[Federal Register Volume 74, Number 93 (Friday, May 15, 2009)]
[Proposed Rules]
[Pages 22848-22867]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11329]



[[Page 22848]]

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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 925

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1263

RIN 2590-AA18


Federal Home Loan Bank Membership for Community Development 
Financial Institutions

AGENCY: Federal Housing Finance Board and Federal Housing Finance 
Agency.

ACTION: Proposed rule.

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SUMMARY: Pursuant to the requirements of the Federal Home Loan Bank Act 
(Bank Act), as amended by section 1206 of the Housing and Economic 
Recovery Act of 2008 (HERA), the Federal Housing Finance Agency (FHFA) 
proposes to amend its membership regulations to authorize non-federally 
insured, CDFI Fund-certified community development financial 
institutions (CDFIs) to become members of a Federal Home Loan Bank 
(Bank). The newly eligible CDFIs include community development loan 
funds, venture capital funds and state-chartered credit unions without 
federal insurance. This notice of proposed rulemaking sets out the 
eligibility and procedural requirements for CDFIs that wish to become 
members of a Bank.

DATES: FHFA will accept written comments on this proposed rule on or 
before July 14, 2009.

ADDRESSES: You may submit your comments on the proposed regulation 
identified by regulatory information number (RIN) 2590-AA18, by any one 
of the following methods:
    <bullet> U.S. Mail, United Parcel Post, Federal Express, or Other 
Mail Service: The mailing address for comments is: Alfred M. Pollard, 
General Counsel, Attention: Comments/RIN 2590-AA18, Federal Housing 
Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552.
    <bullet> Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA18, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
    <bullet> E-mail: Comments to Alfred M. Pollard, General Counsel may 
be sent by e-mail to <a href="/cdn-cgi/l/email-protection#d486b1b397bbb9b9b1baa0a794b2bcb2b5fab3bba2"><span class="__cf_email__" data-cfemail="9fcdfaf8dcf0f2f2faf1ebecdff9f7f9feb1f8f0e9">[email protected]</span></a>. Please include ``RIN 2590-
AA18'' in the subject line of the message.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at <a href="/cdn-cgi/l/email-protection#2d7f484a6e4240404843595e6d4b454b4c034a425b"><span class="__cf_email__" data-cfemail="e0b28587a38f8d8d858e9493a086888681ce878f96">[email protected]</span></a> to ensure timely receipt by the 
agency. Include the following information in the subject line of your 
submission: Federal Housing Finance Agency, Proposed Rule: Federal Home 
Loan Bank Membership for Community Development Financial Institutions, 
RIN 2590-AA18.
    We will post all public comments we receive without change, 
including any personal information you provide, such as your name and 
address, on the FHFA Web site at http://www.fhfa.gov.

FOR FURTHER INFORMATION CONTACT: Sylvia Martinez, Senior Policy 
Analyst/Adviser, 202-408-2825, <a href="/cdn-cgi/l/email-protection#74070d18021d155a191506001d1a110e34121c12155a131b02"><span class="__cf_email__" data-cfemail="5d2e24312b343c73303c2f29343338271d3b353b3c733a322b">[email protected]</span></a>; Amy Bogdon, 
Senior Advisor, 202-408-2546, <a href="/cdn-cgi/l/email-protection#89e8e4f0a7ebe6eeede6e7c9efe1efe8a7eee6ff"><span class="__cf_email__" data-cfemail="10717d693e727f77747f7e50767876713e777f66">[email protected]</span></a>, Division of Federal 
Home Loan Bank Regulation; Deattra Perkins, Community Development 
Specialist, 202-408-2527, <a href="/cdn-cgi/l/email-protection#32565753464640531c425740595b5c4172545a54531c555d44"><span class="__cf_email__" data-cfemail="690d0c081d1d1b0847190c1b0200071a290f010f08470e061f">[email protected]</span></a>, Division of Housing 
Mission and Goals. For legal questions contact Sharon B. Like, 
Associate General Counsel, 202-414-8950, <a href="/cdn-cgi/l/email-protection#7c0f141d0e131252101517193c1a141a1d521b130a"><span class="__cf_email__" data-cfemail="c9baa1a8bba6a7e7a5a0a2ac89afa1afa8e7aea6bf">[email protected]</span></a>. You can 
send regular mail to the Federal Housing Finance Agency, Fourth Floor, 
1700 G Street, NW., Washington DC 20552. The telephone number for the 
Telecommunications Device for the Deaf is 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory and Regulatory Background

    Effective July 30, 2008, Division A of HERA, Public Law No. 110-
289, 122 Stat. 2654 (2008), titled the Federal Housing Finance 
Regulatory Reform Act of 2008, created FHFA as an independent agency of 
the Federal Government. HERA transferred supervisory and oversight 
responsibilities over the Federal National Mortgage Association (Fannie 
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the 
Federal Home Loan Banks (collectively, Regulated Entities) from the 
Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal 
Housing Finance Board (FHFB) to FHFA. The Regulated Entities continue 
to operate under regulations promulgated by OFHEO and FHFB until such 
time as the existing regulations are supplanted by regulations 
promulgated by FHFA.
    Each Bank is a cooperative institution that is owned by its 
members, all of which must comply with certain statutory requirements 
in order to become members. To be eligible for Bank membership, an 
applicant must be one of the several types of financial institutions 
listed in section 4(a)(1) of the Bank Act, must meet certain other 
eligibility criteria, and must purchase stock of the Bank, as set forth 
in sections 4 and 6 of the Bank Act. See 12 U.S.C. 1424, 1426. The 
existing FHFB regulation implementing the membership eligibility and 
minimum stock purchase provisions of the Bank Act (Membership 
Regulation) is codified at 12 CFR part 925. The proposed rule would 
relocate part 925 in its entirety to part 1263, and would amend certain 
provisions of the existing Membership Regulation to accommodate the 
addition of CDFIs to the institutions that may become Bank members.
    As a threshold matter, in order to be eligible for Bank membership, 
an applicant must be authorized under federal or state law to become a 
member of, purchase stock in, do business with, and maintain deposits 
in, the Bank to which the applicant has applied for membership. Prior 
to amendment by HERA, section 4(a)(1) provided that any building and 
loan association, savings and loan association, cooperative bank, 
homestead association, insurance company, savings bank, or federally 
insured depository institution (including credit unions) was eligible 
to become a Bank member. Thus, until HERA was enacted a CDFI could not 
become a member of a Bank unless it also was a federally insured 
depository institution, such as a community development bank, thrift or 
credit union. As of September 30, 2008, 125 such depository institution 
CDFIs had become members of the Bank System. Section 1206 of HERA 
amended section 4(a)(1) to make all CDFIs that are certified by the 
CDFI Fund of the US Department of the Treasury under the Community 
Development Banking and Financial Institutions Act of 1994 (CDFI Act) 
eligible to become members of a Bank. See 12 U.S.C. 1424(a)(1) (as 
amended). Thus, loan funds, venture capital funds and state-chartered 
credit unions without federal deposit insurance are now eligible for 
Bank membership provided they are certified by the CDFI Fund and have 
the authority under state law to do those things necessary to become a 
member, i.e., to buy Bank stock, borrow and pledge collateral. The 
proposed rule would apply only to those newly eligible institutions. 
CDFIs that also are eligible for membership because they are federally 
insured depository

[[Page 22849]]

institutions would continue to follow the existing rules relating to 
membership for depository institutions.
    All institutions that are eligible for membership under section 
4(a)(1) also must comply with certain additional criteria specified in 
section 4(a)(1) and (2) in order to be approved for membership. 
Specifically, under section 4(a)(1), as amended by HERA, an applicant 
must demonstrate that it: (a) Is duly organized under state or federal 
law; (b) either is subject to inspection and regulation under banking 
or similar laws or is certified as a CDFI under the CDFI Act; and (c) 
makes such home mortgage loans as are long-term loans. In addition, 
under section 4(a)(2), an insured depository institution applicant 
must: (a) Have at least 10 percent of its total assets in residential 
mortgage loans (unless it qualifies as a ``community financial 
institution'') \1\; (b) be in sound financial condition such that a 
Bank may safely make advances to it; (c) have a character of management 
that is consistent with sound and economical home financing; and (d) 
have a home-financing policy that is consistent with sound and 
economical home financing. 12 U.S.C. 1424(a)(1), (2).
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    \1\ A ``community financial institution'' is a depository 
institution that is insured by the Federal Deposit Insurance 
Corporation and has average total assets of $1 billion or less. 12 
U.S.C. 1422(10) (as amended). This proposed rulemaking does not 
affect the terms under which a ``community financial institution'' 
may become a member of a Bank.
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    The existing Membership Regulation expands on those statutory 
requirements and further establishes a review and approval process for 
applications for membership in a Bank. See 12 CFR 925.2, 925.3. Any 
institution seeking membership in a Bank is required to submit an 
application to the Bank for approval.\2\ The Membership Regulation also 
includes separate provisions governing the admission of depository 
institutions and insurance companies, respectively, recognizing that 
each type of institution operates under a different business model and 
a different regulatory structure. The proposed rule would follow a 
similar approach for CDFIs, and would establish separate provisions for 
CDFI applicants, recognizing that they too operate in a different 
environment and under a different regulatory structure. The proposed 
rule would delineate the documentation and other information that a 
CDFI applicant must submit to a Bank as part of a membership 
application, as well as the standards that a CDFI applicant must meet 
in order to be deemed to have satisfied the various statutory and 
regulatory requirements for membership.\3\
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    \2\ See 12 CFR 925.2(a). Generally speaking, an institution is 
eligible to become a member only of the Bank of the district in 
which its principal place of business is located. An institution is 
deemed to be located in the state in which it maintains its home 
office, established as such in conformity with the laws under which 
the institution is organized. See 12 CFR 925.18.
    \3\ Although the proposed rule includes provisions relating to 
the financial condition of a CDFI applicant, those provisions are 
threshold requirements for admission to membership. As is the case 
with respect to all other members, a Bank will typically conduct a 
more thorough analysis of a CDFI's financial condition and the 
adequacy of its collateral when determining whether to make advances 
to such members.
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    Once a Bank has approved a CDFI for membership, the CDFI must 
purchase the required amount of Bank stock in order to complete the 
process of becoming a member of the Bank. See 12 U.S.C. 1426. The 
specific amount of stock that any new member, including a CDFI, must 
purchase is set out in each Bank's capital structure plan, and will 
vary from Bank to Bank.\4\ Typically, an institution must purchase a 
certain amount of stock in order to become a member, and may be 
required to purchase additional stock in order to borrow from the Bank 
or to obtain other services from the Bank. In addition to purchasing 
stock, any member, including a CDFI, that wishes to borrow from its 
Bank must pledge certain types of collateral to secure its repayment 
obligation, and must otherwise demonstrate to the Bank that it is 
creditworthy. Under the Bank Act, a member may pledge only the 
following types of collateral for an advance: (a) Fully disbursed, 
whole first mortgages on improved residential property not more than 90 
days delinquent, or securities representing a whole interest in such 
mortgages; (b) securities issued, insured or guaranteed by the U.S. 
Government or any agency thereof; (c) cash or deposits of a Bank; (d) 
other real estate-related collateral acceptable to the Bank, provided 
its value is readily ascertainable and the Bank can perfect its 
interest; and (e) for institutions that qualify as ``community 
financial institutions,'' secured loans for small business, agriculture 
or community development activities, or securities representing a whole 
interest in such secured loans. See 12 U.S.C. 1430(a)(3) (as amended). 
Each Bank sets its own lending and collateral policies, which may vary 
from Bank to Bank and which will apply to all borrowing members of that 
Bank.
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    \4\ Because the Chicago Bank has not yet implemented its capital 
structure plan, any CDFI that becomes a member of that Bank must 
purchase stock in the amount specified by 12 CFR 1263.20 of the 
proposed rule, which carries over the provisions from 12 CFR 925.20 
of the existing rules.
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    Under the Bank Act and FHFA regulations, all members also must 
comply with certain community investment and first-time homebuyer 
lending standards in order to maintain access to long-term advances. 
See 12 U.S.C. 1430(g)(2); 12 CFR part 944. As discussed below, FHFA 
believes that any CDFI that becomes a member of a Bank should be able 
to satisfy the current community support requirements and therefore is 
not proposing to establish community support requirements unique to 
CDFIs, but welcomes comment on whether certain CDFIs may have 
difficulties in complying with the current requirements that would 
warrant establishing separate community support standards for CDFIs.

B. CDFIs

    CDFIs are private nonprofit and for-profit financial institutions 
providing financial services dedicated to economic development and 
community revitalization in underserved markets. The CDFIs comprise 
diverse institutional structures and business lines. The four 
categories of institutions eligible for CDFI certification and CDFI 
Fund financial support are: (1) Federally regulated insured depository 
institutions and holding companies (bank CDFIs); (2) credit unions, 
whether federally or state chartered; (3) community development loan 
funds, which are unregulated institutions specializing in financing of 
housing, businesses or community facilities that provide health care, 
childcare, educational, cultural or social services; and (4) community 
development venture capital funds, which are unregulated institutions 
that provide equity and debt-with-equity-features to small and medium-
sized businesses in distressed communities.
    The CDFIs serve as intermediary financial institutions that promote 
economic growth and stability in low-and-moderate-income communities. A 
large number are not-for-profit community development organizations 
with a long history of providing lending and services to low-and-
moderate-income communities. They provide a unique range of financial 
products and services, such as mortgage financing for low-income and 
first-time homebuyers; homeowner or homebuyer counseling; financing for 
not-for-profit affordable housing developers; flexible underwriting and 
risk capital for needed community facilities; financial literacy 
training; technical assistance; and commercial loans and investments to 
assist small start-up businesses in low-income areas. Some CDFIs 
provide

