[Federal Register Volume 60, Number 208 (Friday, October 27, 1995)]
[Proposed Rules]
[Pages 54958-54979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25823]



 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 60, No. 208 / Friday, October 27, 1995 / 
Proposed Rules  

[[Page 54958]]


FEDERAL HOUSING FINANCE BOARD

12 CFR Part 933

[No. 95-34]


Membership Approval

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its regulation on membership in the Federal Home Loan Banks 
(Bank). The proposed rule will allow the 12 Banks, rather than the 
Finance Board, to approve applications for Bank membership subject to 
the standards provided in the rule. The proposed rule will require the 
Banks to apply tests and criteria for determining compliance with the 
statutory eligibility requirements for Bank membership currently used 
by the Finance Board in approving applications. The proposed rule is 
part of an effort by the Finance Board and the Banks to transfer as 
many governance functions as possible from the Finance Board to the 
Banks.

DATES: Comments must be submitted in writing to the Finance Board by 
December 26, 1995.

ADDRESSES: Written comments may be mailed to: Elaine L. Baker, 
Executive Secretary, Federal Housing Finance Board, 1777 F Street NW., 
Washington, DC 20006. Comments will be available for public inspection 
at this address.

FOR FURTHER INFORMATION CONTACT: Amy R. Maxwell, Associate Director, 
District Banks Secretariat, Office of Managing Director, (202) 408-
2882, or James H. Gray Jr., Associate General Counsel, Office of 
General Counsel, (202) 408-2538, Federal Housing Finance Board, 1777 F 
Street NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    In its role as primary regulator of the savings association 
industry and as overseer of the Banks, the Finance Board's predecessor 
agency, the former Federal Home Loan Bank Board (FHLBB), reviewed and 
approved all applications for Bank membership from federal and state 
chartered savings associations, institutions for which Bank membership 
was required. The FHLBB delegated the authority to approve membership 
applications from insurance companies and state-chartered savings banks 
insured by the Federal Deposit Insurance Corporation (FDIC), for which 
Bank membership was voluntary, to the Bank presidents acting as 
Principal Supervisory Agents of the FHLBB. See 12 U.S.C. 1437 (1988), 
repealed by Financial Institutions Reform, Recovery and Enforcement Act 
of 1989, Pub. L. No. 101-73, 103 Stat. 183 (Aug. 9, 1989) (FIRREA).
    FIRREA amended the membership provisions of the Federal Home Loan 
Bank Act, 12 U.S.C. 1421-1449 (Bank Act). Section 704 of FIRREA amended 
section 4 of the Bank Act to make commercial banks and credit unions 
eligible for Bank membership for the first time. Section 704 of FIRREA 
also revised the membership eligibility criteria. Section 702 of FIRREA 
added sections 2A and 2B to the Bank Act, establishing the Finance 
Board and enumerating its powers and duties. Section 2B of the Bank Act 
limited the Finance Board's authority to delegate responsibilities to 
the Banks. From the enactment of FIRREA in 1989 until July, 1993, all 
Bank membership applications were reviewed and approved by the Finance 
Board. In July 1993, the Finance Board delegated to its Managing 
Director the authority to approve all applications for Bank membership 
from institutions that met all of the statutory criteria and received a 
composite rating of ``1,'' ``2'' or ``3'' under the Uniform Financial 
Institutions Rating System (the regulatory examination rating system). 
See Finance Board Res. No. 90-143 (Dec. 18, 1990); Chairman's Order No. 
93-05 (July 19, 1993).
    In August 1993, the Finance Board amended its membership regulation 
to incorporate the FIRREA changes to the Bank Act. The revised 
membership regulation established the Finance Board's general policies 
pertaining to Bank membership, including specifying the appropriate 
Bank district for applicants and, member stock requirements, outlining 
procedures for consolidation of members with other members and with 
nonmembers, and for withdrawal and removal from membership. Other than 
defining certain terms, the membership regulation did not establish 
standards for compliance with the statutory membership eligibility 
criteria. See 58 FR 43542 (1993), codified at 12 CFR Part 933.
    In November 1993, the Finance Board adopted policy guidelines to 
assist staff in processing applications for Bank membership. See 
Membership Application Processing Guidelines, Finance Board Res. No. 
93-88 (Nov. 17, 1993) (Guidelines). The purpose of the Guidelines was 
to clarify the more subjective membership eligibility criteria in the 
Bank Act, such as ``character of management and * * * home-financing 
policy * * * consistent with sound and economical home financing * * 
*.'' 12 U.S.C. 1424(a)(2)(C). In the Guidelines, the Finance Board also 
delegated to the Banks authority to approve a delineated subset of 
membership applications; that is, applications from institutions 
meeting all of the criteria in the Bank Act, the membership regulation 
and the Guidelines.
    The Guidelines set forth specific, objective primarily financial 
criteria to be met in order for an applicant to be deemed in compliance 
with the statutory criteria. However, the Guidelines establish neither 
a minimum level of financial performance nor standards for evaluating 
applicants that fail to meet the requirements in the Guidelines. So, 
for instance, an application from an institution with a minimum 
composite regulatory examination rating that does not satisfy the 
criteria for delegated approval by the Banks must be evaluated by 
Finance Board staff and approved by the Managing Director pursuant to 
delegated authority. The Board of Directors of the Finance Board has 
not itself considered or acted upon any membership applications since 
authority to approve membership applications was delegated to the 
Managing Director in July 1993. Since December 1993, the Banks have 
approved 778 membership applications and the Finance Board's Managing 
Director has approved 834 membership applications, all pursuant to 
delegated authority. 

[[Page 54959]]

    The Finance Board and the Banks have been considering ways to 
transfer a variety of governance responsibilities from the Finance 
Board to the Banks since the completion of studies required by the 
Housing and Community Development Act of 1992, Pub. L. No. 102-550, 106 
Stat. 3672 (Oct. 28, 1992), including the Finance Board's own study 
completed in April 1993. See Report on the Structure and Role of the 
Bank System 153 (Apr. 28, 1993). Finance Board staff and Bank staff 
have consistently identified membership application approval as one of 
the governance responsibilities that should be devolved from the 
Finance Board to the Banks because the Banks should be allowed broad 
discretion to manage their affairs as long as the Banks comply with the 
Bank Act and Finance Board regulations. This proposed rule is designed 
to transfer authority to approve all Bank membership applications from 
the Finance Board to the Banks. The proposed rule will codify many of 
the tests and criteria for determining compliance with the statutory 
eligibility requirements that are currently in the Finance Board's 
Guidelines for approving applications.

II. Analysis of the Proposed Rule

A. Membership Application Process

1. Requirements
    Section 933.2 of the proposed rule sets forth the procedures for 
submission and review of membership applications. Under Sec. 933.2(a), 
an applicant is required to submit an application which satisfies the 
requirements of part 933 and to certify in writing that it has reviewed 
the requirements of part 933, provided the most recent, accurate and 
complete information available, and will supplement the application if 
additional relevant information becomes available prior to the Bank's 
decision on whether to approve the application and where applicable, 
prior to the Finance Board's resolution of any appeal.
    Under Sec. 933.2(b), a Bank is required to prepare a written digest 
for each applicant that describes the reasons and findings that support 
the Bank's determination whether the applicant meets the requirements 
of this part. This requirement is consistent with the requirements in 
the Guidelines.
    Under Sec. 933.2(c), the Banks are required to maintain a 
membership file for each applicant for at least three years that 
includes the digest, all documents the Bank is required to obtain and 
review under this part, any additional documents the Bank obtains 
during the application process, and the Bank's decision resolution.
    Under Sec. 933.2(d), the Banks are required to use regulatory 
financial reports and other sources independent of the applicant to 
evaluate and analyze all conclusions offered by the applicant regarding 
its membership eligibility. ``Regulatory financial report'' is defined 
in Sec. 933.1(z) of the proposed rule to include periodic financial 
reports filed by the applicant with its primary regulator, including 
quarterly call reports for commercial banks, thrift financial reports 
for thrifts, quarterly or semi-annual call reports for credit unions, 
the National Association of Insurance Commissioners' (NAIC) annual 
statements or quarterly reports for insurance companies, and other 
similar reports. ``Primary regulator'' is defined in Sec. 933.1(x) of 
the proposed rule as the chartering authority for federally chartered 
applicants, the insuring authority for federally-insured applicants 
that are not federally chartered, or the appropriate state agency for 
all other applicants. The Finance Board included Sec. 933.2(d) to 
ensure that the Banks evaluate membership applications without relying 
unduly on representations made by the applicants.
2. Decision on Application
    Section 933.3 of the proposed rule establishes the Banks' authority 
and method for making decisions on applications. Under Sec. 933.3(a), 
the Finance Board authorizes the Banks to approve membership 
applications, subject to the appeal procedure in proposed Sec. 933.5. 
The proposed rule requires that the authority to approve applications 
be exercised only by the Bank's board of directors, 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 who has 
responsibility for business development. Section 933.3(b) requires the 
Bank to prepare for each applicant a decision resolution that includes 
the Bank's decision on whether to approve the applicant and the reasons 
therefor, and states that the information in the digest is accurate and 
based on a diligent and comprehensive review of all available 
information. If the application is approved, the decision resolution 
also must state that the applicant is authorized under the laws of the 
United States and the appropriate state to become a member of, purchase 
stock in, do business with and maintain deposits in the Bank to the 
which the applicant has applied, and that the applicant meets all of 
the eligibility criteria set forth in the Bank Act and part 933. The 
Guidelines currently require the Banks to make these certifications to 
the Finance Board when recommending an application for approval.
    Section 933.3(c) requires the Bank to act on an application within 
60 calendar days of the date the Bank deems the application to be 
complete. Within three business days of the Bank's decision on an 
application, the Bank must provide the applicant and the Finance 
Board's Executive Secretary with a copy of the Bank's decision 
resolution. Section 933.3(c) is intended to ensure expeditious action 
on membership applications. The current Guidelines do not establish 
applications-processing time frames.
3. Automatic Membership
    Section 933.4 of the proposed rule provides for automatic Bank 
membership in appropriate circumstances. Section 933.4(a) continues the 
automatic membership provision in current Sec. 933.2(d) for applicants 
required by law to become a member of a Bank. Section 5(f) of the Home 
Owners' Loan Act (HOLA) requires all federally chartered savings 
associations and savings banks to be members of a Bank and to qualify 
for Bank membership in the manner provided in the Bank Act. 12 U.S.C. 
1464(f). The factors considered by the Office of Thrift Supervision 
when reviewing an application for a federal charter include the factors 
considered in determining eligibility for Bank membership. See 12 
U.S.C. 1464(e). Therefore, it would be duplicative and unnecessarily 
burdensome to require these institutions to file an additional 
application for Bank membership. Section 933.4(b) continues the 
provision in current Sec. 933.2(e) for automatic membership for insured 
depository institution members that convert from one charter type to 
another, 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 identical. 
All relationships existing between the member and the Bank at the time 
of such conversion may continue. Section 933.4(c) adds a new automatic 
membership provision for members that transfer membership from one Bank 
to another pursuant to Sec. 933.18(d) of this part.
4. Appeals
    Section 933.5 of the proposed rule establishes a process for 
appealing Bank membership decisions to the Finance Board. The appeal 
procedure is intended to ensure that membership standards are applied 
consistently by 

[[Page 54960]]
the Banks, and that similarly situated applicants are treated 
similarly. Under Sec. 933.5(a), applicants denied membership by a Bank 
may, within 90 calendar days of the Bank's decision, appeal the denial 
to the Finance Board by writing the Finance Board's Executive 
Secretary, with a copy to the Bank. The applicant's appeal must include 
a copy of the Bank's decision resolution, and a detailed statement of 
the basis for the appeal, including sufficient supporting facts, 
information, analysis and explanation.
    Under Sec. 933.5(b), within 60 calendar days of the date that a 
Bank approves an application for membership, another Bank (appellant 
Bank) may appeal to the Finance Board the determination of the 
appropriate district for membership, pursuant to Sec. 933.18 of this 
part. The appeal must be in writing and addressed to the Finance 
Board's Executive Secretary with a copy to the Bank that granted 
membership, and must include a statement of the basis for the appeal 
with sufficient facts, information, analysis and explanation to support 
the appellant Bank's contentions. As the banking industry consolidates, 
the Finance Board anticipates more questions from the Banks regarding 
the determination of an applicant's principal place of business. The 
appeals procedure will permit recourse to the Finance Board when Banks 
cannot agree on an applicant's principal place of business. The Finance 
Board invites comment on alternative means of addressing this concern. 
-
    Section 933.5(c) explains how the Finance Board will obtain the 
information necessary to decide appeals under Sec. 933.5(a) and (b). 
The Bank whose action has been appealed (appellee Bank) must provide to 
the Finance Board a complete copy of the applicant's membership file 
within five business days of receiving an appeal. Until the Finance 
Board resolves the appeal, the appellee Bank is required to provide to 
the Finance Board any new materials it receives. The Finance Board also 
may request additional information from the appellant (Bank or 
applicant), the appellee Bank, or any other party the Finance Board 
deems appropriate.
    Section 933.5(d) provides that the Finance Board must resolve 
appeals based on the requirements of the Bank Act and part 933, within 
90 calendar days of the date the appeal is filed with the Finance 
Board, after considering the record for appeal described in 
Sec. 933.5(c). When it decides an appeal, the Finance Board must follow 
the presumptions in part 933, unless the appellant or appellee Bank 
presents compelling evidence to rebut a presumption. The current 
Guidelines do not include any provision for appeals.

B. Membership Eligibility Requirements

1. Setting Membership Standards
    Like the current Guidelines, the proposed rule establishes 
objective standards for approving applications for Bank membership. The 
standard for each of the two objective statutory membership eligibility 
criteria and each of the four subjective statutory membership 
eligibility criteria are discussed below. For the objective statutory 
eligibility criteria, failure to comply with the standards established 
by the proposed rule will render an applicant ineligible for 
membership.
    For the subjective statutory eligibility criteria, including the 
requirement that an applicant's financial condition be such that 
advances may be safely made, id. Sec. 1424(a)(2)(B), and that the 
character of an applicant's management and its home financing policy be 
consistent with sound and economical home financing, id. 
Sec. 1424(a)(2)(C), the proposed rule, like the Guidelines, establishes 
objective, yet flexible, standards.
    The proposed rule establishes the presumption that if an applicant 
complies with the regulatory standards, it will be deemed to satisfy 
the statutory criteria; conversely, if an applicant does not meet the 
regulatory standards, it will be presumed, subject to rebuttal, not to 
satisfy the statutory eligibility criteria. The proposed rule, like the 
Guidelines, does allow an applicant to rebut any negative presumption, 
by presenting additional information.
    The Finance Board considered establishing more rigid ``bright-
line'' standards, but believed that the results--i.e., that an 
applicant not meeting every standard would be ineligible for 
membership, regardless of any other evidence the applicant could have 
presented to demonstrate its compliance with the statutory eligibility 
criteria--would be too harsh. ``Bright-line'' tests eliminate all 
discretion in the approval process. The Finance Board specifically 
requests comment on whether the membership eligibility standards should 
be adopted as ``bright-line'' tests or as presumptions.
2. General Eligibility Requirements
    Section 4(a)(1) of the Bank Act defines the types of financial 
institutions eligible to become Bank members as any building and loan 
association, savings and loan association, cooperative bank, homestead 
association, insurance company, savings bank, or any insured depository 
institution. Id. Sec. 1424(a)(1). The definition of insured depository 
institution in the Bank Act includes commercial banks and credit 
unions. Id. Sec. 1422(12).
    The eligibility criteria set forth in section 4(a)(1) of the Bank 
Act apply to all applicants for Bank membership. Under section 4(a)(1) 
of the Bank Act, an institution is eligible for Bank membership if the 
institution:

    (A) Is duly organized under the laws of any State or of the 
United States;
    (B) Is subject to inspection and regulation under the banking 
laws, or under similar laws, of the State or of the United States; 
and
    (C) Makes such home mortgage loans as, in the judgment of the 
[Finance] Board, are long-term loans * * *.

