer of the project after foreclosure. As currently worded, 
Secs. 960.13(c)(5)(iv) and (d)(2)(iv) could be read mistakenly to mean 
that upon the initiation of foreclosure, AHP income-eligibility and 
affordability restrictions automatically terminate. This is not the 
intended meaning of these provisions. Rather, the Finance Board intends 
that AHP income-eligibility and affordability restrictions incorporated 
in any lien on a project will be extinguished in the foreclosure 
process in connection with the repayment, if any, of AHP subsidy. 
Similarly, the Finance Board intends that any deed restriction on the 
project incorporating AHP income-eligibility and affordability 
requirements will be extinguished after foreclosure. Consequently, the 
interim final rule replaces the word ``upon'' in Secs. 960.13(c)(5)(iv) 
and (d)(2)(iv) of the current AHP regulation with ``after,'' so that 
the regulation provides for the termination of AHP income-eligibility 
and affordability restrictions after foreclosure.
    In addition, the interim final rule deletes the reference to 
transfers in lieu of foreclosure, because transfers in lieu of 
foreclosure do not extinguish liens on the property transferred other 
than the lien of the transferee. Consequently, when an AHP project is 
transferred in lieu of foreclosure, the transferee must foreclose on 
the project to remove any remaining AHP lien and the income-eligibility 
and affordability restrictions incorporated in the lien. After such 
foreclosure, Secs. 960.13(c)(5)(iv) and (d)(2)(iv) provide for the 
termination of the AHP income-eligibility and affordability 
restrictions. The interim final rule adds similar language to the 
provisions of the AHP regulation governing retention agreements for 
AHP-assisted owner-occupied projects. See id. Secs. 960.13(c)(4), 
(d)(1).

III. Regulatory Flexibility Act

    Because no notice of proposed rulemaking is required for this 
regulation, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
601 et seq.) do not apply.

List of Subjects in 12 CFR Part 960

    Credit, Federal home loan banks, Housing, Reporting and 
recordkeeping requirements. Accordingly, the Finance Board hereby 
amends title 12, chapter IX, part 960, Code of Federal Regulations, as 
follows.

PART 960--AFFORDABLE HOUSING PROGRAM

    1. The authority citation for part 960 continues to read as 
follows:

    Authority: 12 U.S.C. 1430(j).

    2. Amend Sec. 960.1, by revising the definitions of ``Affordable'', 
``Low-or moderate-income household'' paragraph (2)(ii), ``Owner-
occupied unit'', ``Rental project'', and ``Very low-income household'' 
paragraph (2)(ii) to read as follows:


Sec. 960.1  Definitions.

* * * * *
    Affordable means that the rent charged for a unit which is to be 
reserved for occupancy by a household with an income at or below 80 
percent of the median income for the area, does not exceed 30 percent 
of the income of a household of the maximum income and size expected, 
under the commitment made in the AHP application, to occupy the unit 
(assuming occupancy of 1.5 persons per bedroom or 1.0 person per unit 
without a separate bedroom).
* * * * *
    Low- or moderate-income household.
* * * * *
    (2) * * *
    (ii) Housing with current occupants. In the case of projects 
involving the purchase or rehabilitation of rental housing with current 
occupants, low- or moderate-income household means an occupying 
household with an income at or below 80 percent of the median income 
for the area at the time an application for AHP subsidy is submitted to 
the Bank.
* * * * *
    Owner-occupied unit means a unit in an owner-occupied project. 
Housing with two to four dwelling units consisting of one owner-
occupied unit and one or more rental units shall be considered a single 
owner-occupied unit.
    Rental project means a project involving the purchase, 
construction, or rehabilitation of rental housing, including overnight 
shelters and transitional housing for homeless households and mutual 
housing, where at least 20 percent of the units in the project are 
occupied by and affordable for very low-income households.
* * * * *
    Very low-income household.
* * * * *
    (2) * * *
    (ii) Housing with current occupants. In the case of projects 
involving the purchase or rehabilitation of rental housing with current 
occupants, very low-income household means an occupying household with 
an income at or below 50 percent of the median income for the area at 
the time an application for AHP subsidy is submitted to the Bank.
* * * * *
    3. Section 960.4 is amended by revising paragraph (d) to read as 
follows:


Sec. 960.4  Advisory Councils.

* * * * *
    (d) Terms of Advisory Council members. Advisory Council members 
shall be appointed by the Bank's board of directors to serve for terms 
of three years, and such terms shall be staggered to provide continuity 
in experience and service to the Advisory Council. An Advisory Council 
member appointed to fill a vacancy shall be appointed for the unexpired 
term of his or her predecessor in office. No Advisory Council member 
may be appointed to serve for more than three consecutive terms. 
Appointments for the unexpired term of a predecessor shall not count 
toward the three-term limit.
* * * * *
    4. Section 960.5 is amended by revising paragraphs (b)(9), 
(b)(10)(i)(C), and (b)(10)(ii) to read as follows:


Sec. 960.5  Minimum eligibility standards for AHP projects.