[[Page 22850]]

community facilities such as child care centers alongside affordable 
housing.
    Frequently, CDFIs serve communities that are underserved by 
conventional financial institutions and may offer products and services 
that are not available from conventional financial institutions. Their 
lending and community support activities are thus consistent with the 
Banks' housing mission. By stabilizing the communities in a Bank's 
District, CDFIs can provide added value to that Bank as well as its 
members.
    There is no single source of information covering all CDFIs, but 
reports from the CDFI Fund and other organizations provide a picture of 
the industry. A 2007 study by Abt Associates,\5\ which included both 
certified and uncertified CDFIs, estimated that there were as many as 
1,122 CDFIs throughout the country in 2005. The CDFI Fund reported that 
there were 804 certified CDFIs as of March 1, 2008.\6\ Loan funds, most 
of which are nonprofit organizations, accounted for 68 percent of the 
certified CDFIs. Eighteen percent of certified CDFIs were credit 
unions, 10 percent were banks or holding companies, and 3.5 percent 
were community venture funds.
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    \5\ See Abt Associates, Assessment of Community Development 
Financial Institutions Fund (CDFI) Training Program, Training 
Program & CDFI Certification, August 17, 2007 (p.2). This estimate 
is based on a list of CDFIs that either were included in one of the 
CDFI Fund's databases or had received a CDFI Data Project (CDP) 
survey in the past three years.
    \6\ Community Development Financial Institutions Fund, 
``Overview. CDFI Fund Director's presentation before the National 
Interagency Community Reinvestment Conference.'' San Francisco: 
Federal Reserve Bank of San Francisco, April 1, 2008.
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    CDFIs are generally small in asset size. The CDFI Fund reported 
that the average asset size for certified CDFIs was $32 million for 
depository institutions and $22.5 million for non-depository 
institutions.\7\ Despite the typical CDFI's relatively small asset 
size, studies demonstrate meaningful impact to low-and-moderate income 
communities by these intermediaries. The CDFIs provide diverse 
financial services and other benefits to urban, rural and Native 
communities. A 2003-2005 trend analysis by the CDFI Fund \8\ reported 
that its sample of CDFIs financed over 90,000 units of housing, 80,000 
of which were affordable housing units. This group of CDFIs also 
provided financing and counseling for over 12,000 first-time homebuyers 
over this period. The Opportunity Finance Network, a trade association 
of 160 CDFI members, reports that over the past 20 years, its members 
financed over 533,394 housing units.\9\ Given the credit conditions 
across the country, demand for CDFI products and services is expected 
to increase. In a recent survey conducted by the Opportunity Finance 
Network, CDFI respondents reported an increase in demand for their 
products as a result of the declining availability of bank credit.\10\ 
However, one common problem facing non-depository CDFIs is that they do 
not have access to long-term funding, limiting their ability to provide 
housing finance to their communities.
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    \7\ Community Development Financial Institutions Fund, 
``Overview.'' Presented April 1, 2008.
    \8\ Community Development Financial Institutions Fund, Three 
Year Trend Analysis of Community Investment Impact System 
Institutional Level Report Data FY 2003-2005. US Department of the 
Treasury. December 2007. The report includes data for 2003 from 223 
CDFIs, for 2004 from 236 CDFIs and for 2005 from 173 CDFIs.
    \9\ Opportunity Finance Network, Overview: About Opportunity 
Finance Network. See http://www.opportunityfinance.net/about/about.aspx. Accessed on December 15, 2008.
    \10\ Opportunity Finance Network, Findings from the Third 
Quarter 2008 CDFI Market Conditions Survey, October 2008.
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    The CDFI Fund of the U.S. Treasury was created to promote economic 
revitalization and community development through investment in and 
financial and technical assistance to CDFIs. See 12 U.S.C. 4701(b). The 
CDFI Fund promotes these purposes through several programs, including 
the CDFI Program, the New Markets Tax Credit Program, the Bank 
Enterprise Award Program and Native Initiatives. See 12 U.S.C. 4701 et 
seq.; 12 CFR part 1805; http://www.cdfifund.gov.
    An institution must apply to the CDFI Fund in order to receive 
awards under its programs. See 12 U.S.C. 4704; 12 CFR 1805.200. To 
receive a CDFI award, an institution must be certified by the CDFI Fund 
as a qualifying CDFI under the CDFI Act. An institution may apply for 
CDFI certification at any time. If an organization is already certified 
as a CDFI, the CDFI Fund may require as a condition for receiving an 
award, that a CDFI submit a Certification of Material Events form 
attesting that there has been no occurrence that affects the 
organization's strategic direction, mission or business operation and, 
thereby, its status as a CDFI. An applicant for CDFI certification must 
meet each of the following general requirements in order to be 
certified as a CDFI:
    (i) Is a legal entity at the time of certification application;
    (ii) Has a primary mission of promoting community development;
    (iii) Is a financing entity;
    (iv) Principally serves an economically distressed area, low-income 
population, or other population that lacks access to financing (known 
as an eligible ``target market'');
    (v) Provides technical assistance, training or other development 
services in conjunction with its financing activities;
    (vi) Is accountable to its target market through representation on 
its board or other means; and
    (vii) Is a non-governmental entity that is not controlled by one or 
more governmental entities (Tribal governments excluded).
    See 12 U.S.C. 4702(5); 12 CFR 1805.201.
    The CDFI certification eligibility requirements are more fully 
elaborated in the CDFI program regulations. See 12 CFR 1805.201. The 
CDFI Fund is not a regulator of CDFIs, and does not evaluate their 
safety and soundness during either the certification or awards 
application processes at the level that would be conducted by a 
financial safety and soundness regulator. The CDFI Fund regulations 
further state that a CDFI certification does not constitute an opinion 
by the CDFI Fund as to the financial viability of the certified CDFI or 
that the CDFI will be selected to receive an award from the CDFI Fund. 
See 12 CFR 1805.201(a). Thus, receipt of a certification or award alone 
does not indicate that a CDFI is financially sound, but only that it 
meets the certification or award eligibility criteria.

C. HERA Section 1201

    Section 1201 of HERA requires the FHFA Director to consider the 
differences between the Banks and the Enterprises in rulemakings that 
affect the Banks with respect to the Banks' cooperative ownership 
structure, mission of providing liquidity to members, affordable 
housing and community development mission, capital structure and joint 
and several liability. See 12 U.S.C. 4513(f). In preparing the proposed 
rule, the Director considered these factors and determined that the 
rule is appropriate, particularly because the proposed amendments would 
implement statutory provisions of the Bank Act that apply only to the 
Banks. See 12 U.S.C. 1424(a). Nonetheless, FHFA requests comments about 
whether these factors should result in a revision of the proposed 
amendment as it relates to the Banks.

[[Page 22851]]

II. Analysis of Proposed Rule

A. Relocation of Membership Regulation to Part 1263

    The proposed rule would relocate the Membership Regulation in its 
entirety from part 925 of the FHFB regulations to part 1263 of the FHFA 
regulations. The proposed rule also would amend certain provisions of 
the relocated Membership Regulation to allow CDFIs to become Bank 
members. Although those amendments are not evident from the regulatory 
text of the proposed rule because the provisions are being relocated in 
their entirety, any material revisions to the regulatory text are 
discussed in this preamble.

B. Scope of the Proposed Regulation

    As noted previously, approximately 125 depository institutions that 
also are CDFIs have already become members of a Bank by virtue of their 
status as federally insured depository institutions. Under the terms of 
this proposed rule, any such institutions that seek to become members 
of a Bank in the future would be required to follow the existing 
membership regulations and procedures applicable for insured depository 
institutions. The amendments embodied in this proposed rule are 
intended to apply only to those types of CDFIs that were not eligible 
for membership prior to the passage of HERA, such as loan funds, 
venture capital funds and credit unions with state or private 
insurance.

C. Definitions

    Consistent with the scope of the proposed regulation, FHFA is 
proposing to amend the definitions section of the Membership Regulation 
by revising existing definitions and adding new definitions to reflect 
the statutory changes related to CDFI members. Thus, section 1263.1 of 
the proposed rule defines ``community development financial 
institution'' and ``CDFI'' to include any institution that is certified 
as a CDFI by the CDFI Fund of the U.S. Department of the Treasury, 
other than a bank or savings association that is insured under the 
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) or a credit 
union that is insured under the Federal Credit Union Act (12 U.S.C. 
1751 et seq.). Because federally insured depository institutions and 
credit unions already are eligible for membership under the pre-HERA 
law, the definition of CDFI excludes those institutions. The proposal 
also defines ``CDFI credit union'' as a state chartered credit union 
that has been certified by the CDFI Fund and does not have federal 
deposit insurance. The CDFI credit unions are the only types of 
depository institution that are affected by the HERA CDFI amendments 
and, for reasons stated below, those entities will be evaluated for 
financial condition under the same provisions that currently apply to 
state chartered credit unions that are currently eligible for 
membership because they are insured by the National Credit Union 
Administration (NCUA).
    The proposed rule also adds or revises several other definitions in 
order to accommodate the admission of CDFIs to Bank membership. Those 
defined terms are ``appropriate regulator,'' ``CDFI Fund,'' ``gross 
revenues,'' ``operating expenses,'' ``restricted assets,'' ``total 
assets,'' and ``unrestricted cash and cash equivalents.'' The proposal 
would revise the existing definition of ``appropriate regulator'' to 
add CDFI credit unions to the list of financial institutions included 
within the current rule. As noted previously, FHFA is proposing to 
subject CDFI credit unions to the same financial condition provisions 
that apply to state chartered credit unions that are insured by the 
NCUA, and these definitions are consistent with that approach. Most of 
the other new definitions relate to terms that are used elsewhere in 
the proposal to measure the financial condition and performance of 
those CDFIs that are not subject to state or federal regulation. 
Generally speaking, these financial definitions are intended to reflect 
the terms used in the financial performance standards employed by the 
CDFI Fund or by third-party auditors experienced in assessing the 
financial performance of the CDFIs. FHFA requests comments on whether 
the proposed definitions are appropriate in the context of assessing 
the financial condition of CDFI applicants.
    Apart from those new or revised definitions, the proposed rule 
carries over into part 1263 all of the existing definitions from the 
Membership Regulation, some of which include minor clarifying or 
technical changes.

D. Application Process

    Subpart B of the current Membership Regulation includes several 
provisions--Sec. Sec.  925.2 to 925.5--relating to the process for the 
submission and consideration of applications for membership. The 
proposed rule would relocate all of those provisions without 
substantive change to proposed Sec. Sec.  1263.2, 1263.3, 1263.4, and 
1263.5, respectively. The proposed rule would make minor changes to 
certain of those provisions, none of which are intended to change the 
substance of those provisions.

E. Eligibility Requirements

    Subpart C of the current Membership Regulation includes 13 
provisions relating principally to the eligibility requirements for 
membership and how they are to be applied to the various types of 
institutions that may become members of a Bank. Some of these 
regulatory provisions are readily applicable to CDFIs in the same 
manner as other financial institutions, but others require some 
adaptation to reflect the unique characteristics of CDFIs. The proposed 
rule would amend certain of these provisions to address the statutory 
changes that have allowed CDFIs to become members. In proposing these 
amendments, FHFA has sought to develop regulatory standards that 
recognize the unique characteristics of CDFIs and the valuable 
contribution they make to their communities, while remaining 
sufficiently rigorous to comply with the statutory requirements.
    General eligibility requirements. Section 4(a)(1) of the Bank Act 
requires that all applicants for Bank membership meet certain 
requirements for membership. These requirements are currently listed in 
Sec.  925.6(a) of the Membership Regulation and are being retained in 
the proposed rule at proposed Sec.  1263.6(a). With respect to proposed 
Sec.  1263.6(a), the only change to the existing regulatory text would 
be to add ``community development financial institution'' to the list 
of entities eligible for membership. As discussed above, that term has 
been defined to exclude federally insured depository institutions and 
credit unions, because such institutions are already authorized to 
become Bank members.
    Section 4(a)(2) of the Bank Act further requires any ``insured 
depository institution'' applicant to have at least 10 percent of its 
assets in residential mortgage loans, be in sound financial condition, 
and have sound management and home financing policy. 12 U.S.C. 
1424(a)(2). The term ``insured depository institution'' is defined in 
the Bank Act to include any federally-insured bank, savings association 
or credit union, and thus does not include the newly-eligible CDFIs or 
insurance companies. See 12 U.S.C. 1422(9). Nonetheless, the Bank Act 
does not preclude FHFA from applying these concepts to other types of 
applicants, based on its authority to ensure that the Banks operate in 
a safe and sound manner and carry out their public policy missions. 
Indeed, FHFA's predecessor agency, FHFB, exercised that authority to 
require all applicants without federal deposit insurance, i.e., 
insurance companies, to have mortgage-

[[Page 22852]]

