[Federal Register Volume 61, Number 150 (Friday, August 2, 1996)]
[Proposed Rules]
[Pages 40364-40365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19526]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 935
[No. 96-47]
Terms and Conditions for Advances
AGENCY: Federal Housing Finance Board.
ACTION: Proposed rule.
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SUMMARY: The Board of Directors of the Federal Housing Finance Board
(Finance Board) is proposing to amend its regulation on terms and
conditions for advances. The proposed rule requires a Federal Home Loan
Bank (FHLBank) that wants to make putable advances available to member
institutions to provide appropriate disclosures and to offer
replacement advance funding if the FHLBank terminates the putable
advance prior to its stated maturity date.
DATES: Comments on this proposed rule must be received in writing on or
before September 3, 1996.
ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.
20006. Comments will be available for public inspection at this
address.
FOR FURTHER INFORMATION CONTACT: Christine M. Freidel, Assistant
Director, Financial Management Division, Office of Policy, (202) 408-
2976, or, Janice A. Kaye, Attorney-Advisor, Office of General Counsel,
(202) 408-2505, Federal Housing Finance Board, 1777 F Street, N.W.,
Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
Under section 10 of the Federal Home Loan Bank Act (Bank Act), each
FHLBank has the authority to make secured advances to its members. See
12 U.S.C. 1430. To ensure that the FHLBanks operate their advance
programs in a safe and sound manner, id. Sec. 1422a(