Source: https://www.federalregister.gov/documents/2010/12/09/2010-30519/use-of-community-development-loans-by-community-financial-institutions-to-secure-advances-secured
Timestamp: 2017-08-22 13:57:44
Document Index: 540920603

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Federal Register :: Use of Community Development Loans by Community Financial Institutions To Secure Advances; Secured Lending by Federal Home Loan Banks to Members and Their Affiliates; Transfer of Advances and New Business Activity Regulations
A Rule by the Federal Housing Finance Board and the Federal Housing Finance Agency on 12/09/2010
76617-76624 (8 pages)
Definitions—§ 1266.1
Secured Lending—§ 1266.2(e)
Long Term Advances—§ 1266.3
Community Development Loans as Collateral—§ 1266.7(b)(1)
Clarification of Provision—§ 1266.11
https://www.federalregister.gov/d/2010-30519 https://www.federalregister.gov/d/2010-30519
Federal Housing Finance Board, Federal Housing Finance Agency.
Prior to HERA, CFIs were defined under the Bank Act as depository institutions insured under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) with average total assets of less than $500 million, as adjusted annually for inflation thereafter. 12 U.S.C. 1422(13) (2008). Section 1211 of HERA raised the $500 million average total assets cap to $1 billion. See section 1211 Public Law No. 110-289, 122 Stat. 2790 (amending 12 U.S.C. 1422(10)). By Notice published in the Federal Register in February 2009, FHFA adjusted the $1 billion figure for inflation to $1.011 billion. 74 FR 7438 (Feb. 17, 2009). As part of FHFA's separate rulemaking addressing Bank membership for community development financial institutions, FHFA included a technical amendment to the definition of “CFI” to implement the average total asset cap increase to $1 billion made by HERA.[1] See 74 FR 22848, 22857 (May 15, 2009); 75 FR 678, 691 (Jan. 5, 2010).
Under the Bank Act, any member, including a CFI, that wishes to borrow from its Bank must pledge certain types of collateral to secure its repayment obligation on advances, and must otherwise demonstrate to the Bank that it is creditworthy. 12 U.S.C. 1430(a). Each Bank sets its own lending and collateral policies, which may vary from Bank to Bank and will apply to all borrowing members of that Bank. Prior to HERA, section 10(a)(3) of the Bank Start Printed Page 76618Act specified that a member may pledge the following types of collateral to secure an advance: (i) Fully disbursed, whole first mortgages on improved residential property not more than 90 days delinquent, or securities representing a whole interest in such mortgages; (ii) securities issued, insured or guaranteed by the U.S. Government or any agency thereof; (iii) cash or deposits of a Bank; (iv) other real estate related collateral acceptable to the Bank, provided the value of such collateral is readily ascertainable and the Bank can perfect its security interest in the collateral; and (v) for institutions that qualify as CFIs, secured loans for small business or agriculture, or securities representing a whole interest in such secured loans.[2] See 12 U.S.C. 1430(a)(3). Section 1211 of HERA amended section 10(a)(3)(E) of the Bank Act to broaden the collateral that may be pledged by CFI members to include secured loans for community development activities. Section 1211 Public Law 110-289, 122 Stat. 2790 (amending 12 U.S.C. 1430(a)(3)(E)).
In addition, prior to HERA, section 10(a)(2) of the Bank Act provided that a Bank could make a long-term advance to a member only for the purposes of providing funds to the member for residential housing finance, except that it also allowed long-term advances to CFI members for purposes of funding small business, small farm, and small agri-business lending.[3] 12 U.S.C. 1430(a)(2). Section 1211 of HERA amended section 10(a)(2)(B) of the Bank Act so that a Bank also may make long-term advances to a CFI member to fund community development activities. Section 1211, Public Law 110-289, 122 Stat. 2790 (amending 12 U.S.C. 1430(a)(2)(B)).
FHFA proposed adding definitions for “community development” and “community development loan” to the advances regulation to help implement Start Printed Page 76619the HERA provision allowing CFI members to pledge community development loans to secure advances. In the proposed rule, “community development” was defined with reference to the definition for this term adopted by CFI members' primary federal regulators under Community Reinvestment Act (CRA) regulations.[4] In turn, FHFA proposed to define “community development loan” as a loan that has community development as its primary purpose. Because FHFA did not intend the proposed definition to call into question the validity of any collateral allowed under the advances regulation to be pledged by all members, the proposed definition of “community development loan” excluded categories of eligible collateral identified in § 950.7(a) of the advances rule [5] from its scope. FHFA specifically requested comments on whether, and how, these proposed definitions might be altered to better help CFI members fund community development activities while continuing to assure that advances be secured only by high quality collateral. 75 FR at 7992.