* * * * *
    (b) * * *
    (9) Fair housing. The project, as proposed, must comply with 
applicable federal and state laws on fair housing and housing 
accessibility, including, but not limited to, the Fair Housing Act, the 
Rehabilitation Act of 1973, the Americans with Disabilities Act of 
1990, and the Architectural Barriers Act of 1969, and must demonstrate 
how the project will be affirmatively marketed.
    (10) District eligibility requirements. (i) * * *
    (C) A requirement that the member submitting the application has 
made use of a minimum amount of a credit

[[Page 27673]]

product offered by the Bank, other than AHP or CIP credit products, 
within the previous 12 months, provided that such a minimum threshold 
for credit product usage established by a Bank shall not exceed 1.5 
percent of a member's total assets, and all members shall have access 
to some amount of AHP subsidy, as determined by the Bank, regardless of 
whether they meet the Bank's minimum threshold for credit product 
usage.
    (ii) Any limit on the amount of AHP subsidy available per member 
must result in equal amounts of AHP subsidy available to all members.
    5. Section 960.6 is amended by revising the second sentence of 
paragraph (b)(4)(ii), the fourth sentence of paragraph (b)(4)(iii), and 
paragraphs (b)(4)(iv)(A), (b)(4)(iv)(C)(2), (b)(4)(iv)(D), 
(b)(4)(iv)(F)(8), and (b)(4)(iv)(F)(10) to read as follows:


Sec. 960.6  Procedure for approval of applications for funding.

* * * * *
    (b) * * *
    (4) * * *
    (ii) Point allocations. * * * The scoring criterion for targeting 
identified in paragraph (b)(4)(iv)(C) of this section shall be 
allocated at least 20 points. * * *
    (iii) Satisfaction of scoring criteria. * * * A Bank shall 
designate the targeting and subsidy-per-unit scoring criteria 
identified in paragraphs (b)(4)(iv)(C) and (H), respectively, of this 
section as variable-point criteria. * * *
    (iv) * * *
    (A) Use of donated government-owned or other properties. The 
creation of housing using a significant proportion of units or land 
donated or conveyed for a nominal price by the federal government or 
any agency or instrumentality thereof, or by any other party. For 
purposes of this paragraph, a nominal price is a small, negligible 
amount, most often one dollar, and may be accompanied by modest 
expenses related to the conveyance of the property for use by the 
project.
* * * * *
    (C) * * *
    (2) Owner-occupied projects. Applications for owner-occupied 
projects shall be awarded points based on a declining scale, with 
projects having the highest percentage of units targeted to households 
with the lowest percentage of median income for the area awarded the 
highest number of points.
* * * * *
    (D) Housing for homeless households. The creation of rental housing 
reserving at least 20 percent of the units for homeless households, or 
the creation of transitional housing for homeless households permitting 
a minimum of six months occupancy.
* * * * *
    (F) * * *
    (8) Economic diversity. The creation of housing that is part of a 
strategy to end isolation of very low-income households by providing 
economic diversity through mixed-income housing in low- or moderate-
income neighborhoods, or providing very low-or low- or moderate-income 
households with housing opportunities in neighborhoods or cities where 
the median income exceeds the median income for the larger surrounding 
area--such as the city, county, or Primary Metropolitan Statistical 
Area--in which the neighborhood or city is located;
* * * * *
    (10) Community involvement. Demonstrated support for the project by 
local government, other than as a project sponsor, in the form of 
property tax deferment or abatement, zoning changes or variances, 
infrastructure improvements, fee waivers, or other similar forms of 
non-cash assistance, or demonstrated support for the project by 
community organizations or individuals, other than as project sponsors, 
through the commitment by such entities or individuals of donated goods 
and services, or volunteer labor;
* * * * *
    6. Section 960.7 is amended by revising paragraph (a) to read as 
follows:


Sec. 960.7  Modifications of applications prior to project completion.

    (a) Modification procedure. If, prior to final disbursement of 
funds to a project from all funding sources, there is or will be a 
change in the project that would change the score that the project 
application received in the funding period in which it was originally 
scored and approved, had the changed facts been operative at that time, 
a Bank, in its discretion, may approve in writing a modification to the 
terms of the approved application, provided that:
* * * * *
    7. Section 960.9 is amended by revising the introductory text to 
read as follows:


Sec. 960.9  Modifications of applications after project completion.