Id. Sec. 1424(a)(1).
    Section 4(a)(2) of the Bank Act establishes the following 
membership eligibility criteria for ``insured depository institutions'' 
that were not Bank members on January 1, 1989 (section 4(a)(2) 
criteria):

    (A) The insured depository institution has at least 10 percent 
of its total assets in residential mortgage loans;
    (B) The insured depository institution's financial condition is 
such that advances may be safely made to such institution; and
    (C) The character of its management and its home-financing 
policy are consistent with sound and economical home financing.

Id. Sec. 1424(a)(2). Although the section 4(a)(2) criteria apply only 
to ``insured depository institutions,'' the Finance Board has 
determined to extend that requirement to insurance company applicants. 
-
    Sections 933.10 through 933.13 of the proposed rule apply the 
section 4(a)(2) criteria to insured depository institution applicants. 
Section 933.16 of the proposed rule applies these criteria to insurance 
company and all other applicants. Under the Finance Board's current 
membership regulation, the financial condition criterion, section 
4(a)(2)(B), and the character of management and home financing policy 
requirement, section 4(a)(2)(C), id. Sec. 1424(a)(2)(B), (C), apply to 
every applicant. See 12 CFR 933.4(a)(4), (5). In addition, prior to the 
enactment of FIRREA in 1989, the financial condition, character of 
management and home financing policy criteria were applicable to 
insurance companies. See 47 Stat. 726 (July 22, 1932). The proposed 
rule would maintain the current law requirements, and would extend the 
section 4(a)(2)(A) 10 percent requirement to all applicants. The 
reasons for this approach are explained more fully below in the 
discussion of the 10 percent requirement. 

[[Page 54961]]

3. Duly Organized Requirement -
    Section 4(a)(1)(A) of the Bank Act provides that an institution is 
eligible for Bank membership if it is duly organized under the laws of 
any State or of the United States. Under Sec. 933.7 of the proposed 
rule, an applicant is deemed to be duly organized as required by 
section 4(a)(1)(A) of the Bank Act and Sec. 933.6(a)(1) of this part, 
if the applicant establishes that it is chartered by a state or federal 
agency as a building and loan association, savings association, 
cooperative bank, homestead association, insurance company, savings 
bank or insured depository institution. If an applicant does not 
satisfy this requirement, the applicant is ineligible for membership. 
This standard is consistent with the current Guidelines.
4. Subject to Inspection and Regulation Requirement
    Section 4(a)(1)(B) of the Bank Act provides that an institution is 
eligible for Bank membership if it is subject to inspection and 
regulation under the banking laws, or under similar laws, of any State 
or of the United States. Under Sec. 933.8 of the proposed rule, an 
applicant is deemed to meet the inspection and regulation requirement 
if the applicant can establish that it is subject to inspection and 
regulation by the Federal Deposit Insurance Corporation, the Federal 
Reserve Board, the National Credit Union Administration, the Office of 
the Comptroller of the Currency, the Office of Thrift Supervision, a 
state insurance commissioner, or other state regulatory agency 
authorized to regulate depository institutions or insurance companies. 
If an applicant does not satisfy this requirement, the applicant is 
ineligible for membership. This standard is consistent with the current 
Guidelines.
5. Makes Long-Term Home Mortgage Loans Requirement
    Section 4(a)(1)(C) of the Bank Act provides that an institution is 
eligible for Bank membership if it makes such ``home mortgage loans'' 
as, in the judgment of the Finance Board, are long-term home mortgage 
loans. Under Sec. 933.9(a) of the proposed rule, an applicant is deemed 
to meet this requirement if it originates or purchases ``long-term'' 
``home mortgage loans,'' as those terms are defined in the regulation. 
If an applicant does not satisfy this requirement, the applicant is 
ineligible for membership, unless the Finance Board, in its sole 
discretion, determines on the basis of additional information supplied 
by the applicant or otherwise, that the applicant does satisfy the 
requirement. This standard is consistent with the current Guidelines.
    The proposed rule makes one change to the current definition of 
``home mortgage loan'' at 12 CFR 933.1(j). A ``home mortgage loan'' is 
defined in the Bank Act as a loan made by a member upon the security of 
a ``home mortgage.'' 12 U.S.C. 1422(5). The Bank Act defines a ``home 
mortgage'' as a mortgage on real estate upon which is located one or 
more homes or other dwelling units, ``all of which may be defined by 
the Board,'' including ``first mortgages'' and such classes of ``first 
liens'' as are commonly given to secure advances on real estate. Id. 
Sec. 1422(6). Based on the Bank Act definition, a ``home mortgage 
loan'' essentially is a loan secured by a first mortgage on real 
property with one or more structures designed primarily for residential 
use.
    The definition of ``home mortgage loan,'' in Sec. 933.1(m) of the 
proposed rule, includes:
    a. A domestic 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 
interest in property:
    (1) One-to-four family property or multifamily property, in fee 
simple;
    (2) A leasehold on one-to-four family property or multifamily 
property under a lease of not less than 99 years which 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
    (3) 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
    b. A mortgage pass-through security that represents an undivided 
ownership interest in:
    (1) Long-term loans, provided that, at the time of issuance of the 
security, all of the loans meet the requirements of this section; or
    (2) 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 this definition.
    The Finance Board has deleted the provision allowing it to include 
additional items within this definition. Instead, Sec. 933.9(b) of the 
proposed rule allows the Finance Board the discretion to determine on 
appeal in appropriate cases that an applicant satisfies the long-term 
home mortgage loans requirement in section 4(a)(1)(C) of the Bank Act, 
even though the applicant does not make long-term home mortgage loans 
as the terms ``long-term'' and ``home mortgage loan'' are defined in 
Sec. 933.1(m) and (q) of the proposed rule.
    Section 933.1(i) of the proposed rule adds a definition for 
``domestic loan.'' A domestic loan is defined as a loan on property 
located in a state or the United States.
    Section 933.1(q) of the proposed rule revises the definition of 
``long-term'' at current 12 CFR 933.1(l) to delete the provision 
allowing the Board to change this definition without engaging in 
rulemaking.
    Section 4(a)(1)(C) of the Bank Act provides that an institution is 
eligible for Bank membership if it ``makes'' such home mortgage loans 
as, in the judgment of the Finance Board, are long-term loans. 12 
U.S.C. 1424(a)(1)(C). Thus, it is necessary to determine what 
constitutes ``making'' a home mortgage loan. Both the Finance Board and 
the FHLBB have interpreted ``makes'' to include originating and 
purchasing qualifying loans and purchasing mortgage pass-through 
securities backed by qualifying loans. Section 933.9 of the proposed 
rule does not change the substance of the current Finance Board 
regulation, 12 CFR 933.4(a)(3), which includes all such transactions 
within the scope of the ``makes'' requirement.
6. Ten Percent Residential Mortgage Loans Requirement
    Section 4(a)(2)(A) of the Bank Act provides that an insured 
depository institution is eligible for Bank membership if it has at 
least 10 percent of its total assets in residential mortgage loans. 
Under Sec. 933.10(a) an applicant is deemed to comply with the 10 
percent requirement in section 4(a)(2)(A) of the Bank Act if the 
applicant has at least 10 percent of its total assets in ``residential 
mortgage loans'' as defined in Sec. 933.1(aa) of the proposed rule. 
Since mortgage debt securities count toward satisfaction of the 10 
percent requirement, the proposed rule, like the current regulation, 
excludes the assets used to secure mortgage debt securities in 
determining whether the applicant has 10 percent of its assets in 
residential mortgage loans. Under Sec. 933.10(b), if an applicant does 
not satisfy the requirement of this section, the applicant is 
ineligible for membership, unless the Finance Board, in its sole 
discretion, determines on the basis of additional information supplied 
by the applicant or otherwise that the applicant satisfies the 
requirements of section 4(a)(2)(A) of the Bank Act. Once approved, an 
institution is not required to maintain a 10 percent residential 
mortgage loan ratio to retain Bank membership. 

[[Page 54962]]

    The Finance Board is considering whether to extend the 10 percent 
test or another specific asset test to insurance company applicants 
similar to the 10 percent test that applies to insured depository 
institution applicants. This would represent a change from the current 
Finance Board regulation, which requires applicants that are not 
insured depository institutions to have ``mortgage-related assets that 
reflect a commitment to housing finance, as determined by the [Finance] 
Board.'' 12 CFR 933.4(c). Noninsured depository institution applicants 
are not currently required to meet the 10 percent requirement, nor does 
there exist in the current regulation any objective standard to meet 
this requirement. 12 CFR 933.4 (b) and (c). The Finance Board realizes 
that, even though an insurance company may be one of the largest 
mortgage loan investors in its state, it might not be able to meet the 
10 percent test because the dollar amount of residential mortgage loan 
assets it holds, when compared to the total assets of the company, 
could constitute less than 10 percent of the company's total assets. 
However, the Finance Board also sees value in applying consistent 
membership eligibility standards to all applicants to ensure that all 
Bank members demonstrate a quantifiable minimum commitment to 
residential housing finance before they are admitted to membership.
    The Finance Board also is considering continuing the status quo by 
applying the 10 percent requirement only to depository institution 
applicants. The proposed rule continues this approach and does not 
specifically require that insurance companies have 10 percent of their 
assets in residential mortgage loans. The Finance Board requests 
comment on whether the 10 percent requirement should apply to insurance 
company applicants and whether a different test that would achieve the 
same objectives as the 10 percent test should be applied to insurance 
company applicants, and if so, what that test should be.
    a. Definition of ``residential mortgage loans.''
    To implement the Bank Act's 10 percent requirement, Sec. 933.10 of 
the proposed rule provides that an applicant is eligible for membership 
if it has at least 10 percent of its total assets in ``residential 
mortgage loans.'' The term ``residential mortgage loans'' is not 
defined in the Bank Act. The definition of ``residential mortgage 
loans'' in Sec. 933.1(aa) of the proposed rule includes the current 
definition, see 12 CFR 933.1(r), and additional loans the Finance Board 
has decided to add to the definition or is considering adding to the 
definition.
    The definition of ``residential mortgage loans'' in Sec. 933.1(aa) 
of the proposed rule, includes any one of the following types of 
domestic 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) Qualified private activity exempt facility bonds where 95 
percent or more of the net proceeds are used for the construction of 
qualified residential rental projects as defined in 26 U.S.C. 
142(a)(7).
    (6) Mortgage pass-through securities representing an undivided 
ownership interest in:
    (i) Loans that meet the requirements 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 this definition; or
    (iii) Mortgage debt securities as defined herein;
    (7) Mortgage debt securities secured by:
    (i) Loans, provided that, at the time of issuance of the security, 
all of the loans meet the requirements of this definition;
    (ii) Securities that meet the requirements 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 
this definition; or
    (8) Home mortgage loans secured by leasehold interests, as defined 
in Sec. 933.1(m)(1)(ii) of the proposed rule, except that the period of 
the lease term may be for any duration.
    The Finance Board proposes to add qualified private activity exempt 
facility bonds where 95 percent or more of the net proceeds are used 
for the construction of qualified residential rental property as 
defined in 26 U.S.C. 142(a)(7). The Internal Revenue Code (IRC) 
excludes the income from these bonds from a taxpayer's gross income, 
when used to construct qualified residential rental property. See 26 
U.S.C. 103, 141(e)(1)(A), 142(a)(7). To be ``qualified'' under the IRC, 
a multifamily residential rental project must meet one of two tests to 
ensure that it serves moderate- or low-income tenants:
    (1) 20-50 test. Twenty percent or more of the units occupied by 
individuals whose income is 50 percent or less of the area median 
income; or
    (2) 40-60 test. Forty percent or more of the units are occupied by 
individuals whose income is 60 percent or less of the area median 
income. 26 U.S.C. 142(d). The Finance Board has determined that such 
bonds are consistent with other instruments that are treated as 
``residential mortgage loans.'' Further, treating such bonds as 
``residential mortgage loans'' is consistent with the purpose of the 10 
percent requirement, to ensure that new members hold at least 10 
percent of their assets in instruments that facilitate home mortgage 
lending.
    The Finance Board also is considering including within the 
definition of ``residential mortgage loans'' shares of open-end 
management companies, also known as ``mutual funds,'' where the assets 
in the open-end management company's portfolio are comprised solely of 
instruments that are ``residential mortgage loans.''
    The Finance Board has deleted the provision allowing it to include 
additional items within the definition of residential mortgage loans. 
Instead, Sec. 933.10(b) of the proposed rule allows the Finance Board 
the discretion to determine on appeal in appropriate cases that the 
applicant has 10 percent of its assets in ``residential mortgage 
loans'' as required by section 4(a)(2)(A) of the Bank Act, even though 
the applicant does not have 10 percent of its assets in ``residential 
mortgage loans'' as that term is defined in Sec. 933.1(aa) of the 
proposed rule.
    The Finance Board specifically requests comment on how it should 
define ``residential mortgage loans'' in the final rule.
    b. Definition of ``total assets.''
    Section 4(a)(2)(a) of the Bank Act and Sec. 933.10 of the proposed 
rule provide that an applicant is eligible for membership if it has at 
least 10 percent of its ``total assets'' in residential mortgage loans. 
Section 933.1(cc) of the proposed rule adds a definition of ``total 
assets'' that includes all assets of a financial institution's 
consolidated subsidiaries located in a state or the United States, and 
all assets otherwise required to be reported on a regulatory financial 
report. Applicants will use this definition of total assets to 
determine whether they comply with the 10 percent requirement.
7. Financial Condition Requirement
    Section 4(a)(2)(B) of the Bank Act requires that, in order to be 
eligible for Bank membership, an insured depository institution's 
financial condition must be such that advances 