FHFA received two comments on these definitions. Both comments urged FHFA to adopt a broader definition for “community development” that would not include the income targeting criteria inherent in the proposed definition. They argued (albeit for different reasons) that the proposed definition of “community lending” was contrary to Congressional intent in adopting section 1211 and that a broader definition would better meet Congress' reasons for including this provision in HERA. Instead of the proposed definition, the commenters suggested developing a definition based on the one used for “economic development projects” in FHFA's current Community Investment Cash Advance Programs (CICA) regulations.[6] One commenter proposed a specific definition for “community development” that included criteria that would limit the definition to projects or activities that were the recipient of any form of federal, state or local government support. The commenter believed such criteria would help identify the activity or project as one viewed by federal, state or local governments as important for the community in question.
FHFA recognizes that many loans that are extended to support community development already will be acceptable collateral for advances under existing Bank Act provisions and FHFA regulations. As a consequence, the definition excludes from the meaning of “community development loan,” any loan that qualifies as acceptable collateral under other provisions of the Bank Act and FHFA regulations. As explained when FHFA initially proposed this definition, FHFA does not intend to call into question the validity of any security pledged (or to be pledged) under the existing categories of eligible collateral. Thus, the definition of “community development loan” excludes from its scope, categories of eligible collateral now identified in § 950.7(a) of the advances rule,[7] which can be pledged by any member to secure an advance, as well as small agri-business loan, small business loan, or small farm loan, which currently are forms of acceptable collateral for CFI members.[8] The definition of “community development loan” also specifically excludes consumer loans or credit extended to one or more individuals for household, family, or other personal expenditures. This exclusion does not change the status of any loan that qualifies as eligible collateral for advances under existing categories of collateral in the Bank Act or current regulations. For example, the new language does not affect the status of home equity loans as other real estate-related collateral eligible to secure advances.
Commenters also urged that FHFA include municipal bonds within the definition of community development loans so that municipal bonds could be accepted as collateral from CFIs to secure advances. They noted that FHFA regulations already allow members to use municipal bonds as collateral to secure letters of credit where the letter of credit helps facilitate residential Start Printed Page 76620housing finance or community lending. 12 CFR 1269.2(c)(2).
Section 1266.7(b)(1) as amended by this rulemaking, however, already allows the Banks to accept from CFI members, as collateral for advances, any security to the extent that the security represents a whole interest in a secured, small agri-business, small business, small farm or community development loan. This restriction limiting the type of securities that can be pledged under the special CFI collateral provision is statutory, and the wording of § 1266.7(b)(1) closely follows that of the Bank Act. See 12 U.S.C. 1430(a)(3)(E). Extending the definition of community development loans to include all municipal securities would go beyond what is authorized in the Bank Act and would not be consistent with the statutory limitation.[9] FHFA, therefore, is not altering the final definition of community development loan as requested. CFI members, of course, can still pledge as collateral for advances any municipal bond to the extent allowed by § 1266.7(b)(1), as that provision is being amended by this rulemaking.
To implement the HERA provisions which allow CFIs to rely on long-term advances to fund “community development loans,” FHFA proposed amending the definition of “residential housing finance assets” to incorporate “community development loans” into the definition. See 75 FR at 7993. To avoid confusion, FHFA also proposed removing the reference to “community lending” from the “residential housing finance assets” definition and incorporating each element of “community lending,” as defined in § 900.2,[10] into the definition. Thus, the proposed definition specifically referred to “loans or investments providing financing for economic development projects for targeted beneficiaries” and for CFI members, to the extent not already included, “small business loans, small farm loans, small agri-business loans, or community development loans.” Other than adding “community development loans,” the proposed changes were editorial in nature and did not alter the scope of the definition for “residential housing finance assets.” No comments were received on these changes and the definition of “residential housing finance assets” is being adopted as proposed.
FHFA also proposed adding to newly designated § 1266.1 definitions for “Bank Act,” “advances,” “Bank,” and “targeted beneficiaries.” These definitions were contained in § 900.1 or § 900.2 of the FHFB rules, and FHFA proposed to carry them over to newly designated part 1266 without substantive change.[11] No comments were received on these definitions and FHFA is adopting them as proposed.
