40018 Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations

Regulation pursuant to delegated authority

(12 CFR 265.7(f)(10)), July 21, 1998.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 98–19947 Filed 7–24–98; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 933

[No. 98–29]

RIN 3069–AA67

Membership Approval

AGENCY: Federal Housing Finance

Board.

ACTION: Final rule.

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 federallychartered applicants, the insuring

authority for federally-insured

applicants that are not federallychartered, or the appropriate state

regulator for all other applicants. See 12

CFR § 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 § 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. § 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. § 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 § 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

§§ 933.11(a)(3) and (b)(1). The

presumption of noncompliance with the

financial condition requirements would

have to be rebutted under § 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 § 933.6(a)(4),

notwithstanding the lack of a regulatory

examination rating. See id.

§ 933.17(d)(1).

The exclusion of the FRB from the

definition of ‘‘primary regulator’’ in

§ 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

§ 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
Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations 40019

§ 933.1(y), as further described below, to

include the FRB.

Another limitation of the current

definition of ‘‘primary regulator’’ in

§ 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

§ 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

§ 933.8, as applicable. The regulatory

entities listed in § 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. § 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. § 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

§ 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 § 933.1(u) by

deleting the references to securities. The

final rule also makes a conforming

change to § 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.

§§ 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 § 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. § 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. §§ 933.4(a), (b). Several Banks
40020 Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations

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 § 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 § 933.25(b)

of the current Regulation. See id.

§ 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
Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations 40021

1Section 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. § 933.25(f). Under the

Finance Board’s proposed amendments to its

regulations governing the election of Bank directors,

§ 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 §§ 932.1 (definition of ‘‘record

date’’), 932.5(b), 63 FR 26539–40.

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

§§ 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 §§ 933.25(e)

and (f). See id. §§ 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 § 933.29 of the

current Regulation. See 12 CFR 933.29.

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 § 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

§ 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. § 933.14.

Section 933.14(a) provides for

streamlined processing for newlychartered 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.

§ 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

§ 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.

§ 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
40022 Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations

eligibility requirements since they are

required by law to be Bank members.

Based on these arguments, proposed

§ 933.14(a)(1) extended the streamlined

application processing currently

applicable to newly-chartered insured

depository institutions that have not yet

commenced operations to newlychartered 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 § 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. §§ 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 §§ 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 §§ 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, § 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 §§ 933.11(b)(3)(i)(A) to (C)

where combined regulatory financial

reports are not available. See id.

§ 933.15(a)(ii). Accordingly, the final

rule provides that, for purposes of

determining compliance with §§ 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
Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations 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 § 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 § 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. § 933.1(l);

b. § 933.1(z);

c. § 933.2(c)(2);

d. § 933.11(a)(3);

e. § 933.11(a)(4);

f. § 933.11(b)(1);

g. § 933.12(a);

h. § 933.17(e)(1) introductory text;

i. § 933.17(e)(1)(i);

j. § 933.17(e)(2)(i); and

k. § 933.17(e)(3)(i).

§ 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.

§§ 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. § 933.1(aa);

b. § 933.9;

c. § 933.10;

d. § 933.11(a)(1);

e. § 933.11(b)(2);

f. § 933.11(b)(3)(i) introductory text;

g. § 933.11(b)(3)(ii);

h. § 933.15(a)(i);

i. § 933.15(a)(ii);

j. § 933.16; and

k. § 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:

§ 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 § 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:

§ 933.3 Decision on application.

* * * * *

(c) * * * The Bank shall notify an

applicant in writing when its
40024 Federal Register / Vol. 63, No. 143 / Monday, July 27, 1998 /Rules and Regulations

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:

§ 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 § 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 § 933.25(d)(1)(i)

shall apply, and upon approval of

automatic membership by the Bank, the

provisions of §§ 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:

§ 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:

§ 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 §§ 933.7, 933.8, 933.11

and 933.12.

* * * * *

11. Section 933.15 is amended by

adding new paragraph (c) to read as

follows:

§ 933.15 Recent merger or acquisition

applicants.

* * * * *

(c) Makes long-term home mortgage

loans requirement; 10 percent

requirement. For purposes of

determining compliance with §§ 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.

* * * * *

§ 933.20 [Amended]

12. Section 933.20 is amended by

removing the citation ‘‘§ 933.4(a)’’ in

paragraphs (b)(1) and (b)(2) and adding

the citation ‘‘§ 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

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 101

[Docket No. 98N–0274]

Food Labeling; Petitions for Nutrient

Content and Health Claims, General

Provisions; Correction

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule; correction.

SUMMARY: The Food and Drug

Administration (FDA) is correcting a

document that appeared in the Federal

Register of May 14, 1998 (63 FR 26717).

The document amended FDA’s

regulations to define the conditions

under which certain petitions for

nutrient content and health claims shall

be deemed to be denied and to codify

the statutory timeframe within which

the agency will complete rulemakings

on such petitions. The document was

published with some errors. This

document corrects those errors.

DATES: Effective July 27, 1998.

FOR FURTHER INFORMATION CONTACT:

Hilario R. Duncan, Center for Food

Safety and Applied Nutrition (HFS–24),

Food and Drug Administration, 200 C

St. SW., Washington, DC 20204, 202–

205–8281.

In FR Doc. 98–12832, appearing on

page 26717 in the Federal Register of

Thursday, May 14, 1998, the following

corrections are made:

1. On page 26718, in the first column,

in the first paragraph under

Supplementary Information, beginning

in the thirtieth line, the phrase ‘‘to

include the statutory language, i.e.,

‘Secretary’ is replaced with ‘FDA’’’ is

corrected to read ‘‘by inserting the

statutory language (with ‘Secretary’

replaced by ‘FDA’)’’.

§ 101.69 [Corrected]

3. On page 26719, in the first column,

in paragraph (m)(3), in the fifteenth line,

the phrase ‘‘denied without filing,’’ is

corrected to read ‘‘denied, without

filing’’.

4. On page 26719, in the first column,

in paragraph (m)(4)(iii), in the second

line, the phrase ‘‘of the filing date’’ is

corrected to read ‘‘of the date of filing’’.

§ 101.70 [Corrected]

5. On page 26719, in the second

column, in paragraph (j)(3)(iii), in the

second line, the phrase ‘‘of the filing

date’’ is corrected to read ‘‘of the date

of filing’’.