[[Page 54963]]
may be safely made to it. 12 U.S.C. 1424(a)(2)(B). Section 933.11 of 
the proposed rule implements this requirement and applies it to all 
applicants for membership, including applicants (such as insurance 
companies) that are not insured depository institutions. However, as 
discussed below, Sec. 933.16 of the proposed rule establishes financial 
condition standards for insurance companies that recognize the 
specialized nature of the insurance business. Section 933.11 of the 
proposed rule is modeled on the current Guidelines.
    a. Review requirement.
    Section 933.11(a) of the proposed rule, like the current 
Guidelines, sets forth the documents pertaining to financial condition 
that must be reviewed for each applicant. These documents include:
    (1) The regulatory financial reports for at least the last six 
calendar quarters and three year-ends;
    (2) The most recent annual audited financial statement, or if 
unavailable, any other such independent external annual financial 
report as the applicant's primary regulator may require, or if 
unavailable, such financial statements as the applicant may otherwise 
have available;
    (3) The most recent available regulatory examination report, a 
summary of the applicant's strengths and weaknesses as cited in the 
examination report, and a summary of actions taken by the applicant to 
respond to examination weaknesses;
    (4) A description of any outstanding enforcement actions, responses 
by the applicant and reports as required by the enforcement action; and
    (5) Any other relevant information that comes to the Bank's 
attention or reasonably should come to the Bank's attention in 
reviewing the applicant's financial condition.
    The final review requirement, that a Bank consider other relevant 
information that comes to its attention or reasonably should come to 
its attention in reviewing the applicant's financial condition, is 
intended to incorporate a due diligence concept into the membership 
approval process. For example, if the Bank were to receive information 
through the media or other sources that is inconsistent with the 
information supplied by the applicant, the Bank should evaluate the 
reliability of the alternative source. The Finance Board does not 
intend to hold the Banks accountable for finding information that might 
have been discovered only through extraordinary means, but the Finance 
Board does expect the Banks to make reasonable efforts to find 
information relevant to an applicant's financial condition.
    b. Standards of adequate ``financial condition.''
    The Bank Act does not define the term ``financial condition'' for 
purposes of membership, except that financial condition must be ``such 
that advances may be safely made.'' 12 U.S.C. 1424(a)(2)(B). The 
Finance Board believes that specific, uniform and quantifiable 
standards for evaluating financial condition are necessary to ensure 
that Bank funding may be extended in a safe and sound manner. For 
applicants other than insurance companies, Sec. 933.11(b) enumerates 
those factors to be reviewed. Because of the special nature of 
insurance companies, the Finance Board is proposing a separate section, 
Sec. 933.16 discussed below, to establish the minimum standards for 
evaluating the financial condition of insurance company applicants.
    Section 933.11(b) of the proposed rule establishes a standard for 
adequate financial condition similar to the interpretation of the term 
``financial condition'' in the current Guidelines and Finance Board 
practice. An applicant that complies with the standard is presumed to 
be in adequate financial condition for purposes of section 4 of the 
Bank Act. This presumption is rebuttable if the Bank obtains 
information to the contrary. Under Sec. 933.11(b), an applicant is 
presumed to be in adequate financial condition if:
    (1) The applicant received a composite regulatory examination 
rating by its primary regulator within two years from the date of the 
application. The Finance Board requires that the applicant be examined 
within two years of the date of the application to ensure the accuracy 
of critical information used for eligibility determinations. Federal 
and state examiners typically examine regulated entities at least every 
two years.
    (2) The applicant meets all of its minimum statutory and regulatory 
capital requirements as reported in its most recent quarter-end 
regulatory financial report filed with its primary regulator. This 
provision, modeled on the current Guidelines, supports the other 
banking regulators' efforts to ensure the safety and soundness of the 
industry by recognizing the importance of capital adequacy and 
compliance with statutory and regulatory minimum capital standards.
    (3) The applicant's most recent composite regulatory examination 
rating was ``1;'' or was ``2'' or ``3'' and the applicant also 
satisfies certain performance trend criteria. -
    The term ``regulatory examination rating'' is defined in 
Sec. 933.1(y) of the proposed rule, as a rating of capital, assets, 
management, earnings and liquidity following the guidelines of the 
Uniform Financial Institutions Rating System contained in a written 
report of examination conducted by the applicant's appropriate 
regulator, including a CAMEL rating, a MACRO rating or other similar 
ratings. The composite regulatory examination rating for an insured 
depository institution is determined according to the Uniform Financial 
Institutions Rating System (CAMEL, MACRO or equivalent scale). This 
rating system is based on an evaluation of the five critical dimensions 
of an institution's operations that reflect, in a comprehensive 
fashion, an institution's financial condition, compliance with banking 
statutes and regulations, and overall operating soundness. A composite 
regulatory examination rating of ``1'' is the highest possible rating 
on a 5 point scale. A ``5'' rating is assigned to institutions that 
require immediate corrective action and constant supervisory attention. 
The probability of failure for ``5'' rated institutions is high.
    The importance of the composite regulatory examination rating in 
the membership approval process may be illustrated in the breakdown of 
the ratings assigned to applicants approved by the Finance Board since 
FIRREA--all but one institution approved for membership have been rated 
``1,'' ``2'' or ``3''; the single ``4'' rated institution approved for 
membership has since been upgraded. No ``5'' rated institutions have 
been approved for membership.
    Using the Uniform Financial Institutions Rating System to evaluate 
membership applicants reduces the documentation requirements for 
applicants, limits the potential for the Banks to be perceived by 
applicants as another layer in the financial regulatory structure, adds 
considerable efficiency to the application process and provides an 
independent assessment by those responsible for the soundness of the 
entity. The Uniform Financial Institutions Rating System is not used to 
evaluate insurance company applicants.
    Under the proposed rule, an applicant with a recent composite 
regulatory examination rating of ``1'' meets the minimum performance 
standard in Sec. 933.11(b)(3). A composite regulatory examination 
rating of ``2'' or ``3'' may be an acceptable performance standard 
under Sec. 933.11(b)(3) if the applicant also meets additional 
performance trend 

[[Page 54964]]
thresholds. These thresholds are designed to identify trends in the 
institution's key performance areas by reviewing six calendar quarters 
of financial data. The performance trend measures include: (1) positive 
earnings in 4 of the 6 most recent calendar quarters, (2) nonperforming 
assets not exceeding 10 percent of the applicant's total assets in the 
most recent calendar quarter, and (3) a ratio of loan loss reserves to 
nonperforming assets of 60 percent or greater during 4 of the 6 most 
recent calendar quarters. These performance trends are in the current 
Guidelines. The Finance Board also is considering setting the 
performance trend for nonperforming assets at eight percent of the 
applicant's total assets in the most recent calendar quarter and 
specifically requests comment on this alternative.
    The term ``nonperforming assets'' is defined in Sec. 933.1(u) of 
the proposed rule as the sum of loans and leases reported on a 
regulatory financial report that have been past due for 90 days or 
longer; loans and leases on a nonaccrual basis; restructured loans and 
leases (not already reported as nonperforming); and foreclosed real 
estate, except that nonperforming assets shall be as defined by the 
National Credit Union Administration (NCUA) for credit union 
applicants. The Finance Board is considering substituting a specific 
list of assets that the NCUA would regard as nonperforming assets for a 
credit union. The term ``loan loss reserves'' is defined in 
Sec. 933.1(p) of the proposed rule as a specified balance sheet account 
held to fund potential losses on loans or leases. The Finance Board 
requests comment on all aspects of the standard for adequate financial 
condition.
    The Finance Board has designed the proposed rule to ensure that no 
single measure of financial condition is determinative. An applicant 
with a regulatory examination rating of ``1'' may not have an adequate 
financial condition if the Bank uncovers compelling evidence to the 
contrary, as described below in the discussion of Sec. 933.17 of the 
proposed rule. Similarly, an applicant with a low regulatory 
examination rating could be admitted to membership if the applicant 
demonstrates other compelling evidence of an adequate financial 
condition. The Finance Board encourages all financial institutions 
interested in home mortgage lending to apply for Bank membership.
    The performance trend thresholds in Sec. 933.11(b)(3) measure 
financial performance based on quarterly financial data. However, 
Sec. 933.11(b)(3)(iv) provides that applicants that are not required to 
report financial data on a quarterly basis to their primary regulator 
may report the information required in Sec. 933.11(b)(3)(i)-(iii) on a 
semiannual basis.
    c. Eligible collateral not considered.
    The Bank Act requires that an institution have a ``financial 
condition such that advances may be safely made.'' 12 U.S.C. 
1424(a)(2)(B). The Finance Board considered interpreting the Bank Act 
to presume that any applicant with ``eligible collateral'' would meet 
the financial condition requirement of section 4(a)(2)(B) of the Bank 
Act. However, since the Finance Board seeks to avoid having the Banks 
become lenders of last resort to failing or weak institutions, the 
Finance Board has determined that a minimum level of financial analysis 
should be required for all applicants as a prerequisite to membership. 
Section 933.11(c) of the proposed rule states that the availability of 
sufficient eligible collateral to secure advances to the applicant is 
presumed and will not be considered in determining whether an applicant 
meets the financial condition criteria required by section 933.6(a)(5).
    The Finance Board seeks public comment on whether the financial 
condition standards incorporated in the proposed rule or other 
performance trends or measures of financial condition should be 
incorporated in the final regulation.
8. Character of Management Requirement
    Section 4(a)(2)(C) of the Bank Act requires that the ``character'' 
of an applicant's management be ``consistent with sound and economical 
home financing.'' 12 U.S.C. 1424(a)(2)(C).
    a. Review requirement. Section 933.12 of the proposed rule sets out 
the review requirement and the standards to be used to determine 
whether an applicant may be presumed to have the character of 
management required by the Bank Act and Sec. 933.6(a)(6) of this part. 
Section 933.12(a) requires the Bank to review the following to evaluate 
an applicant's character of management:
    (1) The names of directors and senior officers;
    (2) The most recent regulatory financial report;
    (3) The most recent audited financial statement, or if unavailable, 
other such independent external financial report that the applicant's 
primary regulator may require, or if unavailable, such financial 
statements that the applicant may otherwise have available;
    (4) Enforcement actions;
    (5) Certain pending criminal, civil or administrative matters;
    (6) Information concerning potential monetary liabilities, material 
pending law suits or unsatisfied judgments; and
    (7) Any other document that comes to the Bank's attention or 
reasonably should come to the Bank's attention in reviewing the 
applicant's character of management.
    The term ``enforcement action'' is defined in Sec. 933.1(k) of the 
proposed rule as any written notice, directive, order or agreement 
initiated by an applicant or its appropriate regulator to address any 
operational, financial, managerial or other deficiencies of the 
applicant identified by the appropriate regulator. ``Appropriate 
regulator'' is defined in Sec. 933.1(e) of the proposed rule and 
includes the applicant's primary regulator and any officer, agency, 
supervisor or other entity that has regulatory authority over, or is 
empowered to institute enforcement action against, an applicant.
    As explained above in the discussion of the financial condition 
review requirement, the Finance Board realizes that Sec. 933.12(a)(7) 
makes the Bank responsible for determining what additional documents it 
should review to evaluate an applicant's character of management. The 
Banks will have to make this determination on a case-by-case basis. The 
Finance Board expects the Banks to exercise due diligence, but does not 
expect the Banks to take extraordinary measures or incur great expense 
to comply with this review requirement. For example, in the past, 
several Banks have performed computer database searches to verify that 
an applicant was making full disclosure of potential character of 
management issues. The Finance Board cites this practice as one 
relatively quick and inexpensive means by which a Bank may verify 
character of management.
    b. Standards of adequate ``Character of Management.''
    Section 933.12(b) of the proposed rule establishes the character of 
management standards. An applicant that meets these standards is deemed 
to have the character of management required by the Bank Act and 
Sec. 933.6(a)(6) of this part. This presumption is rebuttable. The 
elements of the character of management standard are that:
    (1) Neither the applicant nor any of its directors or senior 
officers is subject to or operating under any enforcement action 
instituted by an appropriate regulator;
    (2) Neither the applicant nor any of its directors or senior 
officers has been the subject of criminal, civil or administrative 
proceedings reflecting upon creditworthiness, business 

[[Page 54965]]
judgment or moral turpitude since the most recent examination;
    (3) There are no known or potential civil, criminal, or 
administrative monetary liabilities, material pending law suits or 
unsatisfied judgments against the applicant, its directors or senior 
officers since the most recent examination; and
    (4) The applicant provides the written certification required in 
Sec. 933.12(c), described below.
    An applicant that does not meet the character of management 
standards can still be considered for membership as provided in 
Sec. 933.17 of the proposed rule, if the applicant presents a 
sufficient explanation of its failure to meet the character of 
management standards. The character of management standards in the 
proposed rule are based on the current Guidelines.
    c. Written certification.
    Section 933.12(c) of the proposed rule requires a written 
certification either by a majority of the board of directors of the 
applicant, or by an individual with authority to act on behalf of the 
board of directors of the applicant, concerning the character of 
management standards described above. An applicant must provide either 
an unqualified certification that there are no enforcement actions, 
objectionable proceedings, or objectionable liabilities, or, if that is 
not possible, the applicant must provide a qualified certification that 
includes a detailed explanation regarding any exceptions noted. An 
applicant that provides a qualified certification is presumed not to 
have the character of management required by the Bank Act and 
Sec. 933.6(a)(6) of this part, but this presumption may be rebutted.
    The Finance Board is continuing the current policy of applying the 
character of management requirements in Sec. 933.12 to all applicants, 
rather than just insured depository institution applicants.
    The Finance Board has found the written certification to be the 
best way to surface any character of management issues, and to get an 
explanation of those issues because the burden of disclosure is placed 
on the applicant. The Finance Board requests public comment on the 
character of management review requirement and standards incorporated 
in the proposed rule, including alternative character of management 
measures that should be considered for the final regulation.
9. Home Financing Policy Requirement
    Section 4(a)(2)(C) of the Bank Act also requires that an 
applicant's home financing policy be ``consistent with sound and 
economical home financing.'' 12 U.S.C. 1424(a)(2)(C).
    Section 933.13(a) of the proposed rule establishes the standards a 
Bank must use to evaluate an applicant's home financing policy. If an 
applicant meets the standards, the applicant is deemed to comply with 
the home financing policy requirement of section 4(a)(2)(C) of the Bank 
Act and Sec. 933.6(a)(7) of this part. This presumption is rebuttable. 
Section 933.13(a) of the proposed rule is based on the home financing 
policy standards in the Guidelines.
    Under Sec. 933.13(a), an applicant that has been evaluated for 
Community Reinvestment Act (CRA) performance within four years from the 
date of application and has received a CRA rating of ``satisfactory'' 
or better on its most recent compliance examination, is presumed to 
meet the home financing policy requirement.
    Section 933.13(b) requires an applicant that is not subject to the 
CRA, or an applicant that received a ``needs to improve'' rating on its 
most recent CRA performance evaluation but received a ``satisfactory'' 
or better rating on its prior CRA performance evaluation, to file as 
part of its application a written justification that demonstrates how 
and why the applicant's credit policies and lending practices (if 
applicable) are consistent with the Bank System's housing finance 
mission.
    The Finance Board acknowledges that CRA is not a perfect method for 
evaluating whether an institution's home financing policy is 
``consistent with sound and economical home financing.'' CRA 
evaluations are based on whether a financial institution meets the 
credit needs of its assessment area, rather than on its mortgage 
lending activity. See 60 FR 22180 (May 4, 1995) to be codified at 12 
CFR 25.22. Further, CRA does not consider whether a financial 
institution's home financing policy is ``sound and economical.'' Id. 
The Finance Board seeks comment on the use of CRA as a proxy for the 
home financing policy criterion and suggestions for alternative 
measures that the Finance Board might consider.
    Since neither the Congress nor the Finance Board have yet 
specifically defined the Bank System's housing finance mission, the 
Finance Board also acknowledges limitations in requesting a written 
justification demonstrating how and why an applicant's policies are 
consistent with the Bank System's housing finance mission. The Finance 
Board requests comment on how institutions might best provide the 
requisite justification.
    The Finance Board is continuing its current policy of applying the 
home financing policy requirements in Sec. 933.17 to all applicants. 
Currently, to determine whether an insurance company applicant's home-
financing policy is adequate, the Guidelines require that the applicant 
provide evidence that the applicant engages in, or intends to engage 
in, various housing related activities. Under the proposed rule, an 
insurance company will be subject to the same requirements as all other 
applicants.
    An applicant that does not comply with the home financing policy 
standard may still be considered for membership if the applicant can 
rebut the presumption that it does not have an adequate home financing 
policy, as provided in Sec. 933.17 of the proposed rule.
    The Finance Board requests comment on the home financing policy 
standards in the proposed rule and on alternative measures of the 
adequacy of an applicant's home financing policy that should be 
considered for the final regulation.
10. De Novo Insured Depository Institution Applicants
    Section 933.14 of the proposed rule codifies certain exceptions to 
the membership eligibility standards for de novo or newly chartered 
insured depository institution applicants that are currently in the 
Guidelines. An insured depository institution applicant that provides 
to a Bank written confirmation from its primary regulator that it has 
been chartered for less than three years or is otherwise considered a 
de novo insured depository institution by the applicant's primary 
regulator will receive special consideration for membership 
eligibility.
    Under Sec. 933.14(a)(1), a de novo applicant that has not filed 
regulatory financial reports for the last six quarters and three year-
ends shall provide any such regulatory financial reports as the 
applicant has filed. Under Sec. 933.14(a)(2), a de novo applicant shall 
provide its most recent annual audited financial statement, or if 
unavailable, other such independent external annual financial report as 
the applicant's primary regulator may require, or if unavailable, a de 
novo applicant shall, at a minimum, provide financial reports for at 
least six calendar quarters of operation.
    Section 933.14(a)(3) of the proposed rule provides that if a de 
novo applicant has not yet received a composite regulatory examination 
rating from its primary regulator, the applicant shall provide a 
preliminary or informal 

