[Federal Register Volume 63, Number 143 (Monday, July 27, 1998)]
[Rules and Regulations]
[Pages 40018-40024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19912]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 933

[No. 98-29]
RIN 3069-AA67


Membership Approval

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulation on membership in the Federal Home Loan Banks (Banks) 
(Membership Regulation) to make certain technical and substantive 
revisions to the regulation that would improve the operation of the 
membership application process, as well as further streamline 
application processing for certain types of applicants for Bank 
membership.

EFFECTIVE DATE: August 26, 1998.

FOR FURTHER INFORMATION CONTACT: Richard Tucker, Deputy Director, 
Compliance Assistance Division, Office of Policy, (202) 408-2848, or 
Sharon B. Like, Senior Attorney-Adviser, Office of General Counsel, 
(202) 408-2930, Federal Housing Finance Board, 1777 F Street, N.W., 
Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Under the Federal Home Loan Bank Act (Act), the Finance Board is 
responsible for the supervision and regulation of the 12 Banks, which 
provide advances and other financial services to their member 
institutions. See 12 U.S.C. 1422a(a). Institutions may become members 
of a Bank if they meet certain membership eligibility and minimum stock 
purchase criteria set forth in the Act and the Finance Board's 
implementing Membership Regulation. See id. sections 1424, 1426, 
1430(e)(3); 12 CFR part 933.
    On August 16, 1996, the Finance Board published a final rule 
amending the Membership Regulation to authorize the 12 Banks, rather 
than the Finance Board, to approve or deny all applications for Bank 
membership, subject to certain criteria for determining compliance with 
the statutory eligibility requirements for Bank membership formerly 
contained in policy guidelines used by the Finance Board in approving 
membership applications. See 61 FR 42531 (Aug. 16, 1996) (codified at 
12 CFR part 933); Federal Home Loan Bank System Membership Application 
Guidelines, Finance Board Res. No. 93-88 (Nov. 17, 1993) (Guidelines). 
The final rule also provided for streamlined application processing for 
certain types of membership applications. See 12 CFR part 933.
    In the course of processing and approving membership applications 
under the Membership Regulation, the Banks raised a number of technical 
and substantive issues with the Regulation whose resolution would 
improve operation of the membership application process and streamline 
membership application processing for certain types of institutions. To 
address these concerns, the Finance Board issued a proposed rule 
revising various provisions of the Membership Regulation, which was 
published in the Federal Register on February 19, 1998, with a 30-day 
period for public comment. See 63 FR 8364 (Feb. 19, 1998). The Finance 
Board received a total of four letters on the proposed rule. Commenters 
included three Banks, and one Bank member thrift institution.

II. Analysis of the Final Rule

A. Definitions--Section 933.1

1. Definition of ``Primary Regulator''--Section 933.1(y)
    Section 933.1(y) of the current Membership Regulation defines the 
term ``primary regulator'' as the chartering authority for federally-
chartered applicants, the insuring authority for federally-insured 
applicants that are not federally-chartered, or the appropriate state 
regulator for all other applicants. See 12 CFR Sec. 933.1(y). This 
definition does not include the Federal Reserve Board (FRB) for state-
chartered applicants that are members of the Federal Reserve System 
(FRS). Under Sec. 933.11(a)(3), a Bank is required to obtain as part of 
the membership application the applicant's most recent available 
regulatory examination report prepared by its primary regulator or 
appropriate state regulator. See id. Sec. 933.11(a)(3). Section 
933.11(b)(1) provides that an applicant must have received a composite 
regulatory examination rating from its primary regulator or appropriate 
state regulator within two years preceding the date the Bank receives 
the application for membership. See id. Sec. 933.11(b)(1).
    One Bank identified a potential problem with meeting these 
financial condition requirements where the FRB and a state financial 
institution regulator alternate examinations of a state-chartered 
applicant that is an FRS member. When the state financial institution 
regulator performs the examination, it provides a copy of the 
regulatory examination report to the FRB. According to the Bank, 
certain state financial institution regulators in its district cannot 
or will not release to the Bank copies of the regulatory examination 
reports they have prepared, nor will the FRB release to the Bank copies 
of the state regulatory examination reports. Thus, regulatory 
examination reports prepared under such circumstances are not available 
in order for the Bank to obtain a regulatory examination rating for the 
applicant. Nor may the Bank obtain and rely on a copy of the regulatory 
examination report and rating of the FRB when the FRB has examined the 
applicant, because the definition of ``primary regulator'' in 
Sec. 933.1(y) does not include the FRB. Thus, in such situations, the 
Bank may not be able to obtain any examination report and rating for 
the applicant and, therefore, the applicant cannot be deemed to satisfy 
the financial condition requirements of Secs. 933.11(a)(3) and (b)(1). 
The presumption of noncompliance with the financial condition 
requirements would have to be rebutted under Sec. 933.17(d)(1) by 
preparing a written justification providing substantial evidence 
acceptable to the Bank that the applicant is in the financial condition 
required by Sec. 933.6(a)(4), notwithstanding the lack of a regulatory 
examination rating. See id. Sec. 933.17(d)(1).
    The exclusion of the FRB from the definition of ``primary 
regulator'' in Sec. 933.1(y) was an oversight. The Banks should be able 
to rely on regulatory examination reports and examination ratings from 
the FRB to determine an applicant's financial condition under 
Sec. 933.11. An applicant should not have to go through the additional 
burden of establishing its satisfactory financial condition through the 
rebuttal process if an FRB regulatory examination report and rating are 
available. Two Bank commenters specifically supported allowing the 
Banks to rely on FRB regulatory examination reports and ratings. One 
commenter stated that it believes the FRB examination is equivalent in 
rigor and thoroughness to an examination by the Federal Deposit 
Insurance Corporation (FDIC) or the Office of the Comptroller of the 
Currency (OCC).
    Accordingly, consistent with the proposed rule, the final rule 
revises the definition of ``primary regulator'' in