related assets that reflect a commitment to housing finance. 12 CFR 
925.6(c); See 58 FR 43522 (Aug. 17, 1993). FHFB reasoned that such an 
approach treated all applicants in an equitable and consistent manner, 
and was consistent with the housing finance mission of the Banks. See 
id. at 43531-43533. FHFA believes that rationale can apply as well to 
the newly eligible CDFI applicants, and thus is proposing to require 
such CDFI applicants to have mortgage related assets that reflect a 
commitment to housing finance. FHFA expects that the Banks will assess 
the commitment to housing finance requirements in light of the unique 
community development focus of the business of CDFIs. Because the 
language of the current regulation already applies to any applicant 
that is not an insured depository institution, no amendment to proposed 
Sec.  1263.6(c) is necessary to affect this change.
    In a similar manner, the proposed rule would require the newly 
eligible CDFI applicants to satisfy requirements relating to financial 
condition, character of management and home financing policy. When FHFB 
extended those provisions to insurance companies, it reasoned that they 
were sufficiently important to concepts of safety and soundness and the 
housing finance mission to warrant doing so. See 58 FR at 43533. FHFA 
believes that the same rationale should apply to the newly eligible 
category of CDFI applicants. Thus, the proposed rule would retain the 
provisions within Subpart C, which would be amended as necessary to 
implement the CDFI provisions of HERA. The amendments to particular 
provisions within Subpart C are discussed separately below.
    Duly organized requirement. Section 4(a)(1)(A) of the Bank Act 
requires that an applicant for membership be duly organized under the 
laws of any state or of the United States. 12 U.S.C. 1424(a)(1)(A). 
Section 1263.7 of the proposed rule would amend the current language of 
Sec.  925.7, which implements this provision, to provide that a newly 
eligible CDFI applicant shall be deemed to be duly organized if it is 
incorporated under state law. The current regulation allows an 
applicant to satisfy this provision if it is chartered as one of 
several types of depository institutions or as an insurance company. 
Because most CDFIs will not have such a charter, FHFA believes that 
being incorporated under state law is sufficient to demonstrate that a 
CDFI meets this requirement of the statute.
    Inspection and regulation requirement. Section 4(a)(1)(B) of the 
Bank Act generally requires an applicant for membership to be subject 
to inspection and regulation under state or federal banking or similar 
laws. In the case of a CDFI, the statute imposes an alternative 
requirement, which is that the applicant be certified by the CDFI Fund. 
See 12 U.S.C. 1424(a)(1)(B). Accordingly, newly-eligible CDFI 
applicants are not required to meet the inspection and regulation 
requirement and, therefore, there is no need to amend the existing 
regulatory language, which would be carried over into proposed Sec.  
1263.8. As discussed earlier, the requirement that a CDFI applicant be 
certified by the CDFI Fund in order to be eligible for membership is 
addressed by the definition of ``CDFI'' in proposed Sec.  1263.1. The 
proposed rule, however, does make certain clarifying revisions to the 
existing regulation text of proposed Sec.  1263.8, which are not 
intended to alter the substance of the provision.
    Long-term mortgage loans requirement. Section 4(a)(1)(C) of the 
Bank Act requires that an applicant for membership make long-term home 
mortgage loans. 12 U.S.C. 1424(a)(1)(C). ``Long-term'' is defined in 
Sec.  925.1 to include loans with a term to maturity of five years or 
greater. 12 CFR 925.1. ``Home mortgage loan'' is defined in Sec.  925.1 
to include, among other things, first mortgages on one-to-four family 
or multifamily property, and mortgage pass-through securities backed by 
such mortgages. See id. Section 925.9 of the Membership Regulation, 
which implements these provisions, provides that an applicant is deemed 
to meet this requirement if, based on the applicant's most recent 
regulatory financial report filed with its appropriate regulator, the 
applicant originates or purchases long-term home mortgage loans. 12 CFR 
925.9. Some newly-eligible CDFI applicants, such as loan funds and 
venture capital funds, do not file regulatory financial reports. 
Accordingly, proposed Sec.  1263.9 would amend the existing language to 
provide that a Bank shall determine whether a CDFI applicant meets the 
``makes long-term home mortgage loans'' requirement based on other 
documentation provided to the Bank, and contemplates that a Bank can 
decide what level of documentation can best allow it to determine 
whether a particular type of CDFI satisfies this requirement.
    Financial condition requirements. The current Membership Regulation 
includes two separate provisions relating to the financial condition of 
applicants for membership. Section 925.11 relates to depository 
institutions (which includes federally insured state chartered credit 
unions), while Sec.  925.16 relates to insurance companies. The 
proposed rule would relocate those provisions to proposed Sec. Sec.  
1263.11 and 1263.16, respectively, and would amend both of them to 
incorporate language relating to CDFI applicants.
    In proposed Sec.  1263.11, FHFA would require CDFI credit unions to 
comply with the same financial condition requirements that currently 
apply to state chartered credit unions that are insured by the 
NCUA.\11\ All credit unions chartered by a particular state operate 
under the same state laws and regulations. All are subject to oversight 
by the same state regulatory agency and would have the same financial 
reporting and examination requirements at the state level. Thus, for 
this category of CDFI, FHFA believes that it is most appropriate for 
the Banks to evaluate financial condition under the same regulatory 
provisions that apply to all other credit union and depository 
institution applicants. Those provisions are set out in proposed Sec.  
1263.11(a) and (b) and require the Banks to evaluate the financial 
condition of the applicants based on information in the regulatory 
financial reports they file with their applicable regulators, their 
audited financial statements, and the examination reports prepared by 
their regulators. The key distinction for CDFI credit unions is that 
they are not subject to oversight by the NCUA and consequently do not 
file financial regulatory reports with the NCUA. Nonetheless, the CDFI 
credit unions should file comparable reports with their appropriate 
state regulator, and FHFA believes that those documents can be used by 
the Banks to assess the financial condition of the CDFI credit unions, 
applying the same criteria as in the existing regulations. To the 
extent that any state chartered credit unions without NCUA insurance 
may not in fact file regulatory financial reports with their state 
regulator that are comparable to those filed by NCUA-regulated credit 
unions, or are not required to have audited financial statements or 
submit to regulatory examinations, FHFA requests comments on what other 
documentation such entities would prepare that would provide the Banks 
with comparable information about their financial condition.
---------------------------------------------------------------------------

    \11\ As of December 31, 2008, 955 credit unions were members of 
the Bank System. Of that number, 476 are state chartered and 479 are 
federal credit unions.
---------------------------------------------------------------------------

    To bring the CDFI credit unions within the scope of the current 
financial condition requirements for depository institutions, the 
proposed rule would amend the existing regulatory text in two 
locations. The first amendment

[[Page 22853]]

would revise proposed Sec.  1263.11(a) to list the types of depository 
institutions that are subject to its provisions and to include CDFI 
credit unions within that list. The second amendment would add a new 
provision, proposed Sec.  1263.11(b)(3)(iii), which would require all 
CDFI credit unions to meet certain performance trend criteria. Under 
the current regulation, the only depository institutions that must 
satisfy those criteria are institutions with a composite examination 
rating of ``2'' or ``3''. Because the CDFI credit unions are not 
subject to oversight by the NCUA and because the Banks may be less 
familiar with state examination ratings, FHFA believes that it is 
prudent to require all such CDFI credit unions to demonstrate that 
their earnings, nonperforming assets, and allowance for loan and lease 
losses are consistent with the existing performance criteria. Apart 
from those amendments, proposed Sec.  1263.11 would retain all of the 
language from the existing Sec.  925.11. FHFA requests comments on 
whether the application of these standards is appropriate for CDFI 
credit unions and whether the nature or extent of oversight and 
examination by a state regulator differs in any manner that would 
require any of the provisions in this section to be modified. For 
example, the current rule requires the submission of quarterly 
regulatory financial reports and information from a regulatory 
examination report. To the extent that any state chartered CDFI credit 
unions might not have quarterly reports, financial statements audited 
by a certified public accountant or regulatory examination reports, 
FHFA seeks information on the types of financial condition statements 
and regulatory reports that such entities do submit and what types of 
examination and rating are provided by the state regulators.
    For all other CDFIs, such as CDFI loan funds and venture capital 
funds, FHFA is proposing new financial condition requirements. These 
requirements would be incorporated into the existing provisions 
relating to insurance companies, set out in proposed Sec.  1263.16(b). 
Institutions in this category of CDFIs are not subject to the same 
degree of state or federal oversight as are depository institutions and 
insurance companies. Thus, they may not be able to provide the Banks 
with documentation similar to examination reports or periodic 
regulatory financial reports to aid the Banks in assessing their 
financial condition. Although these CDFIs will have been certified by 
the CDFI Fund, that process does not include an assessment of the 
CDFI's financial condition. Moreover, the type and extent of available 
financial documentation will differ for the various categories of 
CDFIs. Although some CDFI loan funds and venture capital funds may be 
able to obtain private ratings that would be analogous to those 
relating to depository institutions, those are not routinely generated. 
Because of those differences, FHFA is proposing to establish separate 
financial documentation requirements and approval standards for 
assessing the financial condition of this category of CDFIs, which are 
intended to be analogous to those applicable to other applicants, while 
taking into account the unique characteristics of CDFIs.
    The structure of proposed Sec.  1263.16(b) would generally parallel 
that used for depository institutions, i.e., the regulation would 
identify the types of financial documents that a Bank must review in 
assessing a CDFI's financial condition and would establish standards 
for determining whether an applicant's financial condition is 
sufficiently sound to admit it to Bank membership. Those amendments are 
described below.
    Section 1263.16(b)(1) of the proposed rule would specify two 
categories of financial documents that a Bank must obtain and review 
when assessing a CDFI's financial condition, and would authorize a Bank 
to request any additional documents that it deems necessary to 
assessing the financial condition of the CDFI applicant. The first 
category of documentation relates to financial statements, and requires 
the submission of an independent audit that has been conducted within 
the prior year by a certified public accounting firm, in accordance 
with generally accepted auditing standards (GAAS), as well as more 
recent quarterly financial statements, if those are available. An 
applicant also must submit financial statements for the two years prior 
to the most recent audited financial statement. At a minimum, all such 
financial statements must include income and expense statements, 
statements of activities, statements of financial position, and 
statements of cash flows. The financial statements for the most recent 
year also must include detailed disclosures or schedules relating to 
the affiliates of the CDFI applicant regarding the financial position 
of each affiliate, their lines of business, and the relationship 
between the affiliates and the applicant CDFI.
    FHFA believes that the use of a GAAS-consistent audited financial 
statement is a uniform and reliable means by which an applicant can 
demonstrate to a Bank that it is in sound financial condition, 
particularly in the absence of the regulatory financial and examination 
reports that the Banks typically consider in evaluating other 
depository institutions and insurance companies for membership. 
Nonetheless, FHFA requests comments on whether there might be 
alternatives to GAAS-compliant audited financial statements that would 
allow a Bank to assess accurately the financial condition of a CDFI 
applicant. If certain CDFIs do not typically obtain audited financial 
statements, FHFA might consider allowing the Banks to use alternative 
financial statements, but asks that any persons recommending such 
alternatives provide detailed information about the quality of such 
alternatives and the frequency at which they would be prepared. 
Examples of such alternatives might include financial statements that, 
while not prepared by a certified public accounting firm, would be 
substantially similar to audited financial statements, or financial 
statements prepared by a CDFI that have some other means of assuring 
that they accurately present its financial condition. FHFA will 
consider allowing the use of such alternative financial statements in 
the final rule if it can be reasonably assured that the Banks can rely 
on them to determine that the CDFI applicant is in sound financial 
condition.
    Section 1263.16(b)(1)(ii) and (iii) of the proposed rule further 
requires a CDFI applicant to provide the Bank with a copy of the 
certification it has received from the CDFI Fund, as well as any other 
financial information concerning its financial condition that is 
requested by the Bank. With respect to the issue of certification, each 
CDFI applicant generally must provide a certification issued by the 
CDFI Fund no more than three years prior to the date of the CDFI's 
application for Bank membership. If an applicant's CDFI certification 
does not meet that requirement, the applicant must submit to the Bank a 
written statement that there have been no material events or 
occurrences since the date of certification that would adversely affect 
its strategic direction, mission, or business operations, and thereby 
its status as a CDFI.
    Section 1263.16(b)(2) of the proposed rule sets out minimum 
financial condition standards that a CDFI must meet in order to become 
a member of a Bank. Those standards relate to net assets, earnings, 
loan loss reserves, and liquidity, and are described below.
    Net asset ratio. The proposed rule would require that a CDFI 
applicant have a ratio of net assets to total assets

[[Page 22854]]

of at least 20 percent, which is intended to address the capital 
adequacy of the CDFI. For purposes of this provision, ``net assets'' is 
to be calculated as the residual value of assets (including restricted 
assets) over liabilities and is to be based on information derived from 
the applicant's most recent financial statements.
    FHFA is proposing this approach because it understands that the 
inclusion of restricted assets within net assets is consistent with the 
approach used by the CDFI Fund and others in the CDFI industry, as well 
as with the accounting standards for nonprofit entities. Restricted 
assets typically appear on CDFI balance sheets when donor or government 
funds are specifically designated as capital, and are thereby 
``restricted'' as to their possible uses. When used in this manner, the 
capital may be classified as restricted, but it is nonetheless 
available to absorb any losses. For example, the CDFI Fund commonly 
awards funding for loan loss reserves, which may serve to lower a 
CDFI's borrowing costs. FHFA requests comment on the inclusion of 
restricted assets in the net asset ratio, and on the proposed use of a 
minimum net asset ratio of 20 percent for membership eligibility.
    Earnings. The proposed rule would require a CDFI applicant to 
demonstrate that it has some earnings capacity. Thus, an applicant must 
show that it has generated a positive net income for any two of the 
three most recent years. For purposes of this provision, net income 
would be defined as gross revenues less total expenses, based on 
information derived from the applicant's most recent financial 
statements. In the definitions section of the regulation, the proposal 
defines ``gross revenues'' to mean total revenues received from all 
sources, including earnings from operations, grants and other donor 
contributions. This requirement is adapted from the earnings 
requirement for insured depository institutions in the current 
regulation, which requires that the applicant's adjusted net income be 
positive in four of the six most recent calendar quarters. Because 
CDFIs may not typically file quarterly regulatory reports, and 
generally obtain an audit of their financial statements only once a 
year, FHFA proposes to require that earnings be positive in two of the 
three most recent years, rather than four of the six most recent 
calendar quarters. FHFA requests comment on the appropriateness of this 
measure of earnings and on the proposed minimum eligibility standard.
    Loan loss reserves. The proposed rule would require that an 
applicant's ratio of loan loss reserves to loans and leases 90 or more 
days delinquent, including loans sold with full recourse, be not less 
than 30 percent. The information to determine compliance with this 
provision should be derived from the applicant's most recent financial 
statements. Loan loss reserves, which help the CDFIs self-insure 
against losses, are defined within this provision to mean a specified 
balance sheet account that reflects the amount reserved for loans 
expected to be uncollectible. The proposed rule is intended to provide 
a flexible and relative standard, to acknowledge the CDFIs' mission and 
loan origination practices while also requiring a buffer to protect the 
organization's continued solvency and ongoing operation. The 30 percent 
threshold is half of the requirement that would apply to depository 
institution applicants. FHFA is proposing to allow the lower ratio in 
recognition of a historically lower delinquency rate among CDFI-
originated loans, which have performed equal to or better than prime 
loans. As noted, the CDFIs' fundamental mission is to stabilize 
communities. Most CDFIs hold the loans they make and, consequently, the 
risk in portfolio. These two conditions prompt the use of careful 
underwriting, intensive homeowner and financial counseling, and 
subsidies to assure borrower affordability. CDFIs have the ability to 
modify a loan in response to a borrower's adverse life event, thus 
preventing a foreclosure. Given these unique circumstances, lower loan 
loss reserves would permit more capital to go to borrowers. However, 
given current housing market conditions, FHFA requests comment on the 
appropriateness of the proposed loan loss reserve measure, the 
rationale for the different standard for CDFIs, or whether there are 
any alternative standards that might also serve this purpose.
    Liquidity ratio. The proposed rule would require that an 
applicant's operating liquidity ratio be no less than 1.0 for the 
current year, i.e., the year during which a CDFI applies for 
membership, as well as in at least one of the two years preceding the 
current year. The operating liquidity ratio is to include in the 
numerator unrestricted cash and cash equivalents and in the denominator 
the average quarterly operating expense for the four most recent 
quarters. FHFA believes that this operating liquidity ratio provides a 
measure of funds available to pay expenses and creditors by requiring a 
CDFI to have sufficient liquidity to cover average operating expenses 
for one quarter. FHFA requests comment on the appropriateness of the 
proposed requirement for operating liquidity.
    Self-Sufficiency or Sustainability Ratio. The self-sufficiency or 
sustainability ratio is a measure used to evaluate the extent to which 
a CDFI can cover its expenses from earned revenue and, by inference, 
the CDFI's independence from grants and loans. The ratio is computed as 
earned revenue divided by total expenses. Full self-sufficiency is 
achieved when a CDFI achieves a ratio of 1.0 (100 percent) or greater. 
However, self-sufficiency ratios are affected by the type of services 
and grant programs operated by the CDFI. In some cases, the self-
sufficiency ratio may not adequately portray the financial condition of 
the CDFI, and too stringent a ratio could countermand the service 
delivery requirements for certification by the CDFI Fund. See 12 U.S.C. 
4701(b). The proposed rule does not include a requirement for the self-
sufficiency ratio, but FHFA seeks comment on whether to include a 
standard for the self-sufficiency ratio as part of the minimum 
financial condition standards for CDFI members and, if so, what the 
threshold standard should be.\12\
---------------------------------------------------------------------------