[[Page 54966]]
written regulatory examination rating from the applicant's primary 
regulator, if a preliminary or informal rating is acceptable to the 
Bank. Under Sec. 933.14(a)(4) of the proposed rule, a de novo applicant 
need not meet the performance trend criteria in Sec. 933.11(b)(3)(i)-
(iii) of the proposed rule, if the de novo applicant has completed 
regulatory financial reports for at least six full quarters of 
operation and has complied with its regulatory business plan, either as 
confirmed in writing by the de novo applicant's primary regulator or 
based on a written analysis provided by the applicant that demonstrates 
its substantial compliance with its regulatory business plan as 
determined by the Bank.
    Section 4(a)(2) of the Bank Act makes a special exception to the 10 
percent requirement for de novo insured depository institution 
applicants. The Bank Act specifically provides that a de novo applicant 
may be admitted to membership if it complies with the 10 percent 
requirement within 1 year after commencement of its operations. See 12 
U.S.C. Sec. 1424(a)(2). The proposed rule continues the practice in 
current Guidelines requiring that applicants, other than mandatory 
members, must provide financial reports for at least six calendar 
quarters of operation in order for the Bank to evaluate the applicant's 
financial condition. Therefore, most de novo applicants already will 
have been in operation for more than one year at the time of 
application. However, the provision in section 4(a)(2) of the Bank Act 
currently applies and, under the proposed rule, will continue to apply 
during the first year of operation of a de novo applicant that is 
required by law to be a member and is automatically admitted to 
membership without satisfying the 10 percent requirement pursuant to 
Sec. 933.4(a) of the proposed rule.
    Under Sec. 933.14(b) of the proposed rule, the Bank may presume 
that a de novo applicant that has not yet received a CRA performance 
evaluation has a home financing policy as required by section 
4(a)(2)(C) of the Bank Act and Sec. 933.6(a)(7), if the Bank's digest 
establishes that the de novo applicant has a preliminary or informal 
written CRA performance evaluation of ``satisfactory'' or better. 
Alternatively, the Bank may presume compliance with the home financing 
policy requirement if the Bank's digest establishes that the de novo 
applicant has submitted a written justification acceptable to the Bank 
of how the applicant intends to support the Bank System's housing 
finance mission. The Guidelines are consistent with the approach taken 
in the proposed rule.
11. Recent and Pending Merger Applicants
    The Finance Board, based on its general supervisory authority over 
the Banks, 12 U.S.C. 1422a, 1422b(a)(1), and its authority to interpret 
the statutory membership eligibility requirements, id. Sec. 1424, 
proposes special standards for applicants involved in a recent or 
pending merger to ensure that the information evaluated to determine 
eligibility is appropriate for the entity that results from the merger. 
Standards for recent and pending merger applicants are not provided in 
the Bank Act.
    Section 933.15 of the proposed rule largely codifies the special 
eligibility requirements that recent and pending merger applicants must 
satisfy under the current Guidelines, in addition to or in place of the 
previously described eligibility requirements. To be considered a 
``pending merger applicant'' or a ``recent merger applicant,'' an 
applicant must meet two tests, a timing test and a materiality test 
defined in Sec. 933.15(a) of the proposed rule. For ``pending merger 
applicants,'' the timing test is whether the applicant is a party to a 
merger or acquisition agreement that is expected to be consummated 
within two calendar quarters of submission of the membership 
application. The materiality test is whether the applicant accounts for 
75 percent or less of the combined assets of the resulting entity at 
the time of application.
    For ``recent merger applicants,'' the timing test is whether the 
applicant has merged with or acquired another institution within the 
six calendar quarters prior to submission of the membership 
application. The materiality test is whether the applicant accounts for 
75 percent or less of the combined assets of the resulting entity at 
the time of application.
    Section 933.15(b) of the proposed rule establishes an additional 
review requirement that a Bank shall include in its digest for each 
recent or pending merger applicant. The general information required 
includes: (1) The name of each entity involved and its charter type; 
(2) a general statement of the financial condition of each entity; (3) 
a brief statement of the business reasons for the merger or 
acquisition; and (4) the names and positions of management of the 
resulting entity.
    Section 933.15(c) of the proposed rule establishes the special 
membership eligibility standards for recent and pending merger 
applicants. A recent or pending merger applicant shall be deemed to be 
in compliance with section 4(a) of the Bank Act and Sec. 933.6(a) of 
the proposed rule, subject to rebuttal, only if the recent or pending 
merger applicant satisfies the requirements of part 933 as modified and 
supplemented by Sec. 933.15(c). Section 933.15(c)(1) establishes the 
financial condition standard for a recent merger applicant. For recent 
merger applicants that do not yet have a composite regulatory 
examination rating subsequent to the merger or acquisition, each party 
(other than existing Bank members) to the merger or acquisition must 
satisfy the recent examination requirement, the capital requirements 
and the minimum performance standards in Sec. 933.11(b). Section 
933.15(c)(1)(A) of the proposed rule provides that, to the extent a 
recent merger applicant does not yet have regulatory financial reports 
for the six most recent calendar quarters needed to calculate 
performance trends, the applicant must prepare pro forma combined 
financial statements for those calendar quarters in which actual 
combined regulatory financial reports are unavailable.
    Section 935.15(c)(2) establishes the financial condition standard 
for a pending merger applicant. Since a pending merger has by 
definition not been consummated, the applicant cannot provide a 
composite regulatory examination rating for the combined entity as 
required by Sec. 933.11(b)(1). In lieu of that, each party to the 
merger or acquisition, except an incumbent Bank member, is required by 
Sec. 933.15(c)(2)(A) of the proposed rule to satisfy all of the 
requirements of Sec. 933.11(b).
    Section 933.15(c)(2)(B) of the proposed rule requires that in 
addition to each party to a pending merger individually satisfying all 
of the financial condition standards in Sec. 933.11(b), the pending 
merger applicant must satisfy the capital requirements and the 
performance trend requirements in Sec. 933.11(b)(2) and (3) as a 
combined entity based on pro forma combined financial statements to be 
prepared by the applicant for the six most recent calendar quarters.
    Section 933.15(c)(3) provides that the determination of the 
character of management of a recent or pending merger applicant for 
purposes of Sec. 933.12 of the proposed rule shall be based on an 
evaluation of the directors and senior officers of the resulting 
entity. Section 933.15(c)(4) provides that for a pending merger 
applicant or for a recent merger applicant that does not yet have a CRA 
performance evaluation on a combined basis for the 

[[Page 54967]]
merged entity, the determination of whether the merger applicant's home 
financing policy satisfies the requirements of Sec. 933.13 shall be 
based on a review of the most recent CRA performance evaluation 
available for each party to the merger or acquisition.
12. Insurance Company Applicants
    To become a Bank member, the Bank Act requires that an insurance 
company applicant meet the membership eligibility requirements set 
forth in section 4(a)(1) of the Bank Act. See 12 U.S.C. 1424(a)(1)(A)-
(C); Sec. 933.6(a)(1), (2) and (3) of the proposed rule, discussed in 
part II(B) above. For the reasons discussed in part II(B)(6) above, the 
Finance Board proposes to apply the section 4(a)(2) criteria to all 
applicants for Bank membership, including insurance company applicants, 
even though the Bank Act specifically applies the section 4(a)(2) 
criteria only to insured depository institution applicants. See 12 
U.S.C. 1424(a)(2).
    a. Inspection and regulation.
    Insurance companies are subject to state, not federal, regulation 
and, therefore, the standards applicable to insurance companies are not 
uniform. Every United States insurance company is subject to 
examination and regulation by the state insurance department in its 
domiciliary state, as well as to some level of regulation by the state 
insurance department in each state where the insurance company 
applicant is licensed to do business. State insurance laws are similar 
to federal banking laws in that they require the appropriate regulator 
to monitor whether the insurance company has complied with minimum 
capital and reserve, financial condition, asset valuation and various 
consumer related requirements.
    The standards used to examine and regulate insurance companies vary 
from state to state. Some states adhere to the uniform standards 
established by the National Association of Insurance Commissioners 
(NAIC), while other states either do not conduct examinations of 
insurance companies pursuant to the NAIC standards or do not conduct 
on-site examinations. Thus, there is no single objective measurement 
applicable to all insurance companies. The Finance Board specifically 
requests comment on whether the degree of inspection and regulation 
imposed by a particular state should be a factor in determining whether 
an insurance company applicant satisfies the ``inspection and 
regulation'' requirement. For example, the Finance Board seeks comment 
on whether it should require that an insurance company applicant be 
regulated and examined by an NAIC accredited state insurance 
commissioner in order to satisfy the ``inspection and regulation'' 
requirement.
    b. Financial condition.
    The differences between the regulatory scheme for insurance 
companies and the regulatory scheme for insured depository institutions 
has led the Finance Board to propose a separate set of financial 
condition standards for insurance company applicants. Section 933.16 of 
the proposed rule establishes financial condition standards for 
insurance company applicants that differ from the financial condition 
standards applicable to other applicants under Sec. 933.11.
    Section 933.16(a) of the proposed rule defines certain terms that 
are used only in this section.
    Section 933.16(b) of the proposed rule establishes performance 
standards for insurance company applicants.
    (1) Examination rating and independent rating.
    Section 933.16(b)(1) requires the Bank to review the most recent 
examination report of an insurance company applicant by its primary 
regulator. Most insurance company examination reports do not include a 
rating; however, several private firms rate insurance company 
performance. Therefore, the Finance Board also requires that an 
insurance company applicant have a rating from one of the five 
principal private companies that rate insurance companies, A.M. Best 
Company, Duff & Phelps, Inc., Moody's Investor Service, Inc., Standard 
& Poor's Corp., or Weiss Research, Inc. Relying in part on the 
independent rater's evaluation of an insurance company applicant 
reduces documentation requirements and makes the application process 
more efficient.
    Section 933.16(b)(2) of the proposed rule requires that an 
insurance company applicant's most recent examination indicate no major 
adverse findings pertaining to the applicant's financial condition.
    (2) Capital requirement.
    Section 933.16(b)(3) of the proposed rule requires that an 
insurance company applicant meets all of its minimum statutory and 
regulatory capital requirements and the NAIC capital standards as 
reported in its most recent quarter-end or year-end regulatory 
financial report filed with its primary regulator.
    (3) Minimum performance standard.
    Section 933.16(b)(4) of the proposed rule establishes the minimum 
performance standard for an insurance company applicant. Under 
Sec. 933.16(b)(4)(i), the applicant's most recent composite insurance 
company rating must have been ``strong,'' defined in the proposed rule 
as: ``A-'' or above from A.M. Best Company; ``AA-'' or above from Duff 
& Phelps, Inc.; ``Aa'' or above from Moody's Investor Service, Inc.; 
``AA'' or above from Standard & Poor's Corp.; or ``A'' from Weiss 
Research, Inc.
    Alternatively, under Sec. 933.16(b)(4)(ii), an insurance company 
applicant can establish an acceptable financial condition if it has an 
``adequate'' rating and earnings. An ``adequate'' rating is defined in 
the proposed rule as: ``C+'' to ``B++'' from A.M. Best Company; ``BB-'' 
to ``A+'' from Duff & Phelps, Inc.; ``Ba'' to ``A'' from Moody's 
Investor Service, Inc.; ``BB'' to ``A'' from Standard & Poor's Corp.; 
or ``B'' or ``C'' from Weiss Research, Inc. To establish that it has 
adequate earnings, an insurance company applicant must have positive 
annualized earnings in two of the three most recent calendar years.
    (4) Minimum performance ratios.
    (i) Overall ratios.
    All insurance company applicants also must meet certain minimum 
performance ratios established by Sec. 933.16(b)(5) of the proposed 
rule during the most recent year-end or quarter-end period. Section 
933.16(b)(5)(i) defines certain terms that are used only in this 
paragraph. Section 933.16(b)(5)(ii) establishes the overall minimum 
performance ratios for insurance company applicants.
    Section 933.16(b)(5)(ii)(A) establishes a premium to surplus ratio 
standard that is designed to measure the adequacy of an insurance 
company's reserves for absorbing above-average losses. To calculate 
this ratio, divide net premiums written by total capital and surplus. 
To meet the standard, an applicant's net premiums may not exceed three 
times the level of capital and surplus. Section 933.16(a)(7) defines 
the term ``net premiums written'' as the total consideration paid for 
an insurance contract during a specified period of time, net of 
reinsurance assumed and ceded.
    Section 933.16(a)(8) defines the term ``reinsurance'' as 
transactions in which an assuming enterprise, known as a reinsurer, 
assumes, for a premium, all or part of a risk undertaken originally by 
another insurer.
    Section 933.16(a)(9) defines the term ``reinsurance assumed'' as 
all premiums generated by policies issued to assume a liability, in 
whole or in part, of another insurer that is already covering the risk 
with a policy.
    Section 933.16(a)(10) defines the term ``reinsurance ceded'' as all 
premiums generated by policies or coverage purchased from another 
insurer that 