[[Page 40019]]

Sec. 933.1(y), as further described below, to include the FRB.
    Another limitation of the current definition of ``primary 
regulator'' in Sec. 933.1(y) is that it requires a Bank to obtain the 
regulatory examination report and rating only from the ``primary'' 
regulator listed, even though a regulatory examination report and 
rating from an alternate regulator also may be available. For example, 
many potential members are examined by more than one regulator. 
However, under the regulation, the Bank is required to obtain the 
regulatory examination report and rating prepared by the FDIC for a 
state-chartered, FDIC-insured institution, even though there may be a 
more recent state regulatory examination report and rating available 
for such institution. A Bank should not be limited to using only the 
``primary'' regulator's regulatory examination report and rating when 
more current information is available.
    Accordingly, consistent with the proposed rule, the final rule 
amends Sec. 933.1(y) by changing the term ``primary regulator'' to the 
broader term ``appropriate regulator,'' and defining it to mean a 
regulatory entity listed in Sec. 933.8, as applicable. The regulatory 
entities listed in Sec. 933.8 are: for depository institution 
applicants, the FDIC, FRB, National Credit Union Administration, OCC, 
Office of Thrift Supervision (OTS), or other appropriate state 
regulator; and for insurance company applicants, an appropriate state 
regulator accredited by the National Association of Insurance 
Commissioners. See id. Sec. 933.8. The final rule replaces the terms 
``primary regulator'' and ``primary regulator or appropriate state 
regulator'' wherever they appear throughout the Membership Regulation 
with the term ``appropriate regulator.''
2. Nonperforming Assets Performance Trend Criterion; Definitions of 
``Nonperforming Loans, Leases and Securities;'' ``Performing Loans, 
Leases and Securities''--Sections 933.11(b)(3)(i)(B); 933.1(u), (x)
    Section 933.11(b)(3)(i)(B) of the current Membership Regulation 
provides that if an applicant's most recent composite regulatory 
examination rating within the past two years was ``2'' or ``3,'' the 
applicant's nonperforming loans, leases and securities plus foreclosed 
and repossessed real estate may not have exceeded 10 percent of its 
performing loans, leases and securities plus foreclosed and repossessed 
real estate, in the most recent calendar quarter. See id. 
Sec. 933.11(b)(3)(i)(B). This nonperforming assets performance trend 
criterion was intended to be the same criterion as that required in the 
former Finance Board Guidelines, but was described incorrectly in the 
Membership Regulation. The proposed rule revised the criterion to state 
it correctly as provided in the Guidelines, and made conforming changes 
to components of the criterion consistent with the Guidelines. One Bank 
commenter specifically supported this proposed change.
    Accordingly, consistent with the proposed rule, the final rule 
revises Sec. 933.11(b)(3)(i)(B) to state the criterion correctly, as 
follows: the applicant's nonperforming loans and leases plus other real 
estate owned, did not exceed 10 percent of its total loans and leases 
plus other real estate owned, in the most recent calendar quarter. The 
final rule makes a conforming change to the definition of 
``nonperforming loans, leases and securities'' in Sec. 933.1(u) by 
deleting the references to securities. The final rule also makes a 
conforming change to Sec. 933.1(x) by replacing the definition of 
``performing loans, leases and securities'' with a new definition of 
``other real estate owned.''
3. Definition of ``Consolidation''--Section 933.1(ee)
    Sections 933.24 and 933.25 of the current Membership Regulation set 
forth certain requirements and procedures in the event of the 
``consolidation'' of members with other members or members with 
nonmembers. See id. Secs. 933.24, 933.25. Questions were raised as to 
whether the term ``consolidation'' applies only to transactions falling 
within the narrow meaning of the term, i.e., combinations where a new 
company is formed to acquire the net assets of the combining companies. 
The term ``consolidation'' was not intended to apply solely to such 
combinations of entities. The proposed rule clarified this issue by 
adding a new definition of ``consolidation'' in Sec. 933.1(ee) to 
include a consolidation, a merger, or a purchase of all of the assets 
and assumption of all of the liabilities of an entity by another 
entity. One Bank commenter specifically supported the proposed 
definition.
    Accordingly, the final rule adopts the proposed definition without 
change.