FHFA proposed amending newly designated § 1266.2 of the advances regulation to incorporate a long-standing position that any secured lending by a Bank to members is deemed an advance subject to all requirements related to advances. This position was first taken by the FHFB in 1995 by resolution; this resolution has not been rescinded and is still in effect. Fin. Brd. Res. No. 95-13 (Aug. 9, 1995). FHFA proposed incorporating this position into the regulation to prevent Banks from using forms of secured lending to members, such as reverse repurchase transactions, to avoid specific requirements and obligations associated with making advances to members, including stock purchase requirements. To assure that the proposed provision could not be circumvented by a Bank extending secured credit to an affiliate of a member, the proposed provision also prohibited secured lending to any non-member, affiliate of a member, given that such non-member affiliates would not be eligible to receive an advance under the regulations.
Commenters also pointed out that most acceptable reverse repurchase agreement counterparties would be affiliates of a Bank System member, since most major financial institutions in the United States have at least one affiliate that is a member of some Bank. They also noted that reverse repurchase agreements were an important short term liquid investment for the Banks, especially in times of economic stress when unsecured money-market investments may be a less desirable option on a risk-adjusted basis. These commenters therefore urged that the rule exclude from the prohibition on secured transactions with affiliates of members: (i) Primary dealers in government securities and (ii) other counterparties meeting the credit and other risk management requirements established by a Bank. One commenter stated that the rule should exclude broker-dealer affiliates of members from the prohibition of the rule. A number of commenters also pointed out that the provision prohibiting a Bank from Start Printed Page 76621making a secured extension of credit to “an affiliate of any member” could technically prevent the Bank from making advances to members that were affiliates of other members and urged that the language prohibiting secured lending to affiliates of members be refined in this respect.
FHFA proposed to redesignate § 950.3 of the Finance Board's advances regulation as § 1266.3, and to make certain conforming changes to the provision. No comments were received on these changes, and FHFA is adopting § 1266.3 as proposed. See 75 FR at 7993. Section 1266.3 implements section 10(a)(2) of the Bank Act, as amended by HERA, and provides that a Bank shall make long-term advances only for the purpose of enabling a member to purchase or fund new or existing residential housing finance assets, a term defined in § 1266.1 to include, for CFI members, small business loans, small farm loans, small agri-business loans, and community development loans. Thus, the only change being made in § 1266.3 is to remove, as redundant, references to small business loans, small farm loans, and small agri-business loans that were contained in former § 950.3.
FHFA proposed to implement the HERA provision allowing CFI members to pledge loans for community development activities as collateral for advances by adding “community development loans” to the list of CFI-specific collateral set forth in the redesignated § 1266.7(b)(1). No other changes were proposed to this provision. No comments were received on this provision and it is being adopted as proposed.
FHFA is also adopting language in newly designated § 1266.11 to make clear that the provision only applies to the one Bank that has not yet implemented the capital structure plan required under the Gramm-Leach-Bliley Act (GLB Act). The requirements in newly designated § 1266.11 were all adopted prior to the passage of the GLB Act in November 1999 and have not been amended since the passage of the GLB Act. See 64 FR 16788 (Apr. 6, 1999) and 58 FR 29456 (May 20, 1993). The provision addresses stock purchase and redemption requirements. The GLB Act changed these requirements for a Bank, once the Bank implemented its capital plan and converted to the capital structure required under the GLB Act. See 12 U.S.C. §§ 1426(a)(6) and (c). Banks that have converted to the GLB Act structure are required to set forth in their capital plans the requirements governing member stock purchases and member rights with regard to the redemption and repurchase of Bank stock, consistent with the regulations in 12 CFR parts 931 and 933. To avoid any confusion as to the application of § 1266.11, FHFA is amending this provision to clarify that it only applies to a Bank that has not converted to the GLB Act capital structure.
End List of Subjects Start Printed Page 76622 Start Amendment Part
1. Redesignate
2. Redesignate
Authority: 12 U.S.C. 1430b, 4511, 4513, and 4526.
§ 1264.3
Housing associate eligibility requirements.
§ 1266.1, Definition of CFI member § 925.1, each place that it appears § 1263.1.
§ 1266.1, Definition of State housing finance agency § 926.1 § 1264.1.
§ 1266.4(g)(2)(i) § 950.2(b)(2) § 1266.2(b)(2).
§ 1266.4(g)(2)(ii) § 950.2(a) § 1266.2(a).