[[Page 54968]]
transfer liability, in whole or in part, from direct or reinsurance 
policies.
    Section 933.16(a)(14) defines the term ``surplus'' as the total of 
common and preferred capital stock, aggregate write-ins for other than 
special surplus funds, gross paid-in and contributed surplus, surplus 
notes and unassigned funds, less treasury stock.
    Section 933.16(b)(5)(ii)(B) establishes a change in net premiums 
written ratio standard that is designed to measure the stability of an 
insurance company's operation. Major increases or decreases in net 
premiums written may indicate a lack of stability in company operations 
or an abrupt entry into new product lines or sales territory. To 
calculate this ratio, divide the change in net premiums written between 
the two most recent consecutive calendar years by the total net 
premiums written in the first year. To meet the standard, an 
applicant's ratio must be between -10 percent and +50 percent.
    Section 933.16(b)(5)(ii)(C) establishes a surplus relief ratio 
standard that is designed to measure the insurance company's level of 
dependence on net income generated by reinsurance activities to fund 
capital and surplus. Dependence on income from reinsurance ceded 
premiums may indicate that company management believes current capital 
and surplus to be inadequate. To calculate the surplus relief ratio, 
divide the net of commissions and expenses generated by reinsurance 
ceded and assumed by total capital and surplus. To meet the standard, 
an applicant's surplus relief ratio must be less than 30 percent.
    Section 933.16(b)(5)(ii)(D) establishes an adequacy of investment 
income ratio standard that is designed to measure whether the insurance 
company's investment income is adequate to cover contractual interest 
obligations on policies and funds held on deposit. To calculate this 
ratio, divide net investment income by the sum of total tabular 
interest required on life insurance, accident and health reserves, and 
total interest credited on funds held on deposit. Section 933.16(a)(15) 
defines the term ``tabular interest'' as interest, required by the 
primary regulator, to be set aside to cover all contractual 
obligations.
    Section 933.16(a)(11) defines the term ``reserves'' as funds set 
aside for possible losses on insurance policies, annuities, claims 
unpaid, funds held for policyholders, and deposit funds.
    To meet the adequacy of investment income ratio standard, an 
applicant's net investment income must provide no less than 1.25 times 
the coverage on total funds held in reserves to pay interest on 
contractual obligations and funds held on deposit.
    Section 933.16(b)(5)(ii)(E) establishes a change in capital and 
surplus ratio standard that is designed to provide an overall 
measurement of improvement or deterioration in an insurance company's 
financial condition. To calculate this ratio, divide the net change in 
capital and surplus between the two most recent consecutive calendar 
years, by total capital and surplus in the first year. To meet this 
standard, an applicant's ratio must be between -10 percent and +50 
percent.
    (ii) Solvency ratios.
    Section 933.16(b)(5)(iii) establishes the solvency ratios for 
insurance company applicants. --
    Section 933.16(b)(5)(iii)(A) establishes a highly liquid ratio 
standard that is designed to measure the relationship between highly 
liquid assets and those liabilities that can be withdrawn or must be 
paid by the company in less than 30 days.
    Section 933.16(a)(4) defines the term ``highly liquid assets'' as 
cash or cash equivalent assets readily convertible to cash, including 
marketable Class 1 (highest investment grade) publicly traded bonds, 
marketable preferred and common stock, short-term investments, and 
investment income due. To calculate this ratio, divide highly liquid 
assets by annuity and deposit fund reserves less reserves with no 
withdrawal privileges, separate accounts and reinsurance.
    To meet the standard, an applicant's highly liquid ratio must be no 
less than: (1) 75 percent on traditional life insurance products; (2) 
85 percent on interest sensitive life insurance products; (3) 85 
percent on individual annuity insurance products; (4) 100 percent on 
group annuity insurance products; (5) 79 percent on property and 
liability insurance products; (6) 75 percent on accident and health 
insurance products; and (7) 50 percent on disability income insurance 
products.
    Section 933.16(b)(5)(i)(A) defines ``traditional life insurance 
products'' as insurance business that consists of individual term life 
insurance contracts, individual permanent fixed value life insurance 
contracts, or policies that consist of fixed premiums, fixed dollar 
amounts of contract, or fixed reserves (cash value) established by each 
state.
    Section 933.16(b)(5)(i)(B) defines ``interest sensitive life 
insurance products'' as insurance business that consists of individual 
life insurance policies characterized by flexible premiums, dollar 
amounts of contract that can vary, and reserves which represent a pool 
of assets such as mutual funds that are held for the benefit of, and 
support the investment return to, policy holders.
    Section 933.16(b)(5)(i)(D) defines ``individual and group annuity 
insurance products'' as insurance business that consists of contracts 
that accumulate and disburse retirement benefits to individual 
policyholders or to companies for their employees, hold pension deposit 
funds, or distribute and hold funds under guaranteed interest 
contracts.
    Section 933.16(b)(5)(i)(F) defines ``property insurance products'' 
as insurance business that consists of policies where the majority of 
premiums go to cover losses to real property, automobiles or similar 
tangible assets.
    Section 933.16(b)(5)(i)(G) defines ``liability insurance products'' 
as insurance business that consists of policies that cover losses 
arising from actions taken by individuals or companies, including 
losses from litigation or mutual agreements as to the amount of a 
claim, such as product liability, medical malpractice and worker's 
compensation.
    Section 933.16(b)(5)(i)(C) defines ``accident and health insurance 
products'' as insurance business that consists of coverage for care 
such as basic hospital expense, basic surgical expense, dental care, 
specific hospital reimbursement, long-term nursing home or home care 
expenses for the aged or disabled, major medical expense, and Medicare 
supplemental insurance.
    Section 933.16(b)(5)(i)(E) defines ``disability income insurance 
products'' as insurance business that consists of contracts that pay 
income periodically to insureds who are unable to work as a result of 
sickness or injury.
    Section 933.16(b)(5)(iii)(B) establishes a current ratio standard 
that is designed to measure the relationship between liquid assets and 
liabilities that are available to meet a company's obligations if the 
obligations are paid in an orderly fashion in the normal course of 
business. Section 933.16(a)(6) defines the term ``liquid assets'' as 
installment premiums booked but deferred and not yet due, cash, accrued 
investment income, marketable Class 1 (highest investment grade 
quality) publicly traded bonds and marketable Class 2 (high investment 
grade quality) publicly traded bonds, marketable preferred and common 
stock, cash, short-term investments, and investment income due, less 
investments in affiliated companies and excess of real estate over five 
percent of liabilities.
    To calculate the current ratio, divide liquid assets by annuity, 
ordinary life, 

[[Page 54969]]
and deposit fund reserves, less reserves with no withdrawal privileges, 
separate accounts, reinsurance, and policy loans. -
    Section 933.16(a)(12) defines the term ``separate accounts'' as 
assets and liabilities maintained by an insurance company predominately 
to fund fixed-benefit or variable annuity contracts and pension plans. 
The contract holder assumes the investment risk while the insurance 
company receives a fee for managing or maintaining the investments.
    To meet the standard, an applicant's current ratio must be no less 
than: (1) 60 percent on traditional life insurance products; (2) 75 
percent on interest sensitive life insurance products; (3) 75 percent 
on individual and group annuity insurance products; (4) 87 percent on 
property and liability insurance products; (5) 75 percent on accident 
and health insurance products; and (6) 50 percent on disability income 
insurance products.
    Section 933.16(b)(5)(iii)(C) establishes an adjusted liabilities to 
adjusted surplus ratio standard that is designed to measure whether an 
insurance company's surplus account is adequate in relation to its 
level of current contractual obligations outstanding.
    Section 933.16(a)(1) defines the term ``adjusted liabilities'' as 
total statutory liabilities less separate account liabilities, asset 
valuation reserves, and interest maintenance reserves. Section 
933.16(a)(13) defines the term ``statutory liabilities'' as the total 
of funds set aside to pay future claims and operating expenses, 
including separate account liabilities and funds held for the benefit 
of others, as established under the accounting rules and techniques 
permitted by the NAIC. Examples of statutory liabilities are policy 
reserves, premiums collected in advance, commissions and expenses 
payable, and provisions for policyholder dividends.
    Section 933.16(a)(3) defines the term ``asset valuation reserves'' 
as reserves on the liability side of the balance sheet that are 
established by the primary regulator to guard against fluctuations in 
the value of securities and to absorb all unrealized capital gains and 
losses and certain realized gains and losses on investment activity.
    Section 933.16(a)(5) defines the term ``interest maintenance 
reserves'' as reserves on the liability side of the balance sheet that 
are established to hold the amount of realized capital gains and losses 
on fixed income securities that result from overall interest rate 
changes.
    Section 933.16(a)(2) defines the term ``adjusted surplus'' as 
surplus plus asset valuation reserves and interest maintenance 
reserves.
    To calculate the adjusted liabilities to adjusted surplus ratio, 
divide adjusted liabilities by adjusted surplus. To meet the standard, 
an applicant's adjusted liabilities to adjusted surplus ratio must not 
exceed: (1) 10 to 1 on traditional life insurance products; (2) 10 to 1 
on interest sensitive life insurance products; (3) 10 to 1 on 
individual and group annuity insurance products; (4) 3 to 1 on property 
and liability insurance products; (5) 3 to 1 on accident and health 
insurance products; and (6) 5 to 1 on disability income insurance 
products.
13. Rebuttable Presumptions
    For each membership eligibility criteria required by the Bank Act 
and this part, the Finance Board, based on its general supervisory 
authority over the Banks, 12 U.S.C. 1422a, 1422b(a)(1), and its 
authority to interpret the Bank Act's membership requirements, id. 
Sec. 1424, is proposing to establish flexible standards. In the 
proposed rule, an applicant that meets those standards is presumed to 
be in compliance with the statutory membership eligibility criteria. 
So, too, applicants not meeting the standards are presumed not to be in 
compliance with the Bank Act criteria. The proposed rule provides that 
these presumptions may be rebutted if the applicant provides compelling 
or substantial evidence, depending on the standard at issue, or if the 
Bank otherwise obtains compelling evidence to the contrary. Section 
933.17 of the proposed rule establishes the method by which a 
presumption may be rebutted.
    This approach is similar to the current Guidelines, in that it 
allows an applicant that fails to meet a standard to establish an 
alternative basis for complying with the statutory membership 
eligibility criteria.
    Under Sec. 933.17(a) of the proposed rule, even if an applicant 
meets all of the standards, it may not be admitted to membership if the 
Bank obtains compelling evidence to overcome the presumption that the 
applicant is in compliance with the Bank Act and the general 
eligibility requirements of Sec. 933.6(a).
    Section 933.17(b) provides that an applicant that does not meet all 
of the standards or that is unable to provide information sufficient 
for the Bank to evaluate whether it meets the standards, may 
nevertheless have the opportunity to rebut the presumption that it is 
therefore not in compliance with the Bank Act and the general 
eligibility requirements in Sec. 933.6(a).
    The remaining provisions of section 933.17 describe specific 
rebuttal procedures. Section 933.17(c) of the proposed rule sets out 
the requirements for rebutting the presumption of noncompliance with 
the financial condition standards. Under Sec. 933.17(c)(1), for each 
variance from the required minimum regulatory examination rating, an 
applicant must prepare a written justification that provides compelling 
evidence that the applicant is in the financial condition required by 
Sec. 933.6(a)(4) of the proposed rule, notwithstanding the variance. 
The Finance Board is proposing a compelling evidence standard to rebut 
a low regulatory examination rating, a rating of ``4'' or ``5,'' 
because of the importance of the regulatory examination rating in 
determining an applicant's financial condition.
    Under section 933.17(c)(2) of the proposed rule, for each variance 
from a performance trend criterion required by Sec. 933.11(b)(3), the 
applicant must prepare a written justification that provides 
substantial evidence that the applicant is in an adequate financial 
condition, notwithstanding the variance. The Finance Board is proposing 
a substantial evidence standard to rebut the failure to meet a 
performance trend standard because, while the performance trend 
criteria are important, they are less important than the regulatory 
examination ratings in evaluating financial condition.
    Section 933.17(d) of the proposed rule sets out the requirements 
for rebutting the presumption of noncompliance with the character of 
management standards. Under Sec. 933.17(d)(1) of the proposed rule, if 
an applicant or any of its directors or senior officers is subject to 
or operating under an enforcement action, the applicant must provide 
written confirmation from its appropriate regulator that the applicant, 
its directors or senior officers are in substantial compliance with all 
aspects of the enforcement action. Alternatively, an applicant may 
prepare a written analysis stating each action the applicant, director 
or senior officer is required to take by the enforcement action, the 
actions actually taken by the applicant, director or senior officer, 
and whether the applicant regards this as substantial compliance. If 
the Bank is not certain that the applicant has substantially complied 
with all aspects of the enforcement action, the Bank must consult the 
applicant's appropriate regulator.
    Under Sec. 933.17(d)(2) of the proposed rule, if an applicant or 
any of its directors or senior officers is subject to criminal, civil 
or administrative 

[[Page 54970]]
proceedings that reflect on creditworthiness, business judgment or 
moral turpitude since the last examination, the applicant must provide 
written confirmation from the applicant's primary regulator that the 
proceedings will not likely result in enforcement action. 
Alternatively, the applicant may prepare a written analysis of the 
severity of the pending charges and any mitigating actions taken by the 
applicant, director or senior officer. If the Bank is uncertain whether 
the proceedings will result in enforcement action, the Bank must 
consult the applicant's primary regulator.
    Under Sec. 933.17(d)(3) of the proposed rule, if there are any 
material known or potential civil, criminal or administrative monetary 
liabilities, pending lawsuits, or unsatisfied judgments against the 
applicant or any of its directors or senior officers as of the most 
recent quarter-end, the applicant must provide written confirmation 
from its primary regulator that the matter will not likely cause the 
applicant to fall below its minimum capital requirements. 
Alternatively, the applicant may provide a written analysis of each 
matter, 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. If the Bank is 
uncertain whether the matter will cause the applicant to fall below its 
minimum capital requirements, the Bank must consult the applicant's 
primary regulator.
    Section 933.17(e) of the proposed rule sets out the requirements 
for rebutting the presumption of noncompliance with the home financing 
policy standards. If an applicant received a ``substantial non-
compliance'' rating on its most recent CRA performance evaluation, or 
two consecutive ``needs to improve'' CRA ratings, or has not received a 
CRA performance evaluation within four years from the date of the 
membership application, the applicant must provide written confirmation 
from its primary regulator of the applicant's recent satisfactory CRA 
performance, including any corrective action that substantially 
improved upon the deficiencies cited in any recent CRA performance 
evaluation. Alternatively, the applicant may provide a written analysis 
demonstrating that the applicant's low CRA rating is unrelated to 
housing finance, or providing substantial evidence that the applicant's 
home financing credit policies and lending practices (if applicable) 
are consistent with the Bank System's housing finance mission. The 
Finance Board is proposing a compelling evidence standard to overcome 
the presumption of an inadequate home financing policy because of the 
likelihood that a ``substantial non-compliance'' rating or two 
consecutive ``needs to improve'' ratings indicate a poor home financing 
policy.
    The Finance Board has made no change to Sec. 933.18, Determination 
of appropriate Bank district for membership, other than conforming 
citations to the proposed rule. For the sake of brevity, conforming 
change to the citations in subparts D through I of part 933 are set out 
in a table. Part 933 as revised will be set out in its entirety when 
the final rule is published.

III. Regulatory Flexibility Act

    The proposed rule implements statutory requirements binding on all 
applicants for Bank membership, regardless of their size. The Finance 
Board is not at liberty to make adjustments in those requirements to 
accommodate small entities. The Finance Board has not imposed any 
additional regulatory requirements that will have a disproportionate 
impact on small entities. The proposed rule would, to some extent, 
reduce the tests and criteria for determining compliance with statutory 
eligibility requirements that currently are used by the Finance Board 
in approving membership applications. Therefore, it is certified, 
pursuant to section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 
605(b), that this proposed rule, if promulgated as a final rule, would 
not have a significant economic impact on a substantial number of small 
entities.