B. Action on Applications--Section 933.3(c)

    Section 933.3(c) of the current Membership Regulation requires a 
Bank to notify an applicant when its application is deemed by the Bank 
to be complete. See id. Sec. 933.3(c). Section 933.3(c) also requires a 
Bank to notify an applicant if the 60-day period for acting on a 
membership application is stopped, and when the period for acting on 
the application is resumed. See id. The proposed rule required the Bank 
to provide such notices to the applicant in writing. The intent was to 
ensure that there is a written record of the Banks' actions during the 
application processing period, which may be relevant in the event of an 
appeal of a Bank's denial of an application for membership.
    No commenters opposed the proposed requirement that the Banks 
provide written notice to an applicant when its application is deemed 
complete, which starts the 60-day processing clock. Accordingly, this 
requirement is retained in the final rule.
    Two Bank commenters specifically opposed requiring the Banks to 
provide written notice to an applicant when the 60-day processing 
period is stopped or resumed. They stated that telephone notification 
to the applicant, with a written log of such notification maintained in 
the application files at the Bank, should be sufficient. The commenters 
viewed the notice requirement merely as ``bureaucratic paperwork'' that 
would provide no additional information to the applicant, which would 
already have received verbal notice from the Bank, while increasing the 
workload for Bank staff. One commenter also noted that the processing 
clock often is stopped only for short periods of time in order to get 
additional information from the applicant, and the Bank probably will 
have received the requested information from the applicant before it 
has had time to generate the notice letter.
    The Finance Board believes there is merit in the commenters' 
arguments. A written record can be ensured, for purposes of reviewing 
any appeal of a Bank's denial of a membership application, by requiring 
the Banks to maintain a written log in their application files of 
notices provided to applicants when the processing clock is stopped or 
resumed. Written notice to the applicants in such circumstances does 
not appear to be necessary. The final rule is revised accordingly.

C. Automatic Membership Approval For Certain Consolidations--Section 
933.4(d)

    Sections 933.4(a) and (b) of the current Membership Regulation 
provide for automatic Bank membership approval for institutions 
required by law to become Bank members, and for institutions that have 
undergone certain charter conversions, respectively. See id. 
Secs. 933.4(a), (b). Several Banks

[[Page 40020]]

suggested that the Regulation also should allow for automatic Bank 
membership approval where a member consolidates with a nonmember, the 
nonmember is the surviving entity, and a significant percentage of the 
surviving entity's total assets are derived from the assets of the 
disappearing member. Where the surviving entity has substantially the 
same assets as the disappearing member, the surviving entity arguably 
should not have to go through the membership application process. The 
proposed rule authorized such automatic membership approval where 90 
percent or more of the total assets of the surviving entity are derived 
from the assets of the disappearing member, and where the surviving 
entity provides written notice to the Bank that it desires to be a 
member of the Bank. The Finance Board requested comment on the 
arguments for or against this proposal, including whether the 90 
percent calculation or some other number or approach was an appropriate 
method for determining the similarity of the disappearing and surviving 
entities. In response to a Bank suggestion, the Finance Board also 
requested comment on whether the chief executive officer of the 
surviving entity should be required to submit a letter or certification 
stating that the surviving entity continues to meet the membership 
eligibility requirements.
1. 90 Percent Test
    One Bank commenter specifically supported the proposed 90 percent 
test. Two Bank commenters recommended reducing the percentage 
requirement to 75 percent or 50 percent, which also was supported by 
the Bank endorsing the 90 percent test. Two of these commenters 
recommended that the surviving entity in such consolidations be 
required to provide a letter or certification stating that it continues 
to meet the membership eligibility requirements. The other commenter 
stated that such a letter or certification is not necessary since the 
preponderance of the assets is derived from the disappearing member, 
and it is highly unlikely that the surviving entity would not meet the 
membership eligibility requirements. The commenters stated that 
lowering the percentage requirement would further streamline the 
membership process, while posing little financial risk to the Banks. 
Otherwise, there would be an interruption in membership status while 
the surviving entity applied for membership, which could result in lost 
business for the Bank as well as the surviving entity. The thrift 
member commenter opposed the proposed amendment, stating that any 
efficiencies that may be gained by allowing automatic membership 
approval for the small number of institutions that would be eligible 
for such treatment are outweighed by the risks of not maintaining 
appropriate vigilance over Bank membership.
    After consideration of the comments, the Finance Board has decided 
to retain in the final rule the proposed 90 percent test, but to make 
its application discretionary with the Banks. The final rule also 
clarifies that a consolidated institution that is approved for 
automatic membership by a Bank may become a member of the Bank only 
upon the purchase of its minimum stock purchase requirement pursuant to 
the requirements of Sec. 933.20.
    The intent of the 90 percent test is to permit automatic membership 
approval for consolidated institutions where substantially all of the 
institution's assets are derived from the assets of the disappearing 
member, making satisfaction of the membership eligibility requirements 
essentially automatic. The Finance Board is comfortable that the 90 
percent test generally represents a satisfactory proxy for this 
eligibility determination and that there are not significant risks that 
would affect the integrity of the membership process. However, the 
Finance Board recognizes that there may be special circumstances where 
relying solely on the 90 percent proxy test is not sufficient, and that 
warrant obtaining additional information about the consolidated 
institution in order to verify its satisfaction of the membership 
eligibility requirements. In such cases, a Bank may want to conduct 
additional due diligence of the consolidated institution's financial 
condition or other eligibility factors, pursuant to the normal 
membership application process, in order to verify the institution's 
compliance with the eligibility requirements. Thus, rather than 
requiring automatic membership approval for all consolidated 
institutions meeting the 90 percent test, the final rule authorizes the 
Banks, in their discretion, to approve automatic membership for 
consolidated institutions meeting the 90 percent test.
    A percentage requirement below 90 percent does not ensure automatic 
satisfaction of the membership eligibility requirements, as 
substantially all of the surviving institution's assets cannot be said 
to be derived from the assets of the disappearing member. An 
independent determination that the surviving institution continues to 
meet the eligibility requirements would be necessary. This goes beyond 
the intent of the proposed rule, which was to streamline the membership 
process for consolidated institutions that can be deemed to 
automatically satisfy the membership eligibility requirements. Relying 
on a self-certification of eligibility from the surviving institution 
is no longer an automatic membership process, and may not achieve the 
desired effect of streamlining the process. The surviving institution 
still would have to work through the data from its regulatory financial 
report and determine whether it satisfies the eligibility requirements 
before it could certify its eligibility, and the Bank presumably would 
need to conduct some sort of informal analysis of the institution's 
data in order to ensure that it is comfortable with relying on the 
certification. Moreover, it may not be advisable for a Bank to rely on 
an institution's self-certification of eligibility, in light of the 
fact that the Banks often are required to work extensively with 
membership applicants to get all of the information needed to conduct 
an adequate eligibility review. In addition, it is not clear how the 
rebuttable presumption process under the current Regulation should work 
under a certification process. The Regulation currently allows an 
applicant to rebut a presumption of noncompliance with eligibility 
requirements, as determined in the discretion of the Bank. It may not 
make sense to allow an institution to make its own discretionary 
certification that it has rebutted a presumption of noncompliance.
    In view of all these factors, the final rule does not adopt the 
commenters' suggestions, which go beyond the intended scope of the 
proposed rule.
2. Post-Consolidation Notice Requirement
    Two Bank commenters recommended that the surviving entity be 
required to notify the Bank of its desire for membership within 60 days 
after the effective date of the consolidation, consistent with the 60-
day notice requirement for consolidations involving nonmembers that do 
not satisfy the 90 percent test, which must apply for membership under 
Sec. 933.25(b) of the current Regulation. See id. Sec. 933.25(b). There 
appears to be no reason why consolidated institutions meeting the 90 
percent test should be treated differently, for membership notice 
purposes, from consolidated institutions that do not meet the 90 
percent test and must apply for membership. Sixty days appears to be a 
reasonable amount of time for consolidated institutions meeting the 90