    \12\ By way of reference, between 2003 and 2005, the 
sustainability ratio for CDFI loan funds averaged around 65 percent; 
the median was 63 percent. Venture capital funds, which have a 
different business line, had a sustainability ratio of 68 percent. 
Credit unions principally dedicated to lending would be expected to 
consistently have ratios in excess of 100 percent. See Approaches to 
CDFI Sustainability: Report prepared by the Aspen Institute Economic 
Opportunities Program, for the Department of the Treasury, Community 
Development Financial Institutions Fund, July 2008.
---------------------------------------------------------------------------

    CDFI Bank Holding Companies. FHFA understands that there are some 
bank holding companies that are certified as CDFIs, but it is not 
including that category of institution in the proposed rule. Any bank 
holding company would, by definition, control a federally insured 
commercial bank, which is eligible for Bank membership in its own 
right. Given that authority, FHFA believes that the appropriate vehicle 
for Bank membership for such enterprises is through the existing 
process for insured depository institutions. Nonetheless, FHFA requests 
comment on whether it should include in the final rule additional 
provisions relating to bank holding company membership based on CDFI 
status. To the extent that any commenters address this issue, FHFA also 
asks that they provide information about specific holding companies 
that operate as CDFIs, their relationships to their depository 
institution subsidiaries, and how membership via the CDFI

[[Page 22855]]

provisions would provide benefits not available as a result of the 
depository institution becoming a member.
    Character of Management. The current Sec.  925.12 requires that an 
applicant's character of management be consistent with sound and 
economical home financing. To meet the existing requirement, an 
applicant must provide the Bank with a certification that it has not, 
since the applicant's most recent regulatory examination report, been 
subject to any enforcement actions, criminal, civil or administrative 
proceedings, or criminal, civil or administrative monetary liabilities, 
lawsuits or judgments.
    The proposed rule would amend the existing provision by replacing 
the reference to ``applicant'' with a listing of the types of entities 
to which proposed Sec.  1263.12(a) would apply. The list would include 
the institutions currently covered by this provision, i.e., depository 
institutions and insurance companies, and also would add CDFI credit 
unions to that category. As noted previously, because state chartered 
credit unions that are insured by NCUA must comply with this provision, 
FHFA believes that those provisions should apply as well to state 
chartered credit unions that qualify as CDFI credit union applicants.
    Because certain of the newly-eligible CDFIs, such as loan funds and 
venture capital funds, are not regulated and, therefore, do not undergo 
regulatory examinations and are not subject to enforcement actions, the 
proposed rule would amend proposed Sec.  1263.12(b) to require such 
applicants to provide to the Bank the same certification, except for 
enforcement actions, with respect to the past three years. In light of 
the fact that these CDFIs are not subject to CAMELS-type ratings 
produced by the banking regulators, which evaluate an institution's 
management, FHFA requests comment on whether there are any other means 
by which a Bank can assess the character of a CDFI applicant's 
management.
    Home Financing Policy. Under the current Membership Regulation, 
applicants with a ``Satisfactory'' or better Community Reinvestment Act 
(CRA) rating are deemed to meet the requirement that their home 
financing policy is consistent with sound and economical home 
financing. Section 1263.13(b) of the proposed rule would retain the 
existing requirement that applicants not subject to the CRA--such as 
CDFI applicants--must provide a written justification, acceptable to 
the Bank, explaining how and why their home financing policy is 
consistent with the Bank System's housing finance mission.
    Rebuttable Presumptions. Section 925.17 of the Membership 
Regulation allows presumptions of compliance or noncompliance with 
certain membership eligibility requirements to be rebutted, upon 
meeting certain requirements set forth in that regulation. The proposed 
rule would amend the regulatory language to enable newly-eligible CDFI 
applicants to rebut presumptive noncompliance with such membership 
eligibility requirements, in the same manner as other applicants may do 
under the current regulations.
    Accordingly, the proposed rule would extend the existing rebuttal 
provisions relating to presumptive noncompliance with the financial 
condition and character of management requirements to CDFI applicants. 
Such applicants could rebut those presumptions by submitting a written 
justification providing substantial evidence, acceptable to the Bank, 
demonstrating that their financial condition and character of 
management are both consistent with the standards for approval as 
members.
    Proposed Sec.  1263.17(e)(2) would provide that if a CDFI applicant 
or any of its directors or senior officers has been the subject of any 
criminal, civil or administrative proceedings reflecting upon 
creditworthiness, business judgment, or moral turpitude in the past 
three years, the applicant must provide a written analysis indicating 
that the proceedings will not likely have a significantly deleterious 
effect on the applicant's operations. The written analysis must address 
the severity of the charges, and any mitigating action taken by the 
applicant or its directors or senior officers.
    Proposed Sec.  1263.17(e)(3) would provide that if there are any 
known potential criminal, civil or administrative monetary liabilities, 
material pending lawsuits, or unsatisfied judgments against the CDFI 
applicant or any of its directors or senior officers in the past three 
years that are significant to the applicant's operations, the applicant 
must provide a written analysis acceptable to the Bank indicating that 
the liabilities, lawsuits or judgments will not likely cause the 
applicant to fall below its applicable net asset ratio set forth in 
proposed Sec.  1263.16(b)(2)(i). The written analysis shall state the 
likelihood of the applicant or its directors or senior officers 
prevailing, and the financial consequences if the applicant or its 
directors or senior officers do not prevail.

F. Subpart D--Stock Purchase Requirements

    The proposed rule would make various technical changes to the stock 
purchase requirements currently set forth in various provisions of 
Subpart D. At present, the minimum stock purchase requirements 
specified in Sec.  925.20(a) are based on statutory provisions that 
cease to apply to a Bank once it has converted its capital structure to 
the form required by the Gramm-Leach-Bliley Act (GLB Act). Because all 
but one of the Banks has completed its capital conversion, proposed 
Sec.  1263.20 is being amended to add language to indicate that the 
minimum stock purchase requirement for a member shall be the minimums 
specified in each Bank's capital structure plan. For members of the 
Bank that has not converted, the stock purchase requirement shall 
continue to be as specified in the Membership Regulation. The proposed 
rule also makes some conforming changes to proposed Sec. Sec.  1263.21 
and 1263.22, both of which relate to distinctions based on conversion 
to the GLB Act capital structure.

G. Other Subparts

    The proposed rule makes no substantive changes in any of the 
remaining subparts of the Membership Regulation. In Subpart H, relating 
to the reacquisition of membership, the proposed rule would delete 
language from the current Sec.  925.30(b) relating to institutions that 
withdrew from membership prior to December 31, 1997, as the passage of 
time has rendered that language moot.

H. Community Support Amendment--Part 944

    Section 10(g)(1) of the Bank Act requires FHFA to establish 
standards of community investment or service for members of the Banks 
to maintain continued access to long-term Bank advances, taking into 
account factors such as a member's performance under the CRA and the 
member's record of lending to first-time homebuyers. See 12 U.S.C. 
1430(g)(1), (2). The FHFB regulation setting forth such ``community 
support'' standards is at 12 CFR part 944. Under these provisions, a 
Bank member that is subject to the CRA is deemed to meet the CRA 
standard if its most recent CRA evaluation is ``outstanding'' or 
``satisfactory.'' See 12 CFR 944.3(b)(1). A member also is presumed to 
meet the first-time homebuyer lending standard if its CRA evaluation is 
``outstanding'' and there are no public comments or other

[[Page 22856]]

information to the contrary. 12 CFR 944.3(c). Members that are not 
subject to the CRA, such as credit unions and insurance companies, are 
only required to meet the first-time homebuyer lending standard. Id. 
Because the newly eligible CDFIs are not subject to the CRA, they would 
only be subject to the first-time homebuyer lending standard. Section 
944.3(c)(1) includes a non-exclusive list of eligible activities that 
meet the first-time homebuyer lending standard, such as: having an 
established record of lending to first-time homebuyers; providing 
homeownership counseling programs for first-time homebuyers; providing 
or participating in marketing plans and related outreach programs 
targeted to first-time homebuyers; and providing technical assistance 
or financial support to organizations that assist first-time 
homebuyers. See id. at 944.3(c)(1).
    FHFA believes that a CDFI should be able to comply with these 
requirements, even if it is not subject to the CRA and may have limited 
experience in lending to first-time homebuyers. Nonetheless, FHFA 
requests comments on whether it is appropriate to apply the current 
requirements to CDFIs or whether it would be appropriate to adopt an 
alternative community support standard for CDFIs that recognizes their 
unique mission and business practices while still complying with this 
statutory requirement.

I. Community Financial Institution Amendments

    Apart from the amendments authorizing certified CDFIs to become 
Bank members, HERA included certain other amendments relating to 
``community development activities.'' Section 1211 of HERA amended the 
Bank Act to broaden the circumstances under which ``community financial 
institutions'' (CFI), which are FDIC-insured members with average total 
assets of $1 billion or less, may obtain advances. Specifically, HERA 
allowed CFIs to obtain long-term advances for the purpose of funding 
``community development activities'' and further allowed CFIs to pledge 
secured loans for ``community development activities'' as collateral 
for their advances. Because a CFI must be an institution with FDIC 
insurance, it does not appear that any of the newly eligible CDFIs, all 
of which would lack FDIC insurance, would be eligible to take advantage 
of these amendments to the advances and collateral provisions of the 
Bank Act. Nonetheless, the Finance Agency requests comments on whether 
there is any basis in the legislative history to HERA or otherwise on 
which it could reasonably rely to construe the new CFI provisions as 
applying to CDFIs as well as CFIs.

III. Paperwork Reduction Act

    The information collection contained in the current Membership 
Regulation, entitled ``Members of the Banks,'' has been assigned 
control number 2590-0003 by the Office of Management and Budget (OMB). 
The proposed rule, if adopted as a final rule, would not substantively 
or materially modify the approved information collection. Consequently, 
FHFA has not submitted any information to OMB for review under the 
Paperwork Reduction Act of 1995. 44 U.S.C. 3501, et seq.

IV. Regulatory Flexibility Act

    The proposed rule, if adopted as a final rule, will apply only to 
the Banks, which do not come within the meaning of ``small entities,'' 
as defined in the Regulatory Flexibility Act (RFA). See 5 U.S.C. 
601(6). Therefore, in accordance with section 605(b) of the RFA, 5 
U.S.C. 605(b), the General Counsel of FHFA hereby certifies that the 
proposed rule, if promulgated as a final rule, will not have a 
significant economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Parts 925 and 1263

    Federal home loan banks, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, FHFA proposes to amend 
chapters IX and XII of title 12 of the Code of Federal Regulations as 
follows:

CHAPTER IX--FEDERAL HOUSING FINANCE BOARD

PART 925--MEMBERS OF THE BANKS

    1. Transfer 12 CFR part 925 from chapter IX, subchapter D, to 
chapter XII, subchapter D and redesignate as 12 CFR part 1263.
    2. Newly redesignated part 1263 is revised to read as follows:

PART 1263--MEMBERS OF THE BANKS

Subpart A--Definitions
Sec.
1263.1 Definitions.
Subpart B--Membership Application Process
1263.2 Membership application requirements.
1263.3 Decision on application.
1263.4 Automatic membership.
1263.5 Appeals.
Subpart C--Eligibility Requirements
1263.6 General eligibility requirements.
1263.7 Duly organized requirement.
1263.8 Subject to inspection and regulation requirement.
1263.9 Makes long-term home mortgage loans requirement.
1263.10 Ten percent requirement for certain insured depository 
institution applicants.
1263.11 Financial condition requirement for depository institutions 
and CDFI credit unions.
1263.12 Character of management requirement.
1263.13 Home financing policy requirement.
1263.14 De novo insured depository institution applicants.
1263.15 Recent merger or acquisition applicants.
1263.16 Financial condition requirement for insurance company and 
certain CDFI applicants.
1263.17 Rebuttable presumptions.
1263.18 Determination of appropriate Bank district for membership.
Subpart D--Stock Requirements
1263.19 Par value and price of stock.
1263.20 Stock purchase.
1263.21 Issuance and form of stock.
1263.22 Adjustments in stock holdings.
1263.23 Excess stock.
Subpart E--Consolidations Involving Members
1263.24 Consolidations involving members.
Subpart F--Withdrawal and Removal From Membership
1263.26 Voluntary withdrawal from membership.
1263.27 Involuntary termination of membership.
Subpart G--Orderly Liquidation of Advances and Redemption of Stock
1263.29 Disposition of claims.
Subpart H--Reacquisition of Membership
1263.30 Readmission to membership.
Subpart I--Bank Access to Information
1263.31 Reports and examinations.
Subpart J--Membership Insignia
1263.32 Official membership insignia.

    Authority: 12 U.S.C. 1422, 1423, 1424, 1426, 1430, 1442, 4511, 
4513.

Subpart A--Definitions


Sec.  1263.1  Definitions.