Paperwork Reduction Act

    The Finance Board has submitted to the Office of Management and 
Budget (OMB) an analysis of membership approval collections of 
information contained in Secs. 933.2, 933.3, 933.5, and 933.7 through 
933.17 of the proposed rule, described more fully in part II of the 
Supplementary Information, as well as an analysis of other information 
collection requirements in redesignated Secs. 933.18, 933.22, 933.25, 
933.26 and 933.31 of the current membership regulation, which are not 
otherwise affected by this proposed rule. These information collections 
are necessary to enable the Finance Board and/or the Banks to determine 
whether applicants qualify for Bank membership and to satisfy various 
statutory requirements that apply to FHLBank members. Responses are 
required to obtain or retain a benefit. See 12 U.S.C. 1424, 44 U.S.C. 
3512.
    The information collections will be used by Finance Board and/or 
Bank staff as part of the membership process to determine the 
eligibility of applicants for Bank membership under the Bank Act and 
Finance Board regulation, the amount of stock that each member is 
required to hold pursuant to statutory requirements, information the 
Finance Board must collect to comply with statutory requirements in the 
event of a member's withdrawal from membership, and information the 
Finance Board is required by statute to collect to determine a member's 
actual principal place of business. Confidentiality of information 
obtained from respondents pursuant to the collections of information 
will be maintained by the Finance Board as required by applicable 
statute, regulation and agency policy. Books or records relating to 
these collections of information must be retained as provided in the 
regulation or proposed rule. -
    Likely respondents and/or recordkeepers will be the types of 
financial institutions eligible to become Bank members under the Bank 
Act, 12 U.S.C. 1424(a)(1), including any building and loan association, 
savings and loan association, cooperative bank, homestead association, 
insurance company, savings bank, or insured depository institution; the 
Banks; and the Finance Board. Potential respondents are not required to 
respond to the collections of information unless the regulation 
collecting the information displays a currently valid control number 
assigned by the OMB. See 44 U.S.C. 3512(a).
    The estimated annual reporting and recordkeeping hour burden is:
    a. Number of respondents--6,412.
    b. Total annual responses--6,412.
    Percentage of these responses collected electronically 0%.
    c. Total annual hours requested--59,152.1.
    d. Current OMB inventory--38,889.6.
    e. Difference--20,262.5.
    The estimated annual reporting and recordkeeping cost burden is:
    a. Total annualized capital/startup costs--0.
    b. Total annual costs (O&M)--$1,683,923.95.
    c. Total annualized cost requested--1,683,923.95.
    d. Current OMB inventory--1,754,181.95.
    e. Difference--($70,258.00).
Comments concerning the accuracy of the burden estimates and 
suggestions for reducing the burden may be submitted to the Finance 
Board in writing at the address listed above. 

[[Page 54971]]

    The collections of information have been submitted to OMB for 
review in accordance with section 3507(d) of the Paperwork Reduction 
Act of 1995, 44 U.S.C. 3507(d). Comments regarding the proposed 
collections of information may be submitted in writing to the Office of 
Information and Regulatory Affairs of OMB, Attention: Desk Officer for 
Federal Housing Finance Board, Washington, DC 20503, by December 26, 
1995.

List of Subjects in 12 CFR Part 933

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

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

PART 933--MEMBERS OF THE BANKS

    1. The heading for part 933 is revised as set forth above.
    1a. The authority citation for part 933 continues to read as 
follows:

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

    2. The table of contents to part 933 is revised to read as follows:

Subpart A--Definitions

Sec.
933.1  Definitions.

Subpart B--Membership Application Process

933.2  Membership application requirements.
933.3  Decision on application.
933.4  Automatic membership.
933.5  Appeals.

Subpart C--Eligibility Requirements

933.6  General eligibility requirements.
933.7  Duly organized requirement.
933.8  Subject to inspection and regulation requirement.
933.9  Makes long-term home mortgage loans requirement.
933.10  Ten percent requirement
933.11  Financial condition requirement.
933.12  Character of management requirement.
933.13  Home financing policy requirement.
933.14  De novo insured depository institution applicants.
933.15  Recent and pending merger applicants.
933.16  Financial condition standards for insurance company 
applicants.
933.17  Rebuttable presumptions.
933.18  Determination of appropriate Bank district for membership.

Subpart D--Stock Requirements

933.19  Par value and price of stock.
933.20  Stock purchase.
933.21  Issuance and form of stock.
933.22  Adjustments in stock holdings.
933.23  Purchase of excess stock.

Subpart E--Consolidations Involving Members

933.24  Consolidation of members.
933.25  Consolidations involving nonmembers.

Subpart F--Withdrawal and Removal From Membership

933.26  Procedure for withdrawal.
933.27  Procedure for removal.
933.28  Automatic termination of membership for institutions placed 
in receivership.

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

933.29  Orderly liquidation of advances and redemption of stock.

Subpart H--Reacquisition of Membership

933.30  Reacquisition of membership.

Subpart I--Bank Access to Information

933.31  Reports and examinations.

Subpart J--Membership Insignia

933. 32  Official membership insignia.


Subparts C Through I of Part 933  [Redesignated as Subparts D Through 
J]

    3. Subparts C through I of Part 933 are redesignated as Subparts D 
through J, respectively.


Secs. 933.6 Through 933.19  [Redesignated as Secs. 933.19 Through 
933.32]

    4. Sections 933.6 through 933.19 are redesignated as Secs. 933.19 
through 933.32, respectively.
    5. Subpart A of part 933 is revised to read as follows:

Subpart A--Definitions


Sec. 933.1  Definitions.

    For purposes of this part:
    (a) Act means the Federal Home Loan Bank Act, as amended (12 U.S.C. 
1421 through 1449).
    (b) Aggregate unpaid load principal means the aggregate unpaid 
principal of a subscriber's or member's home mortgage loans, home 
purchase contracts, and similar obligations.
    (c) Annualized adjusted earnings means net earnings, excluding 
extraordinary items such as income received from or expense incurred in 
sales of securities or fixed assets.
    (d) Appropriate Federal banking agency has the same meaning as used 
in 12 U.S.C. 1813(q) and, for federally insured credit unions, shall 
mean the National Credit Union Administration.
    (e) Appropriate regulator means any officer, agency, supervisor or 
other entity that has regulatory authority over, or is empowered to 
institute enforcement action against, an applicant.
    (f) Bank means a Federal Home Loan Bank established under the 
authority of the Act.
    (g) Board means the Federal Housing Finance Board.
    (h) Combination business or farm property means real property for 
which the total appraised value is attributable to residential, and 
business or farm uses.
    (i) Domestic loan means a loan on property located in a state or 
the United States.
    (j) Dwelling unit means a single room or a unified combination of 
rooms designed for residential use.
    (k) Enforcement action means any written notice, directive, order 
or agreement initiated by an applicant or its appropriate regulator to 
address any operational, financial, managerial or other deficiencies of 
the applicant identified by the appropriate regulator.
    (l) 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.
    (m) Home mortgage loan means:
    (1) A domestic 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
    (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 (m)(1) of 
this section; 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 (m)(1) of 
this section.
    (n) Institutions which are eligible to make application to become 
members means for purposes of 12 U.S.C. 1431(e)(2)(A), any building and 
loan association, savings association, cooperative bank, homestead 
association, insurance company, savings bank or any insured depository 

[[Page 54972]]
institution, regardless of whether the institution applies for or would 
be approved for membership.
    (o) Insured depository institution means an insured depository 
institution as defined in 12 U.S.C. 1422(12).
    (p) Loan loss reserves means a specified balance-sheet account held 
to fund potential losses on loans or leases.
    (q) Long-term means a term to maturity of five years or greater.
    (r) 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)).
    (s) Member means an institution that has been approved for 
membership in a Bank and has purchased capital stock in the Bank in 
accordance with Secs. 933.20 or 933.24 of this part.
    (t) Multifamily property means:
    (1) Real property that is solely residential and includes five or 
more dwelling units; or
    (2) Real property that includes five or more dwelling units 
combined with commercial units, provided that the property is primarily 
residential; and
    (3) Property that includes, but is not limited to, nursing homes, 
dormitories and homes for the elderly.
    (u) Nonperforming assets means the sum of loans and leases reported 
on a regulatory financial report that have been past due for 90 days or 
longer; loans and leases on a nonaccrual basis; restructured loans and 
leases (not already reported as nonperforming); and foreclosed real 
estate, except that nonperforming assets shall be as defined by the 
National Credit Union Administration for credit union applicants.
    (v) Nonresidential real property means real property that is not 
used for 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, 
except as otherwise determined by the Board, in its discretion.
    (w) 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.
    (x) Primary regulator means the chartering authority for federally-
chartered applicants, the insuring authority for federally-insured 
applicants that are not federally-chartered; or the appropriate state 
agency for all other applicants.
    (y) Regulatory examination rating means a rating of capital, 
assets, management, earnings and liquidity following the guidelines of 
the Uniform Financial Institutions Rating System contained in a written 
report of examination conducted by the applicant's appropriate 
regulator, including a CAMEL rating, a MACRO rating, or other similar 
ratings.
    (z) Regulatory financial report means a financial report that an 
applicant is required to file with its primary regulator on a specific 
periodic basis, including the quarterly call report for commercial 
banks, thrift financial report for thrifts, quarterly or semi-annual 
call report for credit unions, the National Association of Insurance 
Commissioners' annual or quarterly report for insurance companies and 
other similar reports.
    (aa) Residential mortgage loan means any one of the following types 
of domestic 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) Qualified private activity exempt facility bonds where 95 
percent or more of the net proceeds are used for the construction of 
qualified residential rental projects as defined in 20 U.S.C. 
142(a)(7);
    (6) Mortgage pass-through securities representing an undivided 
ownership interest in:
    (i) Loans that meet the requirements of paragraphs (aa)(1) through 
(4) of this section 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 (r)(1) through (4) of 
this section; or
    (iii) Mortgage debt securities as defined in paragraph (aa)(7) of 
this section;
    (7) Mortgage debt securities secured by:
    (i) Loans, provided that, at the time of issuance of the security, 
all of the loans meet the requirements of paragraphs (aa)(1) through 
(4) of this section;
    (ii) Securities that meet the requirements of paragraph (aa)(6) of 
this section; 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 (aa)(1) through (5) of this section; or
    (8) Home mortgage loans secured by a leasehold interest, as defined 
in paragraph (m)(1)(ii) of this section, except that the period of the 
lease term may be for any duration.
    (bb) State means a State of the United States, the District of 
Columbia, Guam, Puerto Rico or the U.S. Virgin Islands.
    (cc) Total assets means cash and balances due from depository 
institutions, held to maturity securities, available-for-sale 
securities, federal funds sold and securities purchased under 
agreements to resell (in domestic subsidiaries), loans and lease 
financing receivables, assets held in trading accounts (in domestic 
offices of the company and its domestic subsidiaries), premiums and 
fixed assets, other real estate owned, investments in unconsolidated 
subsidiaries and associated companies, customers' liability to the 
reporting bank on acceptances outstanding, intangible assets, and other 
assets.
    6. Subpart B of part 933 is revised to read as follows:

Subpart B--Membership Application Process


Sec. 933.2  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 certification by a 
majority of the applicant's directors or by an individual with 
authority to act on behalf of the applicant of the following: 

[[Page 54973]]

    (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 the 
application, and if the Bank's decision is appealed pursuant to 
Sec. 933.5 of this part, prior to resolution of any appeal by the 
Board.
    (b) Digest. The Bank shall prepare a written digest for each 
applicant stating whether or not the applicant meets each of the 
requirements in Secs. 933.6 to 933.18 of this part, 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 membership and the resolution of any appeal to the Board. 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 Secs. 933.6 to 
933.18 of this part, including those documents required to establish or 
rebut a presumption under this part, shall be described in and attached 
to the digest. If an applicant's primary regulator requires return of a 
regulatory examination report, the date that the report is returned 
shall be noted in the digest.
    (3) Additional documents. Any document submitted by the applicant, 
or otherwise obtained or generated by the Bank, concerning the 
applicant.
    (4) Decision resolution. Decision resolution described in 
Sec. 933.3(b) of this part.
    (d) Independent evaluation. The Bank shall use regulatory financial 
reports and other sources independent of the applicant to evaluate and 
analyze all conclusions offered by the applicant regarding the 
applicant's eligibility for membership. No applicant shall be admitted 
to membership until the Bank is satisfied that the applicant meets the 
requirements of the Act and this part independent of any 
representations by the applicant.


Sec. 933.3  Decision on application.

    (a) Authority. The Board authorizes the Banks to approve or deny 
all applications for membership, subject to Sec. 933.5 of this part. 
The Bank may delegate the authority to approve membership applications 
only to 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 resolution of its board of directors signed by a majority of the 
directors or by an officer with delegated authority to approve 
membership applications. The decision resolution shall state:
    (1) That the information in the digest is accurate and is based on 
a diligent and comprehensive review of all available information; and
    (2) The Bank's decision and the reasons therefor. Decisions to 
approve an application should specifically state 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, that the applicant meets all of the membership 
eligibility criteria of the 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. Within three business days of a Bank's decision on an 
application, the Bank shall provide the applicant and the Board's 
Executive Secretary with a copy of the Bank's decision resolution.


Sec. 933.4  Automatic membership.

    (a) Automatic membership for mandatory members. Any institution 
required by law to become a member of a Bank automatically shall become 
a member of the Bank of the district in which its principal place of 
business is located upon the purchase of stock in that Bank pursuant to 
Sec. 933.20(b)(1) of this part.
    (b) 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 identical. 
In such case, all relationships existing between the member and the 
Bank at the time of such conversion may continue.
    (c) Automatic membership for transfers. Any member whose membership 
is transferred pursuant to Sec. 933.18(d) of this part automatically 
shall become a member of the Bank to which it transfers.


Sec. 933.5  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 the Board.
    (2) Documents. The applicant's appeal shall be addressed to the 
Executive Secretary, Federal Housing Finance Board, 1777 F Street, 
N.W., Washington, D.C. 20006, with a copy to the Bank, and shall 
include the following documents:
    (i) Bank's decision. 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 support the applicant's contentions.
    (b) Appeals by Banks. Within 60 days of the date that a Bank grants 
an application for membership, another Bank (appellant Bank) may file a 
written appeal with the Board of the determination of the appropriate 
district for membership pursuant to Sec. 933.18 of this part, by 
writing to the Board's Executive Secretary with a copy to the Bank that 
granted membership. The appeal shall include a statement of the basis 
for appeal by the appellant Bank with sufficient facts, information, 
analysis and explanation to support the appellant Bank's contentions.
    (c) Record for appeal.--(1) Copy of membership file. Within five 
business days of receiving an appeal, the Bank whose action has been 
appealed (appellee Bank) shall provide the Board with a complete copy 
of the applicant's membership file. Until the Board resolves the 
appeal, the appellee Bank shall supplement the materials provided to 
the Board as new materials are received.
    (2) Additional information. The Board may request additional 
information or further supporting arguments from the appellant, the 
appellee Bank or any other party that the Board deems appropriate.
    (d) Deciding appeals. The Board shall consider the record for 
appeal described in paragraph (c) of this section and shall resolve the 
appeal based on the requirements of the Act and this part within 90 
calendar days of the date the appeal is filed with the Board. In 
deciding the appeal, the Board shall follow the presumptions in this 
part, unless the appellant or appellee Bank presents compelling 
evidence to rebut a presumption. 

[[Page 54974]]

    7. Subpart C of part 933 is added to read as follows:

Subpart C--Eligibility Requirements


Sec. 933.6  General eligibility requirements.

    (a) Requirements. Any building and loan association, savings and 
loan association, cooperative bank, homestead association, insurance 
company, savings bank, or insured depository institution, upon 
application satisfying all of the requirements of the 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 of the United 
States;
    (2) It is subject to inspection and regulation under the banking 
laws, or under similar laws, of any State or the United States;
    (3) It makes long-term home mortgage loans;
    (4) It has at least ten percent of its total assets in residential 
mortgage loans;
    (5) Its financial condition is such that advances may be safely 
made to it;
    (6) The character of its management is consistent with sound and 
economical home financing; and
    (7) Its home-financing policy is consistent with sound and 
economical home financing.
    (b) 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. 933.7  Duly organized requirement.