[[Page 40021]]

percent test to make a decision regarding whether they want to be 
members. Accordingly, the final rule adopts a 60-day post-consolidation 
notice requirement for automatic consolidations.
3. Treatment of Acquired Advances and Stock During Notice Period
    Since the final rule allows for a 60-day post-consolidation notice 
period, the rule also must clarify how any outstanding Bank advances 
and Bank stock acquired from the disappearing member will be treated 
during that period before the consolidated institution has announced 
its intention whether to accept membership. The final rule treats such 
advances and stock consistent with the treatment for consolidated 
institutions not meeting the 90 percent test, under 
Secs. 933.25(d)(1)(i), (e) and (f) of the current regulation, i.e., 
during the 60-day notice period, the consolidated institution's Bank 
may permit the institution to continue to hold any outstanding Bank 
advances and stock, and the institution shall have the limited rights 
associated with such stock in accordance with Secs. 933.25(e) and (f). 
See id. Secs. 933.25(d)(1)(i), (e), (f).\1\ Of course, if the 
consolidated institution ultimately decides not to accept membership, 
then the liquidation of any outstanding indebtedness owed to the 
disappearing institution's Bank and redemption of stock of such Bank 
would be carried out in accordance with the requirements of Sec. 933.29 
of the current Regulation. See 12 CFR 933.29.
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    \1\Section 933.25(f) of the current Membership Regulation 
provides that the consolidated institution may not vote the Bank 
stock acquired in the consolidation from the disappearing member 
unless and until the consolidated institution is a Bank member. See 
id. Sec. 933.25(f). Under the Finance Board's proposed amendments to 
its regulations governing the election of Bank directors, 
Sec. 933.25(f) would be removed. See 63 FR 26532, 26544 (May 13, 
1998). The proposed election regulation would provide that the 
consolidated institution may vote the Bank stock acquired from the 
disappearing member that was held by such member on the record date 
(December 31 of the calendar year immediately preceding the election 
year). See proposed Secs. 932.1 (definition of ``record date''), 
932.5(b), 63 FR 26539-40.
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4. Multiple Members Merging Into a Nonmember; ``Same District'' 
Requirement
    A Bank commenter also recommended that automatic membership be 
allowed for multiple members merging into a single nonmember, but only 
if the principal places of business of the multiple members are located 
in the same Bank district as the principal place of business of the 
surviving nonmember, consistent with the ``same district'' requirement 
in Sec. 933.25(b) of the current Regulation. The final rule allows for 
automatic membership for multiple members merging into a single 
nonmember, where 90 percent of more of the total assets of the 
consolidated institution are derived from the total assets of the 
disappearing members. The final rule also applies to consolidations 
meeting the 90 percent test the ``same district'' requirement, which 
was inadvertently omitted from the proposed rule.