§ 1266.5(b)(2)(ii) § 917.4 of this chapter § 917.4 of this title.
§ 1266.6(a) § 917.4 of this chapter § 917.4 of this title.
§ 1266.9(a)(1) § 950.2(c) § 1266.2(c).
§ 1266.10(a) § 917.4 of this chapter § 917.4 of this title.
§ 1266.16 §§ 950.14 and 950.17 §§ 1266.14 and 1266.17.
§ 1266.17(a) part 925 part 1263.
§ 1266.17(b)(2)(i) introductory text § 926.3(b) § 1264.3(b).
§ 1266.17(b)(2)(i)(A) § 950.7(a)(1) or (2) § 1266.7(a)(1) or (2).
§ 1266.17(b)(2)(i)(B) § 950.7(a)(3) § 1266.7(a)(3).
§ 1266.17(b)(2)(i)(B) § 926.3(b) § 1264.3(b).
§ 1266.17(b)(2)(i)(C) § 950.7(a)(4) § 1266.7(a)(4).
§ 1266.17(c)(2)(i) § 950.3(b), each time it appears § 1266.3(b).
§ 1266.17(c)(2)(ii) § 950.5(b)(2) § 1266.5(b)(2).
§ 1266.17(e)(2) part 926 part 1264.
§ 1266.17(e)(3) part 926 part 1264.
(7) For CFI members, and to the extent not already included in categories (1) Start Printed Page 76623through (6), small business loans, small farm loans, small agri-business loans, or community development loans.
§ 1266.2
Authorization and application for advances; obligation to repay advances.
Capital stock requirements; redemption of excess stock.
§ 1269.1, Definition of community lending § 950.1 of this title § 1266.1 of this chapter.
§ 1269.1, Definition of Residential housing finance § 950.1 § 1266.1.
§ 1269.1, Definition of SHFA associate § 1269.1 § 1264.1.
§ 1269.2(c) § 950.7 of this title § 1266.7 of this chapter.
§ 1269.3(a) introductory text §§ 950.17(b)(1)(i) or (ii) of this title § 1266.17(b)(1)(i) or (ii) of this chapter.
§ 1269.3(b) § 950.17(b)(2)(i)(A),(B) or (C) of this title § 1266.17(b)(2)(i)(A),(B) or (C) of this chapter.
§ 1269.4(a)(1) § 950.17(b)(2)(i)(B) § 1266.17(b)(2)(i)(B).
§ 1269.4(a)(1) § 950.17(d) § 1266.17(d).
§ 1269.4(c) part 950 part 1266.
§ 1269.5(b)(1) § 960.3 § 1269.3.
§ 1269.5(b)(2) §§ 950.7(d), 950.7(e), 950.8, 950.9 and 950.10 of this title §§ 1266.7(d), 1266.7(e), 1266.8, 1266.9 and 1266.10 of this chapter.
§ 1272.1, Definition of new business activity § 950.7(a)(4) § 1266.7(a)(4).
§ 1272.1, Definition of new business activity § 950.7(b) § 1266.7(b).
Start Printed Page 76624
§ 1272.3 introductory text § 980.4(b) § 1272.4(b).
§ 1272.3(b) introductory text § 950.7 § 1266.7.
§ 1272.3(b)(2) § 917.4 of this chapter § 917.4 of this title.
§ 1272.3(b)(3) § 950.10 § 1266.10.
§ 1272.4(a) § 980.3 § 1272.3.
§ 1272.4(a) § 980.5(a)(1) through (4) § 1272.5(a)(1) through (4).
§ 1272.4(b) § 950.7(a)(4) § 1266.7(a)(4).
§ 1272.4(b) § 980.3 § 1272.3.
§ 1272.4(c) § 980.6 § 1272.6.
§ 1272.5(a) introductory text § 980.3 § 1272.3.
§ 1272.5(a)(4) § 980.7 § 1272.7.
§ 1272.5(a)(5) § 980.7 § 1272.7.
§ 1272.5(b) § 980.6 § 1272.6.
5. As part of the transfer of the advances regulation to part 1266, this provision will be redesignated as § 1266.7(a). This provision identifies collateral that can be pledged by all Bank members to secure advances.
7. As part of the proposed transfer of the advances regulation to part 1266, this provision would be redesignated as § 1266.7(a).
10. The definition of “residential housing finance assets” in § 950.1 of the Finance Board's advances regulations incorrectly states that “community lending” is defined in § 900.1 rather than in § 900.2.