    An applicant shall be deemed to be duly organized as required by 
section 4(a)(1)(A) of the Act and Sec. 933.6(a)(1) of this part, 
subject to rebuttal, if it is chartered by a state or federal agency as 
a building and loan association, savings association, cooperative bank, 
homestead association, insurance company, savings bank or insured 
depository institution.


Sec. 933.8  Subject to inspection and regulation requirement.

    An applicant shall be deemed to meet the inspection and regulation 
requirement of section 4(a)(1)(B) of the Act and Sec. 933.6(a)(2) of 
this part, subject to rebuttal, if it is inspected and regulated by the 
Federal Deposit Insurance Corporation, the Federal Reserve Board, the 
National Credit Union Administration, the Office of the Comptroller of 
the Currency, the Office of Thrift Supervision, a state insurance 
commissioner or other state regulatory agency authorized to regulate 
depository institutions or insurance companies.


Sec. 933.9  Makes long-term home mortgage loans requirement.

    (a) Requirement. An applicant shall be deemed to meet the makes 
long-term mortgage loans requirement of section 4(a)(1)(C) of the Act 
and Sec. 933.6(a)(3) of this part, subject to rebuttal, if the 
applicant originates or purchases long-term home mortgage loans.
    (b) Ineligible. If an applicant does not satisfy the requirement in 
paragraph (a) of this section, the applicant is ineligible for 
membership, unless the Board, in its sole discretion, determines on 
appeal, on the basis of additional information supplied by the 
applicant or otherwise, that the applicant satisfies the requirements 
of section 4(a)(1)(C) of the Act.


Sec. 933.10  Ten percent requirement.

    (a) Insured depository institution applicants. Except as provided 
in Sec. 933.14(b) of this part, an insured depository institution 
applicant shall be deemed to be in compliance with the ten percent 
requirement of section 4(a)(2)(A) of the Act and Sec. 933.6(a)(4) of 
this part, subject to rebuttal, if, as of the date of the application, 
the applicant had at least ten percent of its total assets, as reported 
to its primary regulator, in residential mortgage loans, except that 
any assets used to secure mortgage debt securities as described in 
Sec. 933.1(aa)(7) of this part shall not be used to meet this 
requirement.
    (b) Noninsured depository institution applicants. A noninsured 
depository institution applicant shall be deemed to be in compliance 
with the 10 percent requirement of section 4(a)(2)(A) of the Act and 
Sec. 933.6(a)(4) of this part, subject to rebuttal, if the applicant 
has mortgage-related assets that reflect a commitment to housing 
finance, as determined by the Board.
    (c) Ineligible. If an applicant does not satisfy the requirements 
of this section, the applicant is ineligible for membership, unless the 
Board, in its sole discretion, determines on appeal, on the basis of 
additional information supplied by the applicant or otherwise, that the 
applicant otherwise satisfies the requirements of section 4(a)(2)(A) of 
the Act.


Sec. 933.11  Financial condition requirement.

    (a) Review requirement. Except as provided in Sec. 933.14 of this 
part, in determining whether an applicant has complied with the 
financial condition requirement of section 4(a)(2)(B) of the Act and 
Sec. 933.6(a)(5) of this part, the Bank shall obtain as a part of the 
membership application, and consider each of the following documents:
    (1) Financial report. The regulatory financial reports for the last 
six calendar quarters and three year-ends;
    (2) Financial statement. The most recent annual audited financial 
statement, or if unavailable, any other such independent external 
annual financial report as the applicant's primary regulator may 
require, or if unavailable, such financial statements as the applicant 
may otherwise have available;
    (3) Examination report. The most recent available regulatory 
examination report, a summary of the applicant's strengths and 
weaknesses as cited in the examination report, and a summary of actions 
taken by the applicant to respond to examination weaknesses;
    (4) Enforcement actions. A description of any outstanding 
enforcement actions, responses by the applicant and reports as required 
by the enforcement action; and
    (5) Additional information. Any other relevant information that 
comes to the Bank's attention or reasonably should come to the Bank's 
attention in reviewing the applicant's financial condition.
    (b) Standards. Except as provided in Secs. 933.14(a) and 933.16 of 
this part, an applicant shall be deemed to be in compliance with the 
financial condition requirement of section 4(a)(2)(B) of the Act and 
Sec. 933.6(a)(5) of this part, subject to rebuttal, if:
    (1) Recent examination. The applicant has received a composite 
regulatory examination rating by its primary regulator within two years 
from the date of application;
    (2) Meets capital requirement. The applicant meets all of its 
minimum statutory and regulatory capital requirements as reported in 
its most recent quarter-end regulatory financial report filed with its 
primary regulator; and
    (3) Minimum performance standard. (i) The applicant's most recent 
composite regulatory examination rating was ``1;'' or, was ``2'' or 
``3'' and, based on the applicant's most recent regulatory financial 
report, the applicant satisfied all of the following performance trend 
criteria:
    (A) Earnings. Applicant had positive annualized adjusted earnings 
in four of the six most recent calendar quarters;
    (B) Nonperforming assets. Applicant's nonperforming assets did not 
exceed ten percent of its total assets in the most recent calendar 
quarter; and
    (C) Loan loss reserves. Applicant had a ratio of loan loss reserves 
to nonperforming assets of 60 percent or greater during 4 of the 6 most 
recent calendar quarters. 

[[Page 54975]]

    (ii) For applicants that are not required to report financial data 
to their primary regulator on a quarterly basis, the information 
required in paragraphs (b)(3)(i) of this section may be reported on a 
semiannual basis.
    (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 Sec. 933.6(a)(5) of 
this part.


Sec. 933.12  Character of management requirement.

    (a) Review requirement. For each applicant, the Bank shall review:
    (1) The names of directors and senior officers;
    (2) The most recent regulatory financial report;
    (3) The most recent audited financial statement, or if unavailable, 
other such independent external financial report that the applicant's 
primary regulator may require, or if unavailable, such financial 
statements that the applicant may otherwise have available;
    (4) Enforcement actions as described in paragraph (b)(1) of this 
section;
    (5) Certain pending criminal, civil or administrative matters as 
described in paragraph (b)(2) of this section;
    (6) Information concerning potential monetary liabilities, material 
pending law suits or unsatisfied judgments as described in paragraph 
(b)(3) of this section; and
    (7) Any other document that comes to the Bank's attention or 
reasonably should come to the Bank's attention in reviewing the 
applicant's character of management.
    (b) Standards. An applicant shall be deemed to be in compliance 
with the character of management required by section 4(a)(2)(C) of the 
Act and Sec. 933.6(a)(6) of this part, subject to rebuttal, if:
    (1) No enforcement actions. Neither the applicant nor any of its 
directors or senior officers is subject to, or operating under, any 
enforcement action instituted by an appropriate regulator;
    (2) No objectionable 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 
examination; and
    (3) No objectionable liabilities. There are no known or potential 
civil, criminal or administrative monetary liabilities, material 
pending law suits, or unsatisfied judgments against the applicant, its 
directors or senior officers since the most recent examination; and
    (4) Applicant certification. The applicant makes the unqualified 
certification described in paragraph (c)(1) of this section.
    (c) Applicant certification. Either a majority of the members of 
the board of directors of the applicant, or an individual with 
authority to act on behalf of the board of directors of the applicant 
shall provide to the Bank:
    (1) Unqualified certification. An unqualified written certification 
that the statements submitted in response to the requirements of 
paragraphs (b) (1) through (3) of this section are true and correct 
without exception; or
    (2) Qualified certification. A qualified written certification that 
the statements submitted in response to the requirements of paragraphs 
(b) (1) through (3) of this section are true and correct and detailed 
explanations of any exceptions noted.


Sec. 933.13  Home financing policy requirement.

    (a) Standards. An applicant shall be deemed to be in compliance 
with the home financing policy requirement of section 4(a)(2)(C) of the 
Act and Sec. 933.6(a)(7) of this part, subject to rebuttal, if the 
applicant has received:
    (1) Recent evaluation. A Community Reinvestment Act (CRA) 
performance evaluation within four years from the date of application; 
and
    (2) Minimum rating. A CRA rating of ``Satisfactory'' or better in 
the most recent compliance examination.
    (b) Written justification required. An applicant that is not 
subject to CRA or an applicant that received a ``needs to improve'' 
rating in its most recent CRA performance evaluation but has received a 
``satisfactory'' or better rating on its prior CRA performance 
evaluation, shall file as a part of its application, a written 
justification that demonstrates how and why the applicant's home 
financing credit policies and lending practices (if applicable) are 
consistent with the Bank System's housing finance mission.


Sec. 933.14  De novo insured depository institution applicants.

    An insured depository institution applicant that provides a Bank 
with written confirmation from its primary regulator that it has been 
chartered for less than three years or is otherwise considered to be a 
de novo insured depository institution (de novo applicant) by the 
applicant's primary regulator shall receive special consideration for 
eligibility as follows:
    (a) Financial condition--(1) Financial report. For purposes of 
Sec. 933.11(a)(1) of this part, a de novo applicant that has not filed 
regulatory financial reports for the last six calendar quarters and 
three year-ends shall provide any regulatory financial reports the 
applicant has filed.
    (2) Financial statement. For purposes of Sec. 933.11(a)(2) of this 
part, a de novo applicant shall provide the most recent annual audited 
financial statement, or if unavailable other such independent external 
annual financial report as the applicant's primary regulator may 
require, or if unavailable, a de novo applicant shall, at a minimum, 
provide financial reports for six calendar quarters of operation.
    (3) Regulatory examination rating. For purposes of 
Sec. 933.11(b)(1) of this part, if a de novo applicant has not yet 
received a composite regulatory examination rating from its primary 
regulator, the applicant shall provide a preliminary or informal 
written regulatory examination rating from the applicant's primary 
regulator, if a preliminary or informal rating is acceptable to the 
Bank.
    (4) Performance trends. A de novo applicant need not meet the 
performance trend criteria in Sec. 933.11(b)(3)(i) of this part; if:
    (i) Reports for six quarters. Applicant has completed regulatory 
financial reports for at least six calendar quarters of operation; and
    (ii) Business plan compliance. Applicant has provided written 
confirmation from its primary regulator that applicant is in compliance 
with the terms of its regulatory business plan; or applicant has 
prepared a written analysis demonstrating that it is in substantial 
compliance with its regulatory business plan as determined by the Bank.
    (b) Home financing policy. For purposes of Sec. 933.13(b) of this 
part, a de novo applicant that has not yet received a CRA performance 
evaluation shall be deemed to have a home financing policy as required 
by Sec. 933.6(a)(7) of this part if it has received a preliminary or 
informal written CRA performance evaluation of ``Satisfactory'' or 
better; or it has submitted a written justification acceptable to the 
Bank of how the applicant intends to support the Bank System's housing 
finance mission.


Sec. 933.15  Recent and pending merger applicants.

    (a) Definitions--(1) Pending merger applicant means an institution 
that meets both of the following tests:
    (i) Timing test. The institution is a party to a merger or 
acquisition agreement expected to be consummated within two calendar 
quarters of submission of the membership application; and
    (ii) Materiality test. The institution will account for 75 percent 
or less of the 

[[Page 54976]]
combined assets of the resulting entity at the time of the merger or 
acquisition.
    (2) Recent merger applicant means an institution that meets both of 
the following tests:
    (i) Timing test. The institution merged with or acquired another 
institution within the six calendar quarters prior to submission of the 
membership application; and
    (ii) Materiality test. The institution accounts for 75 percent or 
less of the combined assets of the resulting entity at the time of the 
merger or acquisition.
    (b) Review requirement. For each recent or pending merger 
applicant, the digest shall include the following additional 
information:
    (1) The name of each entity involved and its charter type;
    (2) A general statement of the financial condition of each entity;
    (3) A brief statement of the business reasons for the merger or 
acquisition; and
    (4) The names and positions of management of the resulting entity.
    (c) Standards. A recent or pending merger applicant shall be deemed 
to be in compliance with section 4(a) of the Act and Sec. 933.6(a) of 
this part, subject to rebuttal, only if the recent or pending merger 
applicant satisfies the requirements of this part as modified and 
supplemented by this section.
    (1) Recent merger applicant financial condition--(i) Recent 
examination and minimum performance standards. A recent merger 
applicant that does not have a composite regulatory examination rating 
subsequent to the merger or acquisition, shall satisfy the requirements 
of Sec. 933.11(b) of this part on a combined basis and for each party 
to the merger or acquisition, except an incumbent Bank member.
    (ii) Performance trends. To the extent that a recent merger 
applicant does not yet have regulatory financial reports for the six 
most recent calendar quarters, the applicant shall prepare pro forma 
combined financial statements for those calendar quarters in which an 
actual combined regulatory financial report is unavailable to determine 
whether the applicant meets the performance trend requirements of 
Sec. 933.11(b)(3) of this part.
    (2) Pending merger applicant financial condition--(i) Recent 
examination and minimum performance standards. In lieu of a composite 
regulatory examination rating for the combined entity, as required by 
Sec. 933.11(b)(1) of this part, each party to the merger or 
acquisition, except an incumbent Bank member, must satisfy all of the 
requirements of Sec. 933.11(b) of this part.
    (ii) Capital requirements and performance trends. In addition to 
each party to a pending merger individually satisfying all of the 
requirements of Sec. 933.11(b) of this part, the pending merger 
applicant shall satisfy the requirements in Sec. 933.11(b) (2) and (3) 
of this part as a combined entity based on pro forma combined financial 
statements to be prepared by the applicant for the six most recent 
calendar quarters.
    (iii) Character of management. For purposes of Sec. 933.12 of this 
part, the determination of the character of management of a recent or 
pending merger applicant shall be based on an evaluation of the 
directors and senior officers of the resulting entity.
    (iv) Home financing policy. For a pending merger applicant or for a 
recent merger applicant that does not yet have a CRA performance 
evaluation on a combined basis for the merged entity, the determination 
of whether the merger applicant's home financing policy satisfies the 
requirements of Sec. 933.13 of this part, shall be based on a review of 
the most recent CRA performance evaluation for each party to the merger 
or acquisition.


Sec. 933.16  Financial condition standards for insurance company 
applicants.