D. Allowance For Loan and Lease Losses Performance Trend Criterion-- 
Section 933.11(b)(3)(i)(C)

    Section 933.11(b)(3)(i)(C) of the current Membership Regulation 
provides that if an applicant's most recent composite regulatory 
examination rating within the past two years was ``2'' or ``3,'' the 
applicant's ratio of its allowance for loan and lease losses to 
nonperforming loans, leases and securities must have been 60 percent or 
greater during 4 of the 6 most recent calendar quarters. This allowance 
for loan and lease losses performance trend criterion was intended to 
be the same criterion as that required in the former Finance Board 
Guidelines, but was described incorrectly in the Membership Regulation. 
The proposed rule revised the criterion to state it correctly as 
provided in the Guidelines. One Bank commenter specifically supported 
this proposed change.
    Accordingly, consistent with the proposed rule, the final rule 
revises Sec. 933.11(b)(3)(i)(C) to state the criterion correctly, as 
follows: the applicant's ratio of its allowance for loan and lease 
losses plus the allocated transfer risk reserve to nonperforming loans 
and leases was 60 percent or greater during 4 of the 6 most recent 
calendar quarters.
    One Bank commenter recommended that the minimum 60 percent ratio be 
reduced to 40 percent, arguing that 60 percent is too high a threshold 
that too often triggers the need for rebutting a presumption of 
noncompliance with this criterion for applicants that are in a strong 
financial condition. The Bank also suggested an alternative measure of 
compliance through reliance on a determination by the applicant's 
primary regulator of satisfactory performance of the criterion, based 
on the primary regulator's own definition of the criterion.
    The substantive issue of what amount should be the required ratio 
for this performance criterion was not specifically raised for comment 
in the proposed rule, which was intended merely to correct, consistent 
with the Guidelines, an incorrect statement of the ratio in the current 
regulation. No other commenter recommended lowering the ratio from 60 
percent. This issue, therefore, does not appear to be ripe for review 
at this time. However, if additional information is brought to the 
Finance Board's attention at a future time that suggests that the 60 
percent figure should be reconsidered, the Finance Board will act 
accordingly.

E. De Novo Insured Depository Institution Applicants--Section 933.14

    Section 933.14 of the current Membership Regulation sets forth the 
requirements for processing and approving membership applications from 
de novo insured depository institution applicants. See id. Sec. 933.14. 
Section 933.14(a) provides for streamlined processing for newly-
chartered applicants that have not yet commenced operations, which are 
deemed to meet the duly organized, inspection and regulation, financial 
condition, and character of management eligibility requirements. See 
id. Sec. 933.14(a)(1). Section 933.14(b) requires newly-chartered 
applicants that have commenced operations to meet all of the 
eligibility requirements, subject to certain exceptions provided in 
paragraph (b). In particular, if such applicants have not yet filed 
regulatory financial reports for the last six calendar quarters 
preceding the date the Bank receives the membership application, the 
applicant need not meet the performance trend criteria in 
Sec. 933.11(b)(3)(i)(A) through (C) if the applicant has filed 
regulatory financial reports for at least three calendar quarters of 
operation. See id. Sec. 933.14(b)(2)(iii)(A).
    A number of Banks stated that the requirement for having filed 
three calendar quarters of regulatory financial reports should not be 
necessary for institutions that have recently commenced operations. The 
financial condition and character of management of such institutions 
already will have been recently reviewed and approved by their 
chartering and insuring regulators (see, e.g., 12 U.S.C. 1816, 12 CFR 
303.7(d)(ii) (FDIC); 12 U.S.C. 26, 12 CFR 5.20 (OCC)), will have been 
based on a forward looking business plan, and should not have changed 
significantly since the commencement of operations. The Banks should 
not have to duplicate the review performed by the prospective member's 
appropriate regulator. Further, de novo insured depository institution 
applicants should be treated similarly to mandatory de novo thrift 
institutions, which do not have to satisfy any specific Bank membership