    For purposes of this part:
    Adjusted net income means net income, excluding extraordinary items 
such as income received from, or expense incurred in, sales of 
securities or fixed assets, reported on a regulatory financial report.
    Aggregate unpaid loan principal means the aggregate unpaid 
principal of a subscriber's or member's home mortgage loans, home-
purchase contracts and similar obligations.
    Allowance for loan and lease losses means a specified balance-sheet 
account

[[Page 22857]]

held to fund potential losses on loans or leases, that is reported on a 
regulatory financial report.
    Appropriate regulator means:
    (1) In the case of an insured depository institution or CDFI credit 
union, the Federal Deposit Insurance Corporation, Board of Governors of 
the Federal Reserve System, National Credit Union Administration, 
Office of the Comptroller of the Currency, Office of Thrift 
Supervision, or appropriate state regulator that has regulatory 
authority over, or is empowered to institute enforcement action 
against, the institution, as applicable, and
    (2) In the case of an insurance company, an appropriate state 
regulator accredited by the National Association of Insurance 
Commissioners.
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
    CDFI credit union means a state chartered credit union that has 
been certified as a CDFI by the CDFI Fund and that does not have 
federal share insurance.
    CDFI Fund means the Community Development Financial Institutions 
Fund established under section 104(a) of the Community Development 
Banking and Financial Institutions Act of 1994 (12 U.S.C. 4701 et 
seq.).
    CFI asset cap means $1 billion, as adjusted annually by FHFA, 
beginning in 2009, to reflect any percentage increase in the preceding 
year's Consumer Price Index (CPI) for all urban consumers, as published 
by the U.S. Department of Labor.
    Class A stock means capital stock issued by a Bank, including 
subclasses, that has the characteristics specified in section 
6(a)(4)(A)(i) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(i)) and 
applicable FHFA regulations.
    Class B stock means capital stock issued by a Bank, including 
subclasses, that has the characteristics specified in section 
6(a)(4)(A)(ii) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(ii)) and 
applicable FHFA regulations.
    Combination business or farm property means real property for which 
the total appraised value is attributable to residential, and business 
or farm uses.
    Community development financial institution or CDFI means an 
institution that is certified as a community development financial 
institution by the CDFI Fund under the Community Development Banking 
and Financial Institutions Act of 1994 (12 U.S.C. 4701 et seq.), other 
than a bank or savings association insured under the Federal Deposit 
Insurance Act (12 U.S.C. 1811 et seq.) or a credit union insured under 
the Federal Credit Union Act (12 U.S.C. 1751 et seq.).
    Community financial institution or CFI means an institution:
    (1) The deposits of which are insured under the Federal Deposit 
Insurance Act (12 U.S.C. 1811 et seq.); and
    (2) The total assets of which, as of the date of a particular 
transaction, are less than the CFI asset cap, with total assets being 
calculated as an average of total assets over three years, with such 
average being based on the institution's regulatory financial reports 
filed with its appropriate regulator for the most recent calendar 
quarter and the immediately preceding 11 calendar quarters.
    Composite regulatory examination rating means a composite rating 
assigned to an institution following the guidelines of the Uniform 
Financial Institutions Rating System (issued by the Federal Financial 
Institutions Examination Council), including a CAMELS rating or other 
similar rating, contained in a written regulatory examination report.
    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.
    Director means the Director of FHFA or his or her designee.
    Dwelling unit means a single room or a unified combination of rooms 
designed for residential use.
    Enforcement action means any written notice, directive, order or 
agreement initiated by an applicant for Bank membership or by its 
appropriate regulator to address any operational, financial, managerial 
or other deficiencies of the applicant identified by such regulator, 
but does not include a board of directors resolution adopted by the 
applicant in response to examination weaknesses identified by such 
regulator.
    Funded residential construction loan means the portion of a loan 
secured by real property made to finance the on-site construction of 
dwelling units on one-to-four family property or multifamily property 
disbursed to the borrower.
    Gross revenues means, in the case of a CDFI applicant, total 
revenues received from all sources, including grants and other donor 
contributions and earnings from operations.
    Home mortgage loan means:
    (1) A loan, whether or not fully amortizing, or an interest in such 
a loan, which is secured by a mortgage, deed of trust, or other 
security agreement that creates a first lien on one of the following 
interests in property:
    (i) One-to-four family property or multifamily property, in fee 
simple;
    (ii) A leasehold on one-to-four family property or multifamily 
property under a lease of not less than 99 years that is renewable, or 
under a lease having a period of not less than 50 years to run from the 
date the mortgage was executed; or
    (iii) Combination business or farm property where at least 50 
percent of the total appraised value of the combined property is 
attributable to the residential portion of the property or, in the case 
of any community financial institution, combination business or farm 
property, on which is located a permanent structure actually used as a 
residence (other than for temporary or seasonal housing), where the 
residence constitutes an integral part of the property; or
    (2) A mortgage pass-through security that represents an undivided 
ownership interest in:
    (i) Long-term loans, provided that, at the time of issuance of the 
security, all of the loans meet the requirements of paragraph (1) of 
this definition; or
    (ii) A security that represents an undivided ownership interest in 
long-term loans, provided that, at the time of issuance of the 
security, all of the loans meet the requirements of paragraph (1) of 
this definition.
    Insured depository institution means an insured depository 
institution as defined in section 2(9) of the Bank Act, as amended (12 
U.S.C. 1422(9)).
    Long-term means a term to maturity of five years or greater.
    Manufactured housing means a manufactured home as defined in 
section 603(6) of the Manufactured Home Construction and Safety 
Standards Act of 1974, as amended (42 U.S.C. 5402(6)).
    Multifamily property means:
    (1) Real property that is solely residential and includes five or 
more dwelling units;
    (2) Real property that includes five or more dwelling units 
combined with commercial units, provided that the property is primarily 
residential; or
    (3) Nursing homes, dormitories, or homes for the elderly.
    Nonperforming loans and leases means the sum of the following, 
reported on a regulatory financial report:
    (1) 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;
    (2) Loans and leases on a nonaccrual basis; and
    (3) Restructured loans and leases (not already reported as 
nonperforming).
    Nonresidential real property means real property that is not used 
for

[[Page 22858]]

residential purposes, including business or industrial property, 
hotels, motels, churches, hospitals, educational and charitable 
institution buildings or facilities, clubs, lodges, association 
buildings, golf courses, recreational facilities, farm property not 
containing a dwelling unit, or similar types of property.
    One-to-four family property means:
    (1) Real property that is solely residential, including one-to-four 
family dwelling units or more than four family dwelling units if each 
dwelling unit is separated from the other dwelling units by dividing 
walls that extend from ground to roof, such as row houses, townhouses 
or similar types of property;
    (2) Manufactured housing if applicable state law defines the 
purchase or holding of manufactured housing as the purchase or holding 
of real property;
    (3) Individual condominium dwelling units or interests in 
individual cooperative housing dwelling units that are part of a 
condominium or cooperative building without regard to the number of 
total dwelling units therein; or
    (4) Real property which includes one-to-four family dwelling units 
combined with commercial units, provided the property is primarily 
residential.
    Operating expenses means, in the case of a CDFI applicant, expenses 
for business operations, including, but not limited to, staff salaries 
and benefits, professional fees, interest, loan loss provision, and 
depreciation, contained in the applicant's audited financial 
statements.
    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.
    Regulatory examination report means a written report of examination 
prepared by the applicant's appropriate regulator, containing, in the 
case of insured depository institution applicants, a composite rating 
assigned to the institution following the guidelines of the Uniform 
Financial Institutions Rating System, including a CAMELS rating or 
other similar rating.
    Regulatory financial report means a financial report that an 
applicant is required to file with its appropriate regulator on a 
specific periodic basis, including the quarterly call report for 
commercial banks, thrift financial report for savings associations, 
quarterly or semi-annual call report for credit unions, the National 
Association of Insurance Commissioners' annual or quarterly report for 
insurance companies, or other similar report, including such report 
maintained by the appropriate regulator on a computer on-line database.
    Residential mortgage loan means any one of the following types of 
loans, whether or not fully amortizing:
    (1) Home mortgage loans;
    (2) Funded residential construction loans;
    (3) Loans secured by manufactured housing whether or not defined by 
state law as secured by an interest in real property;
    (4) Loans secured by junior liens on one-to-four family property or 
multifamily property;
    (5) Mortgage pass-through securities representing an undivided 
ownership interest in:
    (i) Loans that meet the requirements of paragraphs (1) through (4) 
of this definition at the time of issuance of the security;
    (ii) Securities representing an undivided ownership interest in 
loans, provided that, at the time of issuance of the security, all of 
the loans meet the requirements of paragraphs (1) through (4) of this 
definition; or
    (iii) Mortgage debt securities as defined in paragraph (6) of this 
definition;
    (6) Mortgage debt securities secured by:
    (i) Loans, provided that, at the time of issuance of the security, 
substantially all of the loans meet the requirements of paragraphs (1) 
through (4) of this definition;
    (ii) Securities that meet the requirements of paragraph (5) of this 
definition; or
    (iii) Securities secured by assets, provided that, at the time of 
issuance of the security, all of the assets meet the requirements of 
paragraphs (1) through (5) of this definition;
    (7) Home mortgage loans secured by a leasehold interest, as defined 
in paragraph (1)(ii) of the definition of ``home mortgage loan,'' 
except that the period of the lease term may be for any duration; or
    (8) Loans that finance properties or activities that, if made by a 
member, would satisfy the statutory requirements for the CIP 
established under section 10(i) of the Bank Act (12 U.S.C. 1430(i)), or 
the regulatory requirements established for any CICA program.
    Restricted assets means both permanently restricted assets and 
temporarily restricted assets, as those terms are used in Financial 
Accounting Standard No. 117, or any successor publication.
    Total assets means the total assets reported on a regulatory 
financial report or, in the case of a CDFI applicant, the total assets 
contained in the applicant's audited financial statements.
    Unrestricted cash and cash equivalents means, in the case of a CDFI 
applicant, cash and highly liquid assets that can be easily converted 
into cash that are not restricted in a manner that prevents their use 
in paying expenses, as contained in the applicant's audited financial 
statements.

Subpart B--Membership Application Process


Sec.  1263.2  Membership application requirements.

    (a) Application. An applicant for membership in a Bank shall submit 
to that Bank an application that satisfies the requirements of this 
part. The application shall include a written resolution or 
certification duly adopted by the applicant's board of directors, or by 
an individual with authority to act on behalf of the applicant's board 
of directors, of the following:
    (1) Applicant review. Applicant has reviewed the requirements of 
this part and, as required by this part, has provided to the best of 
applicant's knowledge the most recent, accurate and complete 
information available; and
    (2) Duty to supplement. Applicant will promptly supplement the 
application with any relevant information that comes to applicant's 
attention prior to the Bank's decision on whether to approve or deny 
the application, and if the Bank's decision is appealed pursuant to 
Sec.  1263.5, prior to resolution of any appeal by FHFA.
    (b) Digest. The Bank shall prepare a written digest for each 
applicant stating whether or not the applicant meets each of the 
requirements in Sec. Sec.  1263.6 to 1263.18, the Bank's findings and 
the reasons therefor.
    (c) File. The Bank shall maintain a membership file for each 
applicant for at least three years after the Bank decides whether to 
approve or deny membership or, in the case of an appeal to FHFA, for 
three years after the resolution of the appeal. The membership file 
shall contain at a minimum:
    (1) Digest. The digest required by paragraph (b) of this section.
    (2) Required documents. All documents required by Sec. Sec.  1263.6 
to 1263.18, including those documents required to establish or rebut a 
presumption under this part, shall be described in and attached to the 
digest. The Bank may retain in the file only the relevant portions of 
the regulatory financial reports required by this part. If an 
applicant's appropriate regulator

[[Page 22859]]

requires return or destruction of a regulatory examination report, the 
date that the report is returned or destroyed shall be noted in the 
file.
    (3) Additional documents. Any additional document submitted by the 
applicant, or otherwise obtained or generated by the Bank, concerning 
the applicant.
    (4) Decision resolution. The decision resolution described in Sec.  
1263.3(b).


Sec.  1263.3   Decision on application.

    (a) Authority. FHFA hereby authorizes the Banks to approve or deny 
all applications for membership, subject to the requirements of this 
part. The authority to approve membership applications may be exercised 
only by a committee of the Bank's board of directors, the Bank 
president, or a senior officer who reports directly to the Bank 
president, other than an officer with responsibility for business 
development.
    (b) Decision resolution. For each applicant, the Bank shall prepare 
a written resolution duly adopted by the Bank's board of directors, by 
a committee of the board of directors, or by an officer with delegated 
authority to approve membership applications. The decision resolution 
shall state:
    (1) That the statements in the digest are accurate to the best of 
the Bank's knowledge, and are based on a diligent and comprehensive 
review of all available information identified in the digest; and
    (2) The Bank's decision and the reasons therefor. Decisions to 
approve an application should state specifically that: the applicant is 
authorized under the laws of the United States and the laws of the 
appropriate state to become a member of, purchase stock in, do business 
with, and maintain deposits in, the Bank to which the applicant has 
applied; and the applicant meets all of the membership eligibility 
criteria of the Bank Act and this part.
    (c) Action on applications. The Bank shall act on an application 
within 60 calendar days of the date the Bank deems the application to 
be complete. An application is ``complete'' when a Bank has obtained 
all the information required by this part, and any other information 
the Bank deems necessary, to process the application. If an application 
that was deemed complete subsequently is deemed incomplete because the 
Bank determines during the review process that additional information 
is necessary to process the application, the Bank may stop the 60-day 
clock until the application again is deemed complete, and then resume 
the clock where it left off. The Bank shall notify an applicant in 
writing when its 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. Within 
three business days of a Bank's decision on an application, the Bank 
shall provide the applicant and FHFA with a copy of the Bank's decision 
resolution.


Sec.  1263.4  Automatic membership.

    (a) Automatic membership for certain charter conversions. An 
insured depository institution member that converts from one charter 
type to another automatically shall become a member of the Bank of 
which the converting institution was a member on the effective date of 
such conversion, provided that the converting institution continues to 
be an insured depository institution and the assets of the institution 
immediately before and immediately after the conversion are not 
materially different. In such case, all relationships existing between 
the member and the Bank at the time of such conversion may continue.
    (b) Automatic membership for transfers. Any member whose membership 
is transferred pursuant to Sec.  1263.18(d) automatically shall become 
a member of the Bank to which it transfers.
    (c) 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 the minimum amount of Bank 
stock required for membership in that Bank as required by Sec.  
1263.20, 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.  1263.24(b)(4)(i) shall apply, and upon 
approval of automatic membership by the Bank, the provisions of Sec.  
1263.24(c) and (d) shall apply.


Sec.  1263.5  Appeals.

    (a) Appeals by applicants--(1) Filing procedure. Within 90 calendar 
days of the date of a Bank's decision to deny an application for 
membership, the applicant may file a written appeal of the decision 
with FHFA.
    (2) Documents. The applicant's appeal shall be addressed to the 
Deputy Director for Federal Home Loan Bank Regulation, Federal Housing 
Finance Agency, 1625 Eye Street, NW., Washington, DC 20006, with a copy 
to the Bank, and shall include the following documents:
    (i) Bank's decision resolution. A copy of the Bank's decision 
resolution; and
    (ii) Basis for appeal. A statement of the basis for the appeal by 
the applicant with sufficient facts, information, analysis and 
explanation to rebut any applicable presumptions and otherwise support 
the applicant's position.
    (b) Record for appeal--(1) Copy of membership file. Upon receiving 
a copy of an appeal, the Bank whose action has been appealed (appellee 
Bank) shall provide FHFA with a copy of the applicant's complete 
membership file. Until FHFA resolves the appeal, the appellee Bank 
shall supplement the materials provided to FHFA as any new materials 
are received.
    (2) Additional information. FHFA may request additional information 
or further supporting arguments from the appellant, the appellee Bank 
or any other party that FHFA deems appropriate.
    (c) Deciding appeals. FHFA shall consider the record for appeal 
described in paragraph (b) of this section and shall resolve the appeal 
based on the requirements of the Bank Act and this part within 90 
calendar days of the date the appeal is filed with FHFA. In deciding 
the appeal, FHFA shall apply the presumptions in this part, unless the 
appellant or appellee Bank presents evidence to rebut a presumption as 
provided in Sec.  1263.17.

Subpart C--Eligibility Requirements


Sec.  1263.6  General eligibility requirements.