    (a) Definitions. For purposes of this section:
    (1) Adjusted liabilities means total statutory liabilities less 
separate account liabilities, asset valuation reserves, and interest 
maintenance reserves.
    (2) Adjusted surplus means surplus plus asset valuation reserves 
and interest maintenance reserves.
    (3) Asset valuation reserves means reserves on the liability side 
of the balance sheet that are established by the primary regulatory to 
guard against fluctuations in the value of securities and to absorb all 
unrealized capital gains and losses and certain realized gains and 
losses on investment activity.
    (4) Highly liquid assets means cash or cash equivalents readily 
convertible to cash, including marketable Class 1 (highest investment 
grade) publicly traded bonds, marketable preferred and common stock, 
short-term investments, and investment income due.
    (5) Interest maintenance reserves means reserves on the liability 
side of the balance sheet that are established to hold the amount of 
realized capital gains and losses on fixed income securities that 
result from overall interest rates changes.
    (6) Liquid assets means installment premiums booked but deferred 
and not yet due, cash, accrued investment income, marketable Class 1 
(highest investment grade quality) publicly traded bonds and marketable 
Class 2 (high investment grade quality) publicly traded bonds, 
marketable preferred and common stock, cash, short-term investments, 
and investment income due, less investments in affiliated companies and 
excess of real estate over five percent of liabilities.
    (7) Net premiums written means the total consideration paid for an 
insurance contract during a specified period of time, net of 
reinsurance assumed and ceded.
    (8) Reinsurance means transactions in which an assuming enterprise, 
known as a reinsurer, assumes, for a premium, all or part of a risk 
undertaken originally by another insurer.
    (9) Reinsurance assumed means all premiums generated by policies 
issued to assume a liability, in whole or part, of another insurer that 
is already covering the risk with a policy.
    (10) Reinsurance ceded means all premiums generated by policies or 
coverage purchased from another insurer that transfer liability, in 
whole or part, from direct or reinsurance policies.
    (11) Reserves means funds set aside for possible losses on 
insurance policies, annuities, claims unpaid, funds held for 
policyholders, and deposit funds.
    (12) Separate accounts means assets and liabilities maintained by 
an insurance company predominately to fund fixed-benefit or variable 
annuity contracts and pension plans. The contract holder assumes the 
investment risk while the insurance company receives a fee for managing 
or maintaining the investments.
    (13) Statutory liabilities means the total of funds set aside to 
pay future claims and operating expenses, including separate account 
liabilities and funds held for the benefit of others, as established 
under the accounting rules and techniques permitted by the National 
Association of Insurance Commissioners. Examples of statutory 
liabilities are policy reserves, premiums collected in advance, 
commission and expenses payable, and provisions for policyholder 
dividends.
    (14) Surplus means the total of common and preferred capital stock, 
aggregate write-ins for other than special surplus funds, gross paid-in 
and contributed surplus, surplus notes and unassigned funds less 
treasury stock.
    (15) Tabular interest means interest, required by the primary 
regulator, to be set aside to cover all contractual obligations.
    (b) Performance standards. An insurance company applicant shall be 

[[Page 54977]]
    deemed to meet the financial condition requirement of section 
4(a)(2)(B) of the Act and Sec. 933.6(a)(5) of this part, subject to 
rebuttal, if:
    (1) Recent examination and rating. The applicant has received a 
regulatory examination by its primary regulator and a composite 
independent insurance company rating from A.M. Best Company, Duff & 
Phelps, Inc., Moody's Investor Service, Inc., Standard & Poor's Corp. 
or Weiss Research Inc. within three years of the date of application;
    (2) Satisfactory examination. The applicant's most recent 
regulatory examination by its primary regulator indicates no major 
adverse findings pertaining to the company's financial condition;
    (3) Meets capital requirements. The applicant meets all of its 
minimum statutory and regulatory capital requirements and the capital 
standards established by the National Association of Insurance 
Commissioners as reported in the applicant's most recent regulatory 
financial report filed with its primary regulator;
    (4) Minimum performance standard--(i) Strong rating. The 
applicant's most recent composite independent insurance company rating 
was:
    (A) A.M. Best Company: ``A-'' or above;
    (B) Duff & Phelps, Inc.: ``AA-'' or above;
    (C) Moody's Investor Service, Inc.: ``Aa'' or above;
    (D) Standard & Poor's Corp.: ``AA'' or above; or
    (E) Weiss Research, Inc.: ``A''; or
    (ii) Adequate rating and earnings--(A) Adequate rating. The 
applicant's most recent composite independent insurance company rating 
was:
    (1) A.M. Best Company: ``C+'' to ``B++'';
    (2) Duff & Phelps, Inc.: ``BB-'' to ``A+'';
    (3) Moody's Investor Service, Inc.: ``Ba'' to ``A'';
    (4) Standard & Poor's Corp.: ``BB'' to ``A''; or
    (5) Weiss Research, Inc.: ``B'' or ``C''; and
    (B) Earnings. The applicant had positive annualized adjusted 
earnings in two of the three most recent calendar years; and
    (5) Minimum performance ratios. The applicant meets the minimum 
performance ratios in paragraph (b)(5)(ii) of this section during the 
most recent year-end or quarter-end period.
    (i) Definitions. For purposes of this paragraph (b)(5):
    (A) Traditional life insurance products means insurance business 
that consists of individual term life insurance contracts, individual 
permanent fixed value life insurance contracts, or policies that 
consist of fixed premiums, fixed dollar amounts of contract, or fixed 
reserves (cash value) established by each state.
    (B) Interest sensitive life insurance products (universal or whole 
life) means insurance business that consists of individual life 
insurance policies characterized by flexible premiums, dollar amounts 
of contract that can vary, and reserves which represent a pool of 
assets such as mutual funds that are held for the benefit of, and 
support the investment return to, policy holders.
    (C) Accident and health insurance products (indemnity) means 
insurance business that consists of coverage for care such as basic 
hospital expense, basic surgical expense, dental care, specific 
hospital reimbursement, long-term nursing home or home care expenses 
for the aged or disabled, major medical expense, and Medicare 
supplemental insurance.
    (D) Individual and group annuity insurance products means insurance 
business that consists of contracts that accumulate and disburse 
retirement benefits to individual policyholders or to companies for 
their employees, hold pension deposit funds or distribute and hold 
funds under guaranteed interest contracts.
    (E) Disability income insurance products means insurance business 
that consists of contracts that pay income periodically to insureds who 
are unable to work as a result of sickness or injury.
    (F) Property insurance products means insurance business that 
consists of policies where the majority of premiums go to cover losses 
to real property, automobiles or similar tangible assets.
    (G) Liability insurance products means insurance business that 
consists of policies that cover losses arising from actions taken by 
individuals or companies, including losses from litigation or mutual 
agreements as to the amount of a claim such as product liability, 
medical malpractice and worker's compensation.
    (ii) Overall minimum performance ratios.--(A) Premium to surplus 
ratio. (1) Calculation. Divide net premiums written by total capital 
and surplus.
    (2) Standard. The applicant's net premiums may not exceed three 
times the level of capital and surplus.
    (B) Change in net premiums written ratio.--(1) Calculation. Divide 
the change in net premiums written between the two most recent 
consecutive calendar years by the total net premiums written in the 
first year.
    (2) Standard. The applicant's ratio must be between -10 percent and 
+50 percent.
    (C) Surplus relief ratio.--(1) Calculation. Divide the net of 
commissions and expenses generated by reinsurance ceded and assumed by 
total capital and surplus.
    (2) Standard. The applicant's ratio must be less than 30 percent.
    (D) Adequacy of investment income ratio.--(1) Calculation. Divide 
net investment income by the sum of total tabular interest required on 
life insurance, accident and health reserves, and total interest 
credited on funds held on deposit.
    (2) Standard. The applicant's net investment income must provide no 
less than 1.25 times the coverage on total funds held in reserves to 
pay interest on contractual obligations and funds held on deposit.
    (E) Change in capital and surplus ratio.--(1) Calculation. Divide 
the net change in capital and surplus between the two most recent 
consecutive calendar years, by total capital and surplus in the first 
year.
    (2) Standard. The applicant's ratio must be between -10 percent and 
+50 percent.
    (iii) Solvency ratios.--(A) Highly liquid ratio.--(1) Calculation. 
Divide highly liquid assets by annuity and deposit fund reserves less 
reserves with no withdrawal privileges, separate accounts and 
reinsurance.
    (2) Standard. The applicant's ratio must be no less than:
    (i) 75 percent on traditional life insurance products;
    (ii) 85 percent on interest sensitive life insurance products;
    (iii) 85 percent on individual annuity insurance products;
    (iv) 100 percent on group annuity insurance products;
    (v) 79 percent on property and liability insurance products;
    (vi) 75 percent on accident and health insurance products; and
    (vii) 50 percent on disability income insurance products.
    (B) Current ratio.--(1) Calculation. Divide liquid assets by 
annuity, ordinary life, and deposit fund reserves, less reserves with 
no withdrawal privileges, separate accounts, reinsurance, and policy 
loans.
    (2) Standard. The applicant's ratio must be no less than:
    (i) 60 percent on traditional life insurance products;
    (ii) 75 percent on interest sensitive life insurance products;
    (iii) 75 percent on individual and group annuity insurance 
products;
    (iv) 87 percent on property and liability insurance products; 

[[Page 54978]]

    (v) 75 percent on accident and health insurance products; and
    (vi) 50 percent on disability income insurance products.
    (C) Adjusted liabilities to adjusted surplus ratio.--(1) 
Calculation. Divide adjusted liabilities by adjusted surplus.
    (2) Standard. The applicant's ratio must not exceed:
    (i) 10 to 1 on traditional life insurance products;
    (ii) 10 to 1 on interest sensitive life insurance products;
    (iii) 10 to 1 on individual and group annuity insurance products;
    (iv) 3 to 1 on property and liability insurance products;
    (v) 3 to 1 on accident and health insurance products; and
    (vi) 5 to 1 on disability income insurance products.


Sec. 933.17  Rebuttable presumptions.

    (a) Overcoming presumptive compliance. The presumption that an 
applicant meeting the standards described in Secs. 933.7 to 933.16 of 
this part is in compliance with the Act and Sec. 933.6(a) of this part, 
may be overcome if the Bank obtains compelling evidence to the 
contrary.
    (b) Overcoming presumptive noncompliance. An applicant that does 
not meet all of the standards in Secs. 933.7 to 933.16 of this part, or 
that is unable to provide the information required to evaluate whether 
or not it meets those standards, shall be deemed not to be in 
compliance with the Act and Sec. 933.6(a) of this part unless the 
applicant rebuts the presumption, as described in this section, and the 
Bank determines that the applicant has complied with the Act and 
Sec. 933.6(a) of this part.
    (c) Noncompliance with financial condition standards.--(1) 
Compelling written justification. For each variance from the minimum 
regulatory examination rating required by Sec. 933.11(b)(3) of this 
part, an applicant shall prepare a written justification that provides 
compelling evidence that the applicant is in the financial condition 
required by Sec. 933.6(a)(4) of this part, notwithstanding the 
variance.
    (2) Substantial written justification. For each variance from a 
performance criterion required by Sec. 933.11(b)(3), of this part, the 
applicant shall prepare a written justification pertaining to that 
performance criterion that provides substantial evidence that the 
applicant is in the financial condition required by Sec. 933.6(a)(4) of 
this part, notwithstanding the variance.
    (d) Noncompliance with character of management standards.--(1) 
Enforcement actions. If an applicant or any of its directors or senior 
officers is subject to or operating under an enforcement action, the 
applicant shall provide:
    (i) Regulator confirmation. Written 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 stating each action the 
applicant or its directors or senior officers is 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. If the Bank is uncertain whether the 
applicant has substantially complied with all aspects of the 
enforcement action, the Bank shall consult the applicant's appropriate 
regulator.
    (2) Certain criminal, civil or administrative proceedings. If an 
applicant or any of its directors or senior officers is subject to 
criminal, civil or administrative proceedings that reflect on 
creditworthiness, business judgment or moral turpitude since the last 
examination, the applicant shall provide:
    (i) Regulator confirmation. Written confirmation from the 
applicant's primary regulator that the proceedings will not likely 
result in enforcement action; or
    (ii) Written analysis. A written analysis of the severity of the 
pending charges and any mitigating action taken by the applicant or its 
directors or senior officers. If the Bank is uncertain whether the 
proceedings will result in enforcement action, the Bank shall consult 
the applicant's primary regulator.
    (3) Material monetary liabilities. If there are any material known 
or potential civil, criminal or administrative monetary liabilities, 
pending law suits, or unsatisfied judgments against the applicant or 
its directors or senior officers as of the most recent quarter-end, the 
applicant shall provide:
    (i) Regulator confirmation. Written confirmation from the 
applicant's primary regulator that the matter will not likely cause the 
applicant to fall below its minimum capital requirements; or
    (ii) Written analysis. A written analysis of each matter, 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. If the Bank is uncertain 
whether the matter will cause the applicant to fall below its minimum 
capital requirements, the Bank shall consult the applicant's primary 
regulator.
    (e) Noncompliance with home financing policy standards. If an 
applicant received a ``substantial non-compliance'' rating on its most 
recent CRA performance evaluation, two consecutive ``needs to improve'' 
CRA ratings, or has not received a CRA performance evaluation within 
four years from the date of the membership application, the applicant 
shall provide:
    (1) Regulator confirmation. Written confirmation from the 
applicant's primary regulator of the applicant's recent satisfactory 
CRA performance, including any corrective action that substantially 
improved upon the deficiencies cited in any recent CRA performance 
evaluation; or
    (2) Written analysis. A written analysis demonstrating that the CRA 
rating is unrelated to housing finance, or providing substantial 
evidence that the applicant's home financing credit policies and 
lending practices (if applicable) are consistent with the Bank System's 
housing finance mission.


Sec. 933.18  Determination of appropriate Bank district for membership.

    (a) Eligibility. (1) An institution eligible to become a member of 
a Bank under the 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.
    (2) An institution eligible to become a member of a Bank under the 
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 the Board.
    (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 that a state 
other than the state in which it maintains its home office be 
designated as its principal place of business. Within 90 days of 
receipt of such written request, the board of directors of the Bank in 
the district where the 

[[Page 54979]]
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, the Board 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 
the board 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 Board 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 including directorial 
representation under section 7(c) of the Act, 12 U.S.C. 1427(c), and 
Sec. 932.11 of this chapter, but shall not be subject to the provisions 
on termination of membership set forth in section 6 of the Act, 12 
U.S.C. 1426, or Secs. 933.26, 933.27 and 933.29 of this part, including 
the restriction on reacquiring Bank membership set forth in Sec. 933.30 
of this part.
    8. In the list below, for each section indicated in the left 
column, remove the reference indicated in the middle column from where 
it appears and add the reference indicated in the right column:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                Section                                           Remove -                                                    Add                       
--------------------------------------------------------------------------------------------------------------------------------------------------------
933.20(b)(1)..........................  Secs. 933.2(c) or 933.3.....................................  Sec. 933.3 -                                      
                                        Sec. 933.2(d)...............................................  Sec. 933.4(a)                                     
933.20(b)(2)..........................  Sec. 933.2(d)...............................................  Sec. 933.4(a)                                     
933.22(b)(1)..........................  Sec. 933.7(a)...............................................  Sec. 933.20(a)                                    
                                        Sec. 933.18(d)..............................................  Sec. 933.31(d)                                    
933.23................................  Sec. 933.7(a)...............................................  Sec. 933.20(a)                                    
933.24(a)(2)..........................  Sec. 933.7(a)...............................................  Sec. 933.20(a)                                    
933.24(b)(2)..........................  Sec. 933.16.................................................  Sec. 933.29                                       
933.25(c).............................  Sec. 933.2..................................................  Subpart B                                         
933.25(d)(2)(ii) (A) and (B)..........  Sec. 933.7(a)...............................................  Sec. 933.20(a)                                    
933.25(d)(3)..........................  Sec. 933.16.................................................  Sec. 933.29                                       
933.26(c).............................  Sec. 933.16.................................................  Sec. 933.29                                       
933.27(e).............................  Sec. 933.16.................................................  Sec. 933.29                                       
933.28(b).............................  Sec. 933.16.................................................  Sec. 933.29                                       
933.29(a)(1)..........................  Secs. 933.13, 933.14 or 933.15..............................  Secs. 933.26, 933.27 or 933.28                    
                                        Secs. 933.11(b) or 933.12(d)(3).............................  Secs. 933.24(b) or 933.25(d)(3)                   
933.30 introductory text..............  Sec. 933.13.................................................  Sec. 933.26                                       
933.30(a).............................  Sec. 933.5..................................................  Sec. 933.18                                       
933.30(b).............................  Sec. 933.2(d)...............................................  Sec. 933.4(a)                                     
933.31(d).............................  Sec. 933.9(b)(1)............................................  Sec. 933.22(b)(1)                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Dated: October 5, 1995.
    By the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 95-25823 Filed 10-26-95; 8:45 am]
BILLING CODE 6725-01-U