[[Page 40022]]

eligibility requirements since they are required by law to be Bank 
members.
    Based on these arguments, proposed Sec. 933.14(a)(1) extended the 
streamlined application processing currently applicable to newly-
chartered insured depository institutions that have not yet commenced 
operations to newly-chartered insured depository institutions that have 
commenced operations. Such applicants would be deemed to meet the duly 
organized, inspection and regulation, financial condition, and 
character of management eligibility requirements. In order to be 
considered newly-chartered and subject to the streamlined application 
processing procedures of Sec. 933.14(a)(1), applicants would have to 
have been chartered within three years prior to the date the Bank 
receives the application for membership. Three years is consistent with 
the time period for de novo treatment applied by other financial 
institution regulators. See, e.g., 12 CFR 543.3(a) (OTS).
    The Finance Board requested comment on the arguments for or against 
this proposal. Three Bank commenters specifically supported the 
proposal, while the thrift member commenter opposed it. The supporting 
commenters cited the reasons expressed in the proposed rule for 
streamlining the process. One commenter also noted that the de novo 
applicant's other regulators closely scrutinize the financial condition 
of the institution during its first three years of operations, which 
should provide additional comfort regarding the safety and soundness of 
the institution. The commenter also pointed out that after approving a 
de novo institution for membership, the Bank would closely monitor its 
financial soundness before providing any advances to the institution. 
In addition, the commenter noted that streamlining membership approval 
for such institutions will enable them to more quickly access long-term 
Bank advances for the purpose of originating long-term housing and 
community and economic development loans.
    The thrift member stated that the efficiencies to be gained by the 
proposal appeared small compared to the risks being assumed by the Bank 
System. The commenter indicated that a de novo applicant's first three 
quarterly reports should be reviewed to compare its actual performance 
with its business plan, thereby preserving the possibility of early 
identification and avoidance of financial risks to the Bank System. 
However, as discussed above, streamlined membership processing for de 
novos should not increase the financial risks to the Bank System, given 
the extensive financial scrutiny of the institution already performed 
by its other regulators, as well as the close monitoring that the Banks 
will conduct before making advances to such an institution.
    Accordingly, the final rule retains the proposed provisions, with a 
clarification that the charter date to be used in determining the 
three-year period for de novo status is the date the charter was 
approved. One commenter suggested that the charter date be the date the 
letter approving the charter is issued to the applicant by its 
regulator. This seems unnecessary as the date of charter approval 
should be easily verifiable.

F. Recent Merger or Acquisition Applicants--Section 933.15

    Sections 933.9 and 933.10 of the current Membership Regulation 
require applicants to show satisfaction of the ``makes long-term home 
mortgage loans'' and ``10 percent residential mortgage loans'' 
requirements, respectively, based on the applicant's most recent 
regulatory financial report. See id. Secs. 933.9, 933.10. An applicant 
that recently has merged with or acquired another institution prior to 
applying for Bank membership must show satisfaction of these 
eligibility requirements based on the most recent regulatory financial 
report filed by the consolidated entity. See id. However, a newly 
consolidated entity may not be able to show compliance with these 
requirements as it may be several months before the next quarterly 
regulatory financial report is due to be filed with the appropriate 
regulator.
    One Bank suggested that in order to allow the applicant to be 
approved for membership promptly, the applicant should be allowed to 
demonstrate satisfaction of Secs. 933.9 and 933.10 by providing the 
combined pro forma financial statement that the combined entity filed 
with the regulator that approved its merger or acquisition. Another 
suggestion was that the applicant should be allowed to provide the most 
recent regulatory financial report filed prior to the merger or 
acquisition by each of the institutions that entered into the merger or 
acquisition. The Bank then would consolidate the relevant data from 
both reports for purposes of determining compliance with Secs. 933.9 
and 933.10. The proposed rule allowed reliance on such regulatory 
financial reports, provided that in the case of showing satisfaction of 
the 10 percent residential mortgage loans requirement, the Bank 
obtained a certification from the applicant that there was no material 
decrease in the ratio of consolidated residential mortgage loans to 
consolidated total assets derived from the reports since the reports 
were filed with the appropriate regulator.
    One Bank commenter specifically supported this proposal. However, 
upon further consideration of the issue, the Finance Board is concerned 
that simply consolidating the mortgage loan data contained in the 
regulatory financial reports filed by the entities before the merger or 
acquisition does not accurately reflect a true valuation of the asset 
composition of the combined entity. The proposed rule also created a 
potential difficulty in defining what constitutes a ``material'' 
decrease in the ratio of consolidated residential mortgage loans to 
consolidated total assets. The Finance Board believes that the combined 
pro forma financial statement filed with the regulator that approved 
the merger or acquisition represents a more accurate picture of the 
combined institution's asset composition. Moreover, Sec. 933.15(a)(ii) 
of the current Regulation already allows such applicants to provide 
combined pro forma financial statements to show satisfaction of the 
performance trend criteria in Secs. 933.11(b)(3)(i)(A) to (C) where 
combined regulatory financial reports are not available. See id. 
Sec. 933.15(a)(ii). Accordingly, the final rule provides that, for 
purposes of determining compliance with Secs. 933.9 and 933.10, a Bank 
may, in its discretion, permit a recent merger or acquisition applicant 
that has not yet filed the required consolidated regulatory financial 
report as a combined entity with its appropriate regulator, to provide 
the combined pro forma financial statement for the combined entity 
filed with the regulator that approved the merger or acquisition.

III. Regulatory Flexibility Act

    The final rule implements statutory requirements binding on all 
Banks and on all applicants for Bank membership, regardless of their 
size. The Finance Board is not at liberty to make adjustments to those 
requirements to accommodate small entities. The final rule does not 
impose any additional regulatory requirements that will have a 
disproportionate impact on small entities. Therefore, in accordance 
with section 605(b) of the Regulatory Flexibility Act, see 5 U.S.C. 
605(b), the Finance Board hereby certifies that this final rule will 
not have a significant economic impact on a substantial number of small 
entities.