    (a) Requirements. Any building and loan association, savings and 
loan association, cooperative bank, homestead association, insurance 
company, savings bank, community

[[Page 22860]]

development financial institution, or insured depository institution, 
upon application satisfying all of the requirements of the Bank Act and 
this part, shall be eligible to become a member of a Bank if:
    (1) It is duly organized under the laws of any State or of the 
United States;
    (2) It is subject to inspection and regulation under the banking 
laws, or under similar laws, of any State or of the United States;
    (3) It makes long-term home mortgage loans;
    (4) Its financial condition is such that advances may be safely 
made to it;
    (5) The character of its management is consistent with sound and 
economical home financing; and
    (6) Its home financing policy is consistent with sound and 
economical home financing.
    (b) Additional eligibility requirement for insured depository 
institutions other than community financial institutions. In order to 
be eligible to become a member of a Bank, an insured depository 
institution applicant other than a community financial institution also 
must have at least 10 percent of its total assets in residential 
mortgage loans.
    (c) Additional eligibility requirement for applicants that are not 
insured depository institutions. In order to be eligible to become a 
member of a Bank, an applicant that is not an insured depository 
institution also must have mortgage-related assets that reflect a 
commitment to housing finance, as determined by the Bank in its 
discretion.
    (d) Ineligibility. Except as otherwise provided in this part, if an 
applicant does not satisfy the requirements of this part, the applicant 
is ineligible for membership.


Sec.  1263.7   Duly organized requirement.

    An applicant shall be deemed to be duly organized, as required by 
section 4(a)(1)(A) of the Bank Act (12 U.S.C. 1424(a)(1)(A)) and Sec.  
1263.6(a)(1) of this part, if it is chartered by a state or federal 
agency as a building and loan association, savings and loan 
association, cooperative bank, homestead association, insurance 
company, savings bank, or insured depository institution, or in the 
case of a CDFI applicant, is incorporated under state law.


Sec.  1263.8   Subject to inspection and regulation requirement.

    An applicant shall be deemed to be subject to inspection and 
regulation, as required by section 4(a)(1)(B) of the Bank Act (12 
U.S.C. 1424 (a)(1)(B)) and Sec.  1263.6(a)(2) of this part, if, in the 
case of an insured depository institution or insurance company 
applicant, it is subject to inspection and regulation by its 
appropriate regulator.


Sec.  1263.9   Makes long-term home mortgage loans requirement.

    An applicant shall be deemed to make long-term home mortgage loans, 
as required by section 4(a)(1)(C) of the Bank Act (12 U.S.C. 
1424(a)(1)(C)) and Sec.  1263.6(a)(3) of this part if, based on the 
applicant's most recent regulatory financial report filed with its 
appropriate regulator, or other documentation provided to the Bank in 
the case of a CDFI applicant that does not file such reports, the 
applicant originates or purchases long-term home mortgage loans.


Sec.  1263.10  Ten percent requirement for certain insured depository 
institution applicants.

    An insured depository institution applicant that is subject to the 
10 percent requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C. 
1424(a)(2)(A)) and Sec.  1263.6(b) of this part shall be deemed to be 
in compliance with such requirement if, based on the applicant's most 
recent regulatory financial report filed with its appropriate 
regulator, the applicant has at least 10 percent of its total assets in 
residential mortgage loans, except that any assets used to secure 
mortgage debt securities as described in paragraph (6) of the 
definition of ``residential mortgage loan'' set forth in Sec.  1263.1 
shall not be used to meet this requirement.


Sec.  1263.11  Financial condition requirement for depository 
institutions and CDFI credit unions.

    (a) Review requirement. In determining whether a building and loan 
association, savings and loan association, cooperative bank, homestead 
association, savings bank, insured depository institution, or CDFI 
credit union has complied with the financial condition requirement of 
section 4(a)(2)(B) of the Bank Act (12 U.S.C. 1424(a)(2)(B)) and Sec.  
1263.6(a)(4) of this part, the Bank shall obtain as a part of the 
membership application and review each of the following documents:
    (1) Regulatory financial reports. The regulatory financial reports 
filed by the applicant with its appropriate regulator for the last six 
calendar quarters and three year-ends preceding the date the Bank 
receives the application;
    (2) Financial statement. In order of preference: the most recent 
independent audit of the applicant conducted in accordance with 
generally accepted auditing standards by a certified public accounting 
firm which submits a report on the applicant; the most recent 
independent audit of the applicant's parent holding company conducted 
in accordance with generally accepted auditing standards by a certified 
public accounting firm which submits a report on the consolidated 
holding company but not on the applicant separately; the most recent 
directors' examination of the applicant conducted in accordance with 
generally accepted auditing standards by a certified public accounting 
firm; the most recent directors' examination of the applicant performed 
by other external auditors; the most recent review of the applicant's 
financial statements by external auditors; the most recent compilation 
of the applicant's financial statements by external auditors; or the 
most recent audit of other procedures of the applicant;
    (3) Regulatory examination report. The applicant's most recent 
available regulatory examination report prepared by its appropriate 
regulator, a summary prepared by the Bank of the applicant's strengths 
and weaknesses as cited in the regulatory examination report, and a 
summary prepared by the Bank or applicant of actions taken by the 
applicant to respond to examination weaknesses;
    (4) Enforcement actions. A description prepared by the Bank or 
applicant of any outstanding enforcement actions against the applicant, 
responses by the applicant, reports as required by the enforcement 
action, and verbal or written indications, if available, from the 
appropriate regulator of how the applicant is complying with the terms 
of the enforcement action; and
    (5) Additional information. Any other relevant document or 
information concerning the applicant that comes to the Bank's attention 
in reviewing the applicant's financial condition.
    (b) Standards. An applicant of the type described in paragraph (a) 
of this section shall be deemed to be in compliance with the financial 
condition requirement of section 4(a)(2)(B) of the Bank Act (12 U.S.C. 
1424(a)(2)(B)) and Sec.  1263.6(a)(4) of this part, if:
    (1) Recent composite regulatory examination rating. The applicant 
has received a composite regulatory examination rating from its 
appropriate regulator within two years preceding the date the Bank 
receives the application;
    (2) Capital requirement. The applicant meets all of its minimum 
statutory and regulatory capital requirements as reported in its most 
recent quarter-end

[[Page 22861]]

regulatory financial report filed with its appropriate regulator; and
    (3) Minimum performance standard. (i) Except as provided in 
paragraph (b)(3)(iii) of this section, the applicant's most recent 
composite regulatory examination rating from its appropriate regulator 
within the past two years was ``1;'' or was ``2'' or ``3'' and, based 
on the applicant's most recent regulatory financial report filed with 
its appropriate regulator, the applicant satisfied all of the following 
performance trend criteria:
    (A) Earnings. The applicant's adjusted net income was positive in 
four of the six most recent calendar quarters;
    (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 four of the six most recent calendar quarters.
    (ii) For applicants that are not required to report financial data 
to their appropriate regulator on a quarterly basis, the information 
required in paragraph (b)(3)(i) of this section may be reported on a 
semiannual basis.
    (iii) a CDFI credit union applicant must meet the performance trend 
criteria in paragraph (b)(3)(i) of this section irrespective of its 
composite regulatory examination rating.
    (c) Eligible collateral not considered. The availability of 
sufficient eligible collateral to secure advances to the applicant is 
presumed and shall not be considered in determining whether an 
applicant is in the financial condition required by section 4(a)(2)(B) 
of the Bank Act (12 U.S.C. 1424(a)(2)(B)) and Sec.  1263.6(a)(4) of 
this part.


Sec.  1263.12  Character of management requirement.

    (a) General. A building and loan association, savings and loan 
association, cooperative bank, homestead association, savings bank, 
insured depository institution, insurance company, and CDFI credit 
union shall be deemed to be in compliance with the character of 
management requirement of Sec.  1263.6(a)(5), if the applicant provides 
to the Bank an unqualified written certification duly adopted by the 
applicant's board of directors, or by an individual with authority to 
act on behalf of the applicant's board of directors, that:
    (1) Enforcement actions. Neither the applicant nor any of its 
directors or senior officers is subject to, or operating under, any 
enforcement action instituted by its appropriate regulator;
    (2) Criminal, civil or administrative proceedings. Neither the 
applicant nor any of its directors or senior officers has been the 
subject of any criminal, civil or administrative proceedings reflecting 
upon creditworthiness, business judgment, or moral turpitude since the 
most recent regulatory examination report; and
    (3) Criminal, civil or administrative monetary liabilities, 
lawsuits or judgments. There are no known potential criminal, civil or 
administrative monetary liabilities, material pending lawsuits, or 
unsatisfied judgments against the applicant or any of its directors or 
senior officers since the most recent regulatory examination report, 
that are significant to the applicant's operations.
    (b) CDFIs other than CDFI credit unions. A CDFI applicant other 
than a CDFI credit union shall be deemed to be in compliance with the 
character of management requirement of Sec.  1263.6(a)(5), if the 
applicant provides an unqualified written certification duly adopted by 
the applicant's board of directors, or by an individual with authority 
to act on behalf of the applicant's board of directors, that:
    (1) Neither the applicant nor any of its directors or senior 
officers has been the subject of any criminal, civil or administrative 
proceedings reflecting upon creditworthiness, business judgment, or 
moral turpitude in the past three years; and
    (2) There are no known potential criminal, civil or administrative 
monetary liabilities, material pending lawsuits, or unsatisfied 
judgments against the applicant or any of its directors or senior 
officers arising within the past three years that are significant to 
the applicant's operations.


Sec.  1263.13  Home financing policy requirement.

    (a) Standard. An applicant shall be deemed to be in compliance with 
the home financing policy requirement of Sec.  1263.6(a)(6) if the 
applicant has received a Community Reinvestment Act (CRA) rating of 
``Satisfactory'' or better on its most recent formal, or if 
unavailable, informal or preliminary, CRA performance evaluation.
    (b) Written justification required. An applicant that is not 
subject to the CRA shall file as part of its application for membership 
a written justification acceptable to the Bank of how and why the 
applicant's home financing policy is consistent with the Bank System's 
housing finance mission.


Sec.  1263.14  De novo insured depository institution applicants.

    (a) 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 (de novo applicant) is deemed to 
meet the requirements of Sec. Sec.  1263.7, 1263.8, 1263.11 and 
1263.12.
    (b) Makes long-term home mortgage loans requirement. A de novo 
applicant shall be deemed to make long-term home mortgage loans as 
required by Sec.  1263.9 if it has filed as part of its application for 
membership a written justification acceptable to the Bank of how its 
home financing credit policy and lending practices will include 
originating or purchasing long-term home mortgage loans.
    (c) 10 percent requirement--(1) One-year requirement. A de novo 
applicant that is subject to the 10 percent requirement of section 
4(a)(2)(A) of the Bank Act (12 U.S.C. 1424(a)(2)(A)) and Sec.  
1263.6(b) of this part shall have until one year after commencing its 
initial business operations to meet the 10 percent requirement of Sec.  
1263.10.
    (2) Conditional approval. A de novo applicant shall be 
conditionally deemed to be in compliance with the 10 percent 
requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C. 
1424(a)(2)(A)) and Sec.  1263.6(b) of this part. A de novo applicant 
that receives such conditional membership approval is subject to the 
stock purchase requirements established by FHFA regulation or the 
Bank's capital plan, as applicable, as well as the FHFA regulations 
governing advances to members.
    (3) Approval. A de novo applicant shall be deemed to be in 
compliance with the 10 percent requirement of section 4(a)(2)(A) of the 
Bank Act (12 U.S.C. 1424(a)(2)(A)) and Sec.  1263.6(b) of this part 
upon receipt by the Bank from the applicant, within one year after 
commencement of the applicant's initial business operations, of 
evidence acceptable to the Bank that the applicant satisfies the 10 
percent requirement.
    (4) Conditional approval deemed null and void. If the requirements 
of paragraph (c)(3) of this section are not satisfied, a de novo 
applicant shall be deemed to be in noncompliance with the 10 percent 
requirement of section 4(a)(2)(A) of the Bank Act (12 U.S.C. 
1424(a)(2)(A)) and Sec.  1263.6(b) of this

[[Page 22862]]

part, and its conditional membership approval is deemed null and void.
    (5) Treatment of outstanding advances and Bank stock. If a de novo 
applicant's conditional membership approval is deemed null and void 
pursuant to paragraph (c)(4) of this section, the liquidation of any 
outstanding indebtedness owed by the applicant to the Bank and 
redemption of stock of such Bank shall be carried out in accordance 
with Sec.  1263.29.
    (d) Home financing policy requirement--(1) Conditional approval. A 
de novo applicant that has not received its first formal, or, if 
unavailable, informal or preliminary, Community Reinvestment Act (CRA) 
performance evaluation, shall be conditionally deemed to be in 
compliance with the home financing policy requirement of section 
4(a)(2)(C) of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec.  
1263.6(a)(6) of this part, if the applicant has filed as part of its 
application for membership a written justification acceptable to the 
Bank of how and why its home financing credit policy and lending 
practices will meet the credit needs of its community. An applicant 
that receives such conditional membership approval is subject to the 
stock purchase requirements established by FHFA regulation or the 
Bank's capital plan, as applicable, as well as the FHFA regulations 
governing advances to members.
    (2) Approval. A de novo applicant that has been granted conditional 
approval under paragraph (d)(1) of this section shall be deemed to be 
in compliance with the home financing policy requirement of section 
4(a)(2)(C) of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec.  
1263.6(a)(6) of this part upon receipt by the Bank of evidence from the 
applicant that it received a CRA rating of ``Satisfactory'' or better 
on its first formal, or if unavailable, informal or preliminary, CRA 
performance evaluation.
    (3) Conditional approval deemed null and void. If the de novo 
applicant's first such CRA rating is ``Needs to Improve'' or 
``Substantial Non-Compliance,'' the applicant shall be deemed to be in 
noncompliance with the home financing policy requirement of section 
4(a)(2)(C) of the Bank Act (12 U.S.C. 1424(a)(2)(C)) and Sec.  
1263.6(a)(6) of this part, subject to rebuttal by the applicant under 
Sec.  1263.17(f), and its conditional membership approval is deemed 
null and void.
    (4) Treatment of outstanding advances and Bank stock. If the 
applicant's conditional membership approval is deemed null and void 
pursuant to paragraph (d)(3) of this section, the liquidation of any 
outstanding indebtedness owed by the applicant to the Bank and 
redemption of stock of such Bank shall be carried out in accordance 
with Sec.  1263.29.


Sec.  1263.15  Recent merger or acquisition applicants.