    Modification procedure. If, after final disbursement of funds to a 
project from all funding sources, there is or will be a change in the 
project that would change the score that the project application 
received in the funding period in which it was originally scored and 
approved, had the changed facts been operative at that time, a Bank, in 
its discretion, may approve in writing a modification to the terms of 
the approved application, provided that:
* * * * *
    8. Section 960.12 is amended by revising paragraph (e) to read as 
follows:


Sec. 960.12  Remedial actions for noncompliance.

* * * * *
    (e) Use of repaid subsidies. Amounts repaid to a Bank pursuant to 
this section, including any interest, shall be made available for other 
AHP-eligible projects.
* * * * *
    9. Section 960.13 is amended by revising paragraphs (c)(4), 
(c)(5)(iv), (d)(1), and (d)(2)(iv) to read as follows:


Sec. 960.13  Agreements.

* * * * *
    (c) * * *
    (4) Retention agreements for owner-occupied units. (i) Units with 
AHP-assisted permanent financing. The member shall ensure that an 
owner-occupied unit with permanent financing obtained from the proceeds 
of a subsidized advance is subject to a deed restriction or other 
legally enforceable retention agreement or mechanism requiring that:
    (A) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period;
    (B) In the case of a refinancing prior to the end of the retention 
period, the full amount of the interest rate subsidy received by the 
owner, based on the pro rata portion of the interest rate subsidy 
imputed to the subsidized advance during the period the owner occupied 
the unit prior to refinancing, shall be repaid to the Bank from any net 
gain realized upon the refinancing, unless the unit continues to be 
subject to a deed restriction or other legally enforceable retention 
agreement or mechanism described in this paragraph (c)(4)(i); and
    (C) The obligation to repay AHP subsidy to the Bank shall terminate 
after any foreclosure.
    (ii) Units constructed or rehabilitated with AHP-assisted 
financing. The member shall ensure that an owner-occupied unit 
constructed or rehabilitated with a loan from the proceeds of a 
subsidized advance but which does not have permanent financing from the 
proceeds of a subsidized advance, is subject to a deed restriction or 
other legally enforceable retention agreement or mechanism requiring 
that:

[[Page 27674]]

    (A) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period;
    (B) In the case of a sale prior to the end of the retention period, 
an amount equal to the pro rata portion of the interest rate subsidy 
imputed to the subsidized advance that financed the construction or 
rehabilitation loan for the unit, reduced for every year the seller 
owned the unit, shall be repaid to the Bank from any net gain realized 
upon the sale of the unit after deduction for sales expenses, unless 
the purchaser is a low- or moderate-income household;
    (C) In the case of a refinancing prior to the end of the retention 
period, an amount equal to the pro rata portion of the interest rate 
subsidy imputed to the subsidized advance that financed the 
construction or rehabilitation loan for the unit, reduced for every 
year the owner occupied the unit, shall be repaid to the Bank from any 
net gain realized upon the refinancing, unless the unit continues to be 
subject to a deed restriction or other legally enforceable retention 
agreement or mechanism described in this paragraph (c)(4)(ii); and
    (D) The obligation to repay AHP subsidy to the Bank shall terminate 
after any foreclosure.
    (5) * * *
    (iv) The income-eligibility and affordability restrictions 
applicable to the project terminate after any foreclosure.
* * * * *
    (d) Special provisions where members obtain direct subsidies. (1) 
Retention agreements for owner-occupied units. The member shall ensure 
that an owner-occupied unit that is purchased, constructed, or 
rehabilitated with the proceeds of a direct subsidy is subject to a 
deed restriction or other legally enforceable retention agreement or 
mechanism requiring that:
    (i) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period;
    (ii) In the case of a sale prior to the end of the retention 
period, an amount equal to a pro rata share of the direct subsidy that 
financed the purchase, construction, or rehabilitation of the unit, 
reduced for every year the seller owned the unit, shall be repaid to 
the Bank from any net gain realized upon the sale of the unit after 
deduction for sales expenses, unless the purchaser is a low- or 
moderate-income household;
    (iii) In the case of a refinancing prior to the end of the 
retention period, an amount equal to a pro rata share of the direct 
subsidy that financed the purchase, construction, or rehabilitation of 
the unit, reduced for every year the occupying household has owned the 
unit, shall be repaid to the Bank from any net gain realized upon the 
refinancing, unless the unit continues to be subject to a deed 
restriction or other legally enforceable retention agreement or 
mechanism described in this paragraph (d)(1); and
    (iv) The obligation to repay AHP subsidy to the Bank shall 
terminate after any foreclosure.
    (2) * * *
    (iv) The income-eligibility and affordability restrictions 
applicable to the project terminate after any foreclosure.
* * * * *
    Dated: April 22, 1998.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-13428 Filed 5-19-98; 8:45 am]
BILLING CODE 6725-01-P`