IV. Paperwork Reduction Act

    As part of the proposed rulemaking, the Finance Board published a 
request

[[Page 40023]]

for comments concerning proposed changes to the collection of 
information in the current Membership Regulation, see 63 FR 8364, 8367 
(Feb. 19, 1998), which previously was approved by the Office of 
Management and Budget (OMB) and assigned OMB control number 3069-0004. 
The Finance Board also submitted to OMB an analysis of the proposed 
changes to the collection of information contained in Sec. 933.15 of 
the proposed rule, in accordance with section 3507(d) of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3507(d). No comments were received by 
the Finance Board on the proposed changes to the collection of 
information. OMB approved the information collection without conditions 
with an expiration date of April 30, 2001. The final rule does not 
substantively or materially modify the approved information collection.
    The Banks and, where appropriate, the Finance Board, will use the 
information collection under Sec. 933.15(c) of the final rule to 
determine whether a recent merger or acquisition applicant meets 
certain membership eligibility requirements. See 12 U.S.C. 
1424(a)(1)(C), (a)(2)(A); 12 CFR 933.9, 933.10. Only applicants meeting 
such requirements may become Bank members. See id.; id. Responses are 
required to obtain or retain a benefit. See 12 U.S.C. 1424. The Finance 
Board and the Banks will maintain the confidentiality of information 
obtained from respondents pursuant to the collection of information as 
required by applicable statute, regulation, and agency policy. Books or 
records relating to this collection of information must be retained as 
provided in the regulation.
    Likely respondents and/or recordkeepers will be the Finance Board, 
Banks, and financial institutions that have recently undergone a merger 
or acquisition and are eligible to become Bank members under the Act, 
see id. section 1424(a)(1), including any building and loan 
association, savings and loan association, cooperative bank, homestead 
association, insurance company, savings bank, or insured depository 
institution. The title, description of need and use, and a description 
of the information collection requirements in the final rule are 
discussed further in part II. of the SUPPLEMENTARY INFORMATION. 
Potential respondents are not required to respond to the collection of 
information unless the regulation collecting the information displays a 
currently valid control number assigned by OMB. See 44 U.S.C. 3512(a).
    The changes to the information collection will not impose any 
additional costs on the Finance Board or the Banks. The estimated 
annual reporting and recordkeeping hour burden on respondents is:

a. Number of respondents--15
b. Total annual responses--15
    Percentage of these responses collected electronically--0%
c. Total annual hours requested--60
d. Current OMB inventory--59,152
e. Difference--(59,092)

    The estimated annual reporting and recordkeeping cost burden on 
respondents is:

a. Total annualized capital/startup costs--$0
b. Total annual costs (O&M)--$0
c. Total annualized cost requested--$1,800
d. Current OMB inventory--$1,684,000
e. Difference--($1,682,200)

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

List of Subjects in 12 CFR Part 933

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.

    Accordingly, the Finance Board hereby amends title 12, chapter IX, 
part 933, Code of Federal Regulations, as follows:

PART 933--MEMBERS OF THE BANKS

    1. The authority citation for part 933 continues to read as 
follows:

    Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430, 
1442.

PART 933--[AMENDED]

    2. Part 933 is amended by removing the term ``primary regulator or 
appropriate state regulator'' wherever it appears and adding the term 
``appropriate regulator'' in its place in the following locations:

a. Sec. 933.1(l);
b. Sec. 933.1(z);
c. Sec. 933.2(c)(2);
d. Sec. 933.11(a)(3);
e. Sec. 933.11(a)(4);
f. Sec. 933.11(b)(1);
g. Sec. 933.12(a);
h. Sec. 933.17(e)(1) introductory text;
i. Sec. 933.17(e)(1)(i);
j. Sec. 933.17(e)(2)(i); and
k. Sec. 933.17(e)(3)(i).


Sec. 933.11  [Amended]

    3. Section 933.11(b)(3)(i) introductory text is amended by removing 
the term ``primary regulatory or appropriate state regulator'' and 
adding the term ``appropriate regulator'' in its place.


Secs. 933.11 and 933.17  [Amended]

    4. Sections 933.11(a)(4) and 933.17(e)(1)(i) are amended by 
removing the phrase ``, whichever is applicable,'' wherever it appears.
    5. Part 933 is amended by removing the term ``primary regulator'' 
wherever it appears and adding the term ``appropriate regulator'' in 
its place in the following locations:

a. Sec. 933.1(aa);
b. Sec. 933.9;
c. Sec. 933.10;
d. Sec. 933.11(a)(1);
e. Sec. 933.11(b)(2);
f. Sec. 933.11(b)(3)(i) introductory text;
g. Sec. 933.11(b)(3)(ii);
h. Sec. 933.15(a)(i);
i. Sec. 933.15(a)(ii);
j. Sec. 933.16; and
k. Sec. 933.17(f)(1).