    An applicant that merged with or acquired another institution prior 
to the date the Bank receives its application for membership is subject 
to the requirements of Sec. Sec.  1263.7 to 1263.13 except as provided 
in this section.
    (a) Financial condition requirement--(1) Regulatory financial 
reports. For purposes of Sec.  1263.11(a)(1), 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 regulatory financial 
reports with its appropriate regulator for the last six calendar 
quarters and three year-ends preceding such date, shall provide any 
regulatory financial reports that the applicant has filed with its 
appropriate regulator.
    (2) Performance trend criteria. For purposes of Sec.  
1263.11(b)(3)(i)(A) to (C), 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 combined regulatory financial reports 
with its appropriate regulator for the last six calendar quarters 
preceding such date, shall provide pro forma combined financial 
statements for those calendar quarters in which actual combined 
regulatory financial reports are unavailable.
    (b) Home financing policy requirement. For purposes of Sec.  
1263.13, an applicant that, as a result of a merger or acquisition 
preceding the date the Bank receives its application for membership, 
has not received its first formal, or if unavailable, informal or 
preliminary, Community Reinvestment Act performance evaluation, shall 
file as part of its application a written justification acceptable to 
the Bank of how and why the applicant's home financing credit policy 
and lending practices will meet the credit needs of its community.
    (c) Makes long-term home mortgage loans requirement; 10 percent 
requirement. For purposes of determining compliance with Sec. Sec.  
1263.9 and 1263.10, 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.  1263.16  Financial condition requirement for insurance company 
and certain CDFI applicants.

    (a) Insurance companies. An insurance company applicant shall be 
deemed to meet the financial condition requirement of Sec.  
1263.6(a)(4) if, based on the information contained in the applicant's 
most recent regulatory financial report filed with its appropriate 
regulator, the applicant meets all of its minimum statutory and 
regulatory capital requirements and the capital standards established 
by the National Association of Insurance Commissioners.
    (b) CDFIs other than CDFI credit unions--(1) Review requirement. In 
determining whether a CDFI applicant, other than a CDFI credit union, 
has complied with the financial condition requirement of Sec.  
1263.6(a)(4), the Bank shall obtain as a part of the membership 
application and review each of the following documents:
    (i) Financial statements. An independent audit conducted within the 
prior year in accordance with generally accepted auditing standards by 
a certified public accounting firm, plus more recent quarterly 
statements, if available, and financial statements for the two years 
prior to the most recent audited financial statement. At a minimum, all 
such financial statements must include income and expense statements, 
statements of activities, statements of financial position, and 
statements of cash flows. The financial statement for the most recent 
year must include separate schedules or disclosures of the financial 
position of each of the applicant's affiliates, descriptions of their 
lines of business, detailed financial disclosures of the relationship 
between the applicant and its affiliates (such as indebtedness or 
subordinate debt obligations), disclosures of interlocking 
directorships with each affiliate, and identification of temporary and 
permanently restricted funds and the requirements of these 
restrictions.
    (ii) CDFI Fund certification. The certification that the applicant 
has received from the CDFI Fund. If the certification is more than 
three years old, the applicant must also submit a written statement 
certifying that there have been no material events or occurrences since 
the date of certification that would adversely affect its strategic 
direction, mission, or business operations.

[[Page 22863]]

    (iii) Additional information. Any other relevant document or 
information concerning the financial condition of the applicant 
requested by the Bank and that is not contained in the applicant's 
financial statements.
    (2) Standards. A CDFI applicant, other than a CDFI credit union, 
shall be deemed to be in compliance with the financial condition 
requirement of Sec.  1263.6(a)(4) if it meets all of the following 
minimum financial standards:
    (i) Net asset ratio. The applicant's ratio of net assets to total 
assets is at least 20 percent, with net and total assets including 
restricted assets, where net assets is calculated as the residual value 
of assets over liabilities and is based on information derived from the 
applicant's most recent financial statements;
    (ii) Earnings. The applicant has shown a positive net income for 
two of the three most recent years, where net income is calculated as 
gross revenues less total expenses and is based on information derived 
from the applicant's most recent financial statements;
    (iii) Loan loss reserves. The applicant's ratio of loan loss 
reserves to loans and leases 90 days or more delinquent (including 
loans sold with full recourse) is at least 30 percent, where loan loss 
reserves are a specified balance sheet account that reflects the amount 
reserved for loans expected to be uncollectible and are based on 
information derived from the applicant's most recent financial 
statements;
    (iv) Liquidity. The applicant has an operating liquidity ratio of 
at least 1.0 for the current year, and for one or both of the two 
preceding years, where the numerator of the ratio includes unrestricted 
cash and cash equivalents and the denominator of the ratio is the 
average quarterly operating expense for the four most recent quarters.


Sec.  1263.17  Rebuttable presumptions.

    (a) Rebutting presumptive compliance. The presumption that an 
applicant meeting the requirements of Sec. Sec.  1263.7 to 1263.16 is 
in compliance with section 4(a) of the Bank Act (12 U.S.C. 1424(a)) and 
Sec.  1263.6(a) and (b) of this part, may be rebutted, and the Bank may 
deny membership to the applicant, if the Bank obtains substantial 
evidence to overcome the presumption of compliance.
    (b) Rebutting presumptive noncompliance. The presumption that an 
applicant not meeting a particular requirement of Sec. Sec.  1263.8, 
1263.11, 1263.12, 1263.13, or 1263.16 is in noncompliance with section 
4(a) of the Bank Act (12 U.S.C. 1424(a)) and Sec.  1263.6(a)(2), (4), 
(5), or (6) of this part, may be rebutted, and the applicant shall be 
deemed to meet such requirement, if the applicable requirements in this 
section are satisfied.
    (c) Presumptive noncompliance by insurance company applicant with 
``subject to inspection and regulation'' requirement of Sec.  1263.8. 
If an insurance company applicant is not subject to inspection and 
regulation by an appropriate state regulator accredited by the National 
Association of Insurance Commissioners (NAIC), as required by Sec.  
1263.8, the applicant or the Bank shall prepare a written justification 
that provides substantial evidence acceptable to the Bank that the 
applicant is subject to inspection and regulation as required by Sec.  
1263.6(a)(2), notwithstanding the lack of NAIC accreditation.
    (d) Presumptive noncompliance with financial condition requirements 
of Sec. Sec.  1263.11 and 1263.16--(1) Applicants subject to Sec.  
1263.11. For applicants subject to Sec.  1263.11, in the case of an 
applicant's lack of a composite regulatory examination rating within 
the two-year period required by Sec.  1263.11(b)(1), a variance from 
the rating required by Sec.  1263.11(b)(3)(i), or a variance from a 
performance trend criterion required by Sec.  1263.11(b)(3)(i), the 
applicant or the Bank shall prepare a written justification pertaining 
to such requirement that provides substantial evidence acceptable to 
the Bank that the applicant is in the financial condition required by 
Sec.  1263.6(a)(4), notwithstanding the lack of rating or variance.
    (2) Applicants subject to Sec.  1263.16. For applicants subject to 
Sec.  1263.16, in the case of an insurance company applicant's variance 
from a capital requirement or standard of Sec.  1263.16(a) or in the 
case of a CDFI applicant's variance from the standards of Sec.  
1263.16(b), the applicant or the Bank shall prepare a written 
justification pertaining to such requirement or standard that provides 
substantial evidence acceptable to the Bank that the applicant is in 
the financial condition required by Sec.  1263.6(a)(4), notwithstanding 
the variance.
    (e) Presumptive noncompliance with character of management 
requirement of Sec.  1263.12--(1) Enforcement actions. If an applicant 
or any of its directors or senior officers is subject to, or operating 
under, any enforcement action instituted by its appropriate regulator, 
the applicant shall provide or the Bank shall obtain:
    (i) Regulator confirmation. Written or verbal confirmation from the 
applicant's appropriate regulator that the applicant or its directors 
or senior officers are in substantial compliance with all aspects of 
the enforcement action; or
    (ii) Written analysis. A written analysis acceptable to the Bank 
indicating that the applicant or its directors or senior officers are 
in substantial compliance with all aspects of the enforcement action. 
The written analysis shall state each action the applicant or its 
directors or senior officers are required to take by the enforcement 
action, the actions actually taken by the applicant or its directors or 
senior officers, and whether the applicant regards this as substantial 
compliance with all aspects of the enforcement action.
    (2) Criminal, civil or administrative proceedings. If an applicant 
or any of its directors or senior officers has been the subject of any 
criminal, civil or administrative proceedings reflecting upon 
creditworthiness, business judgment, or moral turpitude since the most 
recent regulatory examination report, or in the case of a CDFI 
applicant, during the past three years, the applicant shall provide or 
the Bank shall obtain:
    (i) Regulator confirmation. Written or verbal confirmation from the 
applicant's appropriate regulator that the proceedings will not likely 
result in enforcement action; or
    (ii) Written analysis. A written analysis acceptable to the Bank 
indicating that the proceedings will not likely result in enforcement 
action, or in the case of a CDFI applicant, that the proceedings will 
not likely have a significantly deleterious effect on the applicant's 
operations. The written analysis shall state the severity of the 
charges, and any mitigating action taken by the applicant or its 
directors or senior officers.
    (3) Criminal, civil or administrative monetary liabilities, 
lawsuits or judgments. If there are any known potential criminal, civil 
or administrative monetary liabilities, material pending lawsuits, or 
unsatisfied judgments against the applicant or any of its directors or 
senior officers since the most recent regulatory examination report, or 
in the case of a CDFI applicant, occurring within the past three years, 
that are significant to the applicant's operations, the applicant shall 
provide or the Bank shall obtain:
    (i) Regulator confirmation. Written or verbal confirmation from the 
applicant's appropriate regulator that the liabilities, lawsuits or 
judgments will not likely cause the applicant to fall below its

[[Page 22864]]

applicable capital requirements set forth in Sec. Sec.  1263.11(b)(2) 
and 1263.16(a); or
    (ii) Written analysis. A written analysis acceptable to the Bank 
indicating that the liabilities, lawsuits or judgments will not likely 
cause the applicant to fall below its applicable capital requirements 
set forth in Sec.  1263.11(b)(2) or Sec.  1263.16(a), or the net asset 
ratio set forth in Sec.  1263.16(b)(2)(i). The written analysis shall 
state the likelihood of the applicant or its directors or senior 
officers prevailing, and the financial consequences if the applicant or 
its directors or senior officers do not prevail.
    (f) Presumptive noncompliance with home financing policy 
requirements of Sec. Sec.  1263.13 and 1263.14(d). If an applicant 
received a ``Substantial Non-Compliance'' rating on its most recent 
formal, or if unavailable, informal or preliminary, Community 
Reinvestment Act (CRA) performance evaluation, or a ``Needs to 
Improve'' CRA rating on its most recent formal, or if unavailable, 
informal or preliminary, CRA performance evaluation and a CRA rating of 
``Needs to Improve'' or better on any immediately preceding CRA 
performance evaluation, the applicant shall provide or the Bank shall 
obtain:
    (1) Regulator confirmation. Written or verbal confirmation from the 
applicant's appropriate regulator of the applicant's recent 
satisfactory CRA performance, including any corrective action that 
substantially improved upon the deficiencies cited in the most recent 
CRA performance evaluation(s); or
    (2) Written analysis. A written analysis acceptable to the Bank 
demonstrating that the CRA rating is unrelated to home financing, and 
providing substantial evidence of how and why the applicant's home 
financing credit policy and lending practices meet the credit needs of 
its community.


Sec.  1263.18  Determination of appropriate Bank district for 
membership.

    (a) Eligibility. (1) An institution eligible to become a member of 
a Bank under the Bank Act and this part may become a member only of the 
Bank of the district in which the institution's principal place of 
business is located, except as provided in paragraph (a)(2) of this 
section. A member shall promptly notify its Bank in writing whenever it 
relocates its principal place of business to another state and the Bank 
shall inform FHFA in writing of any such relocation.
    (2) An institution eligible to become a member of a Bank under the 
Bank Act and this part may become a member of the Bank of a district 
adjoining the district in which the institution's principal place of 
business is located, if demanded by convenience and then only with the 
approval of FHFA.
    (b) Principal place of business. Except as otherwise designated in 
accordance with this section, the principal place of business of an 
institution is the state in which the institution maintains its home 
office established as such in conformity with the laws under which the 
institution is organized.
    (c) Designation of principal place of business. (1) A member or an 
applicant for membership may request in writing to the Bank in the 
district where the institution maintains its home office that a state 
other than the state in which it maintains its home office be 
designated as its principal place of business. Within 90 calendar days 
of receipt of such written request, the board of directors of the Bank 
in the district where the institution maintains its home office shall 
designate a state other than the state where the institution maintains 
its home office as the institution's principal place of business, 
provided all of the following criteria are satisfied:
    (i) At least 80 percent of the institution's accounting books, 
records and ledgers are maintained, located or held in such designated 
state;
    (ii) A majority of meetings of the institution's board of directors 
and constituent committees are conducted in such designated state; and
    (iii) A majority of the institution's five highest paid officers 
have their place of employment located in such designated state.
    (2) Written notice of a designation made pursuant to paragraph 
(c)(1) of this section shall be sent to the Bank in the district 
containing the designated state, FHFA and the institution.
    (3) The notice of designation made pursuant to paragraph (c)(1) of 
this section shall include the state designated as the principal place 
of business and the resulting Bank to which membership will be 
transferred.
    (4) If the board of directors of the Bank in the district where the 
institution maintains its home office fails to make the designation 
requested by the member or applicant pursuant to paragraph (c)(1) of 
this section, then the member or applicant may request in writing that 
FHFA make the designation.
    (d) Transfer of membership. (1) No transfer of membership from one 
Bank to another Bank shall take effect until the Banks involved reach 
agreement on a method of orderly transfer.
    (2) In the event that the Banks involved fail to agree on a method 
of orderly transfer, the FHFA shall determine the conditions under 
which the transfer shall take place.
    (e) Effect of transfer. A transfer of membership pursuant to this 
section shall be effective for all purposes, but shall not affect 
voting rights in the year of the transfer and shall not be subject to 
the provisions on termination of membership set forth in section 6 of 
the Bank Act (12 U.S.C. 1426) or Sec. Sec.  1263.26 and 1263.27, nor 
the restriction on reacquiring Bank membership set forth in Sec.  
1263.30.

Subpart D--Stock Requirements


Sec.  1263.19  Par value and price of stock.

    The capital stock of each Bank shall be sold at par, unless the 
Director has fixed a higher price.


Sec.  1263.20  Stock purchase.