    6. Section 933.1 is amended by revising paragraphs (u), (x), and 
(y), and adding paragraph (ee) to read as follows:


Sec. 933.1  Definitions.

* * * * *
    (u) Nonperforming loans and leases means the sum of the following, 
reported on a regulatory financial report: loans and leases that have 
been past due for 90 days (60 days in the case of credit union 
applicants) or longer but are still accruing; loans and leases on a 
nonaccrual basis; and restructured loans and leases (not already 
reported as nonperforming).
* * * * *
    (x) Other real estate owned means all other real estate owned 
(i.e., foreclosed and repossessed real estate), reported on a 
regulatory financial report, and does not include direct and indirect 
investments in real estate ventures.
    (y) Appropriate regulator means a regulatory entity listed in 
Sec. 933.8, as applicable.
* * * * *
    (ee) Consolidation includes a consolidation, a merger, or a 
purchase of all of the assets and assumption of all of the liabilities 
of an entity by another entity.
    7. Section 933.3 is amended by revising the fourth and fifth 
sentences of paragraph (c) to read as follows:


Sec. 933.3  Decision on application.

* * * * *
    (c) * * * The Bank shall notify an applicant in writing when its

[[Page 40024]]

application is deemed by the Bank to be complete, and shall maintain a 
copy of such letter in the applicant's membership file. The Bank shall 
notify an applicant if the 60-day clock is stopped, and when the clock 
is resumed, and shall maintain a written record of such notifications 
in the applicant's membership file. * * *
* * * * *
    8. Section 933.4 is amended by adding paragraph (d) to read as 
follows:


Sec. 933.4  Automatic membership.

* * * * *
    (d) Automatic membership, in the Bank's discretion, for certain 
consolidations. (1) If a member institution (or institutions) and a 
nonmember institution are consolidated and the consolidated institution 
has its principal place of business in a state in the same Bank 
district as the disappearing institution (or institutions), and the 
consolidated institution will operate under the charter of the 
nonmember institution, on the effective date of the consolidation, the 
consolidated institution may, in the discretion of the Bank of which 
the disappearing institution (or institutions) was a member immediately 
prior to the effective date of the consolidation, automatically become 
a member of such Bank upon the purchase of stock in that Bank pursuant 
to Sec. 933.20, provided that:
    (i) 90 percent or more of the total assets of the consolidated 
institution are derived from the total assets of the disappearing 
member institution (or institutions); and
    (ii) The consolidated institution provides written notice to such 
Bank, within 60 calendar days after the effective date of the 
consolidation, that it desires to be a member of the Bank.
    (2) The provisions of Sec. 933.25(d)(1)(i) shall apply, and upon 
approval of automatic membership by the Bank, the provisions of 
Secs. 933.25(d)(2)(i), (e) and (f) shall apply.
    9. Section 933.11 is amended by revising paragraphs (b)(3)(i)(B) 
and (b)(3)(i)(C) to read as follows:


Sec. 933.11  Financial condition requirement for applicants other than 
insurance companies.

* * * * *
    (b) * * *
    (3) * * *
    (i) * * *
    (B) Nonperforming assets. The applicant's nonperforming loans and 
leases plus other real estate owned, did not exceed 10 percent of its 
total loans and leases plus other real estate owned, in the most recent 
calendar quarter; and
    (C) Allowance for loan and lease losses. The applicant's ratio of 
its allowance for loan and lease losses plus the allocated transfer 
risk reserve to nonperforming loans and leases was 60 percent or 
greater during 4 of the 6 most recent calendar quarters.
* * * * *
    10. Section 933.14 is amended by removing the heading for paragraph 
(a), revising paragraph (a)(1), and removing and reserving paragraph 
(b), as follows:


Sec. 933.14  De novo insured depository institution applicants.

    (a)(1) Duly organized, subject to inspection and regulation, 
financial condition and character of management requirements. An 
insured depository institution applicant whose date of charter approval 
is within three years prior to the date the Bank receives the 
applicant's application for membership in the Bank, is deemed to meet 
the requirements of Secs. 933.7, 933.8, 933.11 and 933.12.
* * * * *
    11. Section 933.15 is amended by adding new paragraph (c) to read 
as follows:


Sec. 933.15  Recent merger or acquisition applicants.

* * * * *
    (c) Makes long-term home mortgage loans requirement; 10 percent 
requirement. For purposes of determining compliance with Secs. 933.9 
and 933.10, a Bank may, in its discretion, permit an applicant that, as 
a result of a merger or acquisition preceding the date the Bank 
receives its application for membership, has not yet filed a 
consolidated regulatory financial report as a combined entity with its 
appropriate regulator, to provide the combined pro forma financial 
statement for the combined entity filed with the regulator that 
approved the merger or acquisition.
* * * * *


Sec. 933.20  [Amended]

    12. Section 933.20 is amended by removing the citation 
``Sec. 933.4(a)'' in paragraphs (b)(1) and (b)(2) and adding the 
citation ``Sec. 933.4(a) or (d)'' in its place.

    Dated: June 24, 1998.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-19912 Filed 7-24-98; 8:45 am]
BILLING CODE 6725-01-P