    (a) Minimum stock purchase. Each member shall purchase stock in the 
Bank of which it is a member in an amount specified by the Bank's 
capital plan, except that each member of a Bank that has not converted 
to the capital structure authorized by the GLB Act shall purchase stock 
in the Bank in an amount equal to the greater of:
    (1) $500;
    (2) 1 percent of the member's aggregate unpaid loan principal; or
    (3) 5 percent of the member's aggregate amount of outstanding 
advances.
    (b) Timing of minimum stock purchase. (1) Within 60 calendar days 
after an institution is approved for membership in a Bank, the 
institution shall purchase its minimum stock requirement as set forth 
in paragraph (a) of this section.
    (2) In the case of a Bank that has not converted to the capital 
structure authorized by the GLB Act, an institution that has been 
approved for membership may elect to purchase its minimum stock 
requirement in installments, provided that not less than one-fourth of 
the total amount shall be purchased within 60 calendar days of the date 
of approval of membership, and that a further sum of not less than one-
fourth of such total shall be purchased at the end of each succeeding 
period of four months from the date of approval of membership.
    (c) Commencement of membership. An institution that has been 
approved for membership shall become a member at the time it purchases 
its minimum stock requirement or the first installment thereof pursuant 
to this section.
    (d) Failure to purchase minimum stock requirement. If an 
institution that

[[Page 22865]]

has submitted an application and been approved for membership fails to 
purchase its minimum stock requirement or its first installment within 
60 calendar days of the date of its approval for membership, such 
approval shall be null and void and the institution, if it wants to 
become a member, shall be required to submit a new application for 
membership.
    (e) Reports. The Bank shall make reports to FHFA setting forth 
purchases by institutions approved for membership of their minimum 
stock requirement pursuant to this section in accordance with the 
instructions provided in the Data Reporting Manual issued by FHFA, as 
amended from time to time.


Sec.  1263.21  Issuance and form of stock.

    (a) A Bank shall issue to each new member, as of the effective date 
of membership, stock in the member's name for the amount of stock 
purchased and paid for in full.
    (b) If the member purchases stock in installments, the stock shall 
be issued in installments with the appropriate number of shares issued 
after each payment is made.
    (c) A Bank that has not converted to the capital structure 
authorized by the GLB Act may issue stock in certificated or 
uncertificated form at the discretion of the Bank.
    (d) A Bank that has not converted to the capital structure 
authorized by the GLB Act may convert all outstanding certificated 
stock to uncertificated form at its discretion.


Sec.  1263.22  Adjustments in stock holdings.

    (a) Adjustment in general. A Bank may from time to time increase or 
decrease the amount of stock any member is required to hold.
    (b)(1) Annual adjustment. A Bank shall calculate annually, in the 
manner set forth in Sec.  1263.20(a), each member's required minimum 
holdings of stock in the Bank in which it is a member using calendar 
year-end financial data provided by the member to the Bank, pursuant to 
Sec.  1263.31(d), and shall notify each member of the adjustment. The 
notice shall clearly state that the Bank's calculation of each member's 
minimum stock holdings is to be used to determine the number of votes 
that the member may cast in that year's election of directors and shall 
identify the state within the district in which the member will vote. A 
member that does not agree with the Bank's calculation of the minimum 
stock requirement or with the identification of its voting state may 
request FHFA to review the Bank's determination. FHFA shall promptly 
determine the member's minimum required holdings and its proper voting 
state, which determination shall be final.
    (2) Redemption of excess shares. If, in the case of a Bank that has 
not converted to the capital structure authorized by the GLB Act and 
after the annual adjustment required by paragraph (b)(1) of this 
section is made, the amount of stock that a member is required to hold 
is decreased, the Bank may, in its discretion and upon proper 
application of the member, retire such excess stock, and the Bank shall 
pay for each share upon surrender of the stock an amount equal to the 
par value thereof (except that if at any time FHFA finds that the paid-
in capital of a Bank is or is likely to be impaired as a result of 
losses in or depreciation of the assets held, the Bank shall on the 
order of FHFA withhold from the amount to be paid in retirement of the 
stock a pro rata share of the amount of such impairment as determined 
by FHFA) or, at its election, the Bank may credit any part of such 
payment against the member's debt to the Bank. The Bank's authority to 
retire such excess stock shall be further subject to the limitations of 
section 6(f) of the Bank Act (12 U.S.C. 1426(f)).
    (c) A member's stock holdings shall not be reduced under this 
section to an amount less than required by sections 6(b) and 10(c) of 
the Bank Act (12 U.S.C. 1426(b), 1430(c)).


Sec.  1263.23  Excess stock.

    (a) Sale of excess stock. Subject to the restriction in paragraph 
(b) of this section, a member may purchase excess stock as long as the 
purchase is approved by the member's Bank and is permitted by the laws 
under which the member operates.
    (b) Restriction. Any Bank with excess stock greater than 1 percent 
of its total assets shall not declare or pay any dividends in the form 
of additional shares of Bank stock or otherwise issue any excess stock. 
A Bank shall not issue excess stock, as a dividend or otherwise, if 
after the issuance, the outstanding excess stock at the Bank would be 
greater than 1 percent of its total assets.

Subpart E--Consolidations Involving Members


Sec.  1263.24  Consolidations involving members.

    (a) Consolidation of members. Upon the consolidation of two or more 
institutions that are members of the same Bank into one institution 
operating under the charter of one of the consolidating institutions, 
the membership of the surviving institution shall continue and the 
membership of each disappearing institution shall terminate on the 
cancellation of its charter. Upon the consolidation of two or more 
institutions, at least two of which are members of different Banks, 
into one institution operating under the charter of one of the 
consolidating institutions, the membership of the surviving institution 
shall continue and the membership of each disappearing institution 
shall terminate upon cancellation of its charter, provided, however, 
that if more than 80 percent of the assets of the consolidated 
institution are derived from the assets of a disappearing institution, 
then the consolidated institution shall continue to be a member of the 
Bank of which that disappearing institution was a member prior to the 
consolidation, and the membership of the other institutions shall 
terminate upon the effective date of the consolidation.
    (b) Consolidation into nonmember--(1) In general. Upon the 
consolidation of a member into an institution that is not a member of a 
Bank, where the consolidated institution operates under the charter of 
the nonmember institution, the membership of the disappearing 
institution shall terminate upon the cancellation of its charter.
    (2) Notification. If a member has consolidated into a nonmember 
that has its principal place of business in a state in the same Bank 
district as the former member, the consolidated institution shall have 
60 calendar days after the cancellation of the charter of the former 
member within which to notify the Bank of the former member that the 
consolidated institution intends to apply for membership in such Bank. 
If the consolidated institution does not so notify the Bank by the end 
of the period, the Bank shall require the liquidation of any 
outstanding indebtedness owed by the former member, shall settle all 
outstanding business transactions with the former member, and shall 
redeem or repurchase the Bank stock owned by the former member in 
accordance with Sec.  1263.29.
    (3) Application. If such a consolidated institution has notified 
the appropriate Bank of its intent to apply for membership, the 
consolidated institution shall submit an application for membership 
within 60 calendar days of so notifying the Bank. If the consolidated 
institution does not submit an application for membership by the end of 
the period, the Bank shall require the liquidation of any outstanding 
indebtedness owed by the former member, shall settle all outstanding 
business transactions with the former

[[Page 22866]]

member, and shall redeem or repurchase the Bank stock owned by the 
former member in accordance with Sec.  1263.29.
    (4) Outstanding indebtedness. If a member has consolidated into a 
nonmember institution, the Bank need not require the former member or 
its successor to liquidate any outstanding indebtedness owed to the 
Bank or to redeem its Bank stock, as otherwise may be required under 
Sec.  1263.29, during:
    (i) The initial 60 calendar-day notification period;
    (ii) The 60 calendar-day period following receipt of a notification 
that the consolidated institution intends to apply for membership; and
    (iii) The period of time during which the Bank processes the 
application for membership.
    (5) Approval of membership. If the application of such a 
consolidated institution is approved, the consolidated institution 
shall become a member of that Bank upon the purchase of the amount of 
Bank stock required by section 6 of the Bank Act (12 U.S.C. 1426). If a 
Bank's capital plan has not taken effect, the amount of stock that the 
consolidated institution is required to own shall be as provided in 
Sec. Sec.  1263.20 and 1263.22. If the capital plan for the Bank has 
taken effect, the amount of stock that the consolidated institution is 
required to own shall be equal to the minimum investment established by 
the capital plan for that Bank.
    (6) Disapproval of membership. If the Bank disapproves the 
application for membership of the consolidated institution, the Bank 
shall require the liquidation of any outstanding indebtedness owed by, 
and the settlement of all other outstanding business transactions with, 
the former member, and shall redeem or repurchase the Bank stock owned 
by the former member in accordance with Sec.  1263.29.
    (c) Dividends on acquired Bank stock. A consolidated institution 
shall be entitled to receive dividends on the Bank stock that it 
acquires as a result of a consolidation with a member in accordance 
with applicable FHFA regulations.
    (d) Stock transfers. With regard to any transfer of Bank stock from 
a disappearing member to the surviving or consolidated member, as 
appropriate, for which the approval of FHFA is required pursuant to 
section 6(f) of the Bank Act (12 U.S.C. 1426(f)), as in effect prior to 
November 12, 1999, such transfer shall be deemed to be approved by FHFA 
by compliance in all applicable respects with the requirements of this 
section.

Subpart F--Withdrawal and Removal From Membership


Sec.  1263.26  Voluntary withdrawal from membership.

    (a) In general. (1) Any institution may withdraw from membership by 
providing to the Bank written notice of its intent to withdraw from 
membership. A member that has so notified its Bank shall be entitled to 
have continued access to the benefits of membership until the effective 
date of its withdrawal, but the Bank need not commit to providing any 
further services, including advances, to a withdrawing member that 
would mature or otherwise terminate subsequent to the effective date of 
the withdrawal. A member may cancel its notice of withdrawal at any 
time prior to its effective date by providing a written cancellation 
notice to the Bank. A Bank may impose a fee on a member that cancels a 
notice of withdrawal, provided that the fee or the manner of its 
calculation is specified in the Bank's capital plan.
    (2) A Bank shall notify FHFA within 10 calendar days of receipt of 
any notice of withdrawal or notice of cancellation of withdrawal from 
membership.
    (b) Effective date of withdrawal. The membership of an institution 
that has submitted a notice of withdrawal shall terminate as of the 
date on which the last of the applicable stock redemption periods ends 
for the stock that the member is required to hold, as of the date that 
the notice of withdrawal is submitted, under the terms of a Bank's 
capital plan as a condition of membership, unless the institution has 
cancelled its notice of withdrawal prior to the effective date of the 
termination of its membership.
    (c) Stock redemption periods. The receipt by a Bank of a notice of 
withdrawal shall commence the applicable 6-month and 5-year stock 
redemption periods, respectively, for all of the Class A and Class B 
stock held by that member that is not already subject to a pending 
request for redemption. In the case of an institution the membership of 
which has been terminated as a result of a merger or other 
consolidation into a nonmember or into a member of another Bank, the 
applicable stock redemption periods for any stock that is not subject 
to a pending notice of redemption shall be deemed to commence on the 
date on which the charter of the former member is cancelled.
    (d) Certification. No institution may withdraw from membership 
unless, on the date that the membership is to terminate, there is in 
effect a certification from FHFA that the withdrawal of a member will 
not cause the Bank System to fail to satisfy its requirements under 
section 21B(f)(2)(C) of the Bank Act (12 U.S.C. 1441b(f)(2)(C)) to 
contribute toward the interest payments owed on obligations issued by 
the Resolution Funding Corporation.


Sec.  1263.27  Involuntary termination of membership.

    (a) Grounds. The board of directors of a Bank may terminate the 
membership of any institution that:
    (1) Fails to comply with any requirement of the Bank Act, any 
regulation adopted by FHFA, or any requirement of the Bank's capital 
plan;
    (2) Becomes insolvent or otherwise subject to the appointment of a 
conservator, receiver, or other legal custodian under federal or state 
law; or
    (3) Would jeopardize the safety or soundness of the Bank if it were 
to remain a member.
    (b) Stock redemption periods. The applicable 6-month and 5-year 
stock redemption periods, respectively, for all of the Class A and 
Class B stock owned by a member and not already subject to a pending 
request for redemption, shall commence on the date that the Bank 
terminates the institution's membership.
    (c) Membership rights. An institution whose membership is 
terminated involuntarily under this section shall cease being a member 
as of the date on which the board of directors of the Bank acts to 
terminate the membership, and the institution shall have no right to 
obtain any of the benefits of membership after that date, but shall be 
entitled to receive any dividends declared on its stock until the stock 
is redeemed or repurchased by the Bank.

Subpart G--Orderly Liquidation of Advances and Redemption of Stock


Sec.  1263.29  Disposition of claims.

    (a) In general. If an institution withdraws from membership or its 
membership is otherwise terminated, the Bank shall determine an orderly 
manner for liquidating all outstanding indebtedness owed by that member 
to the Bank and for settling all other claims against the member. After 
all such obligations and claims have been extinguished or settled, the 
Bank shall return to the member all collateral pledged by the member to 
the Bank to secure its obligations to the Bank.
    (b) Bank stock. If an institution that has withdrawn from 
membership or that otherwise has had its membership terminated remains 
indebted to the Bank or has outstanding any business

[[Page 22867]]

transactions with the Bank after the effective date of its termination 
of membership, the Bank shall not redeem or repurchase any Bank stock 
that is required to support the indebtedness or the business 
transactions until after all such indebtedness and business 
transactions have been extinguished or settled.

Subpart H--Reacquisition of Membership


Sec.  1263.30  Readmission to membership.

    (a) In general. An institution that has withdrawn from membership 
or otherwise has had its membership terminated and which has divested 
all of its shares of Bank stock, may not be readmitted to membership in 
any Bank, or acquire any capital stock of any Bank, for a period of 5 
years from the date on which its membership terminated and it divested 
all of its shares of Bank stock.
    (b) Exceptions. An institution that transfers membership between 
two Banks without interruption shall not be deemed to have withdrawn 
from Bank membership or had its membership terminated.

Subpart I--Bank Access to Information


Sec.  1263.31  Reports and examinations.

    As a condition precedent to Bank membership, each member:
    (a) Consents to such examinations as the Bank or FHFA may require 
for purposes of the Bank Act;
    (b) Agrees that reports of examinations by local, state or federal 
agencies or institutions may be furnished by such authorities to the 
Bank or FHFA upon request;
    (c) Agrees to give the Bank or the appropriate Federal banking 
agency, upon request, such information as the Bank or the appropriate 
Federal banking agency may need to compile and publish cost of funds 
indices and to publish other reports or statistical summaries 
pertaining to the activities of Bank members;
    (d) Agrees to provide the Bank with calendar year-end financial 
data each year, for purposes of making the calculation described in 
Sec.  1263.22(b)(1); and
    (e) Agrees to provide the Bank with copies of reports of condition 
and operations required to be filed with the member's appropriate 
Federal banking agency, if applicable, within 20 calendar days of 
filing, as well as copies of any annual report of condition and 
operations required to be filed.

Subpart J--Membership Insignia


Sec.  1263.32  Official membership insignia.

    Members may display the approved insignia of membership on their 
documents, advertising and quarters, and likewise use the words 
``Member Federal Home Loan Bank System.''

    Dated: May 7, 2009.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
[FR Doc. E9-11329 Filed 5-14-09; 8:45 am]
BILLING CODE 8070-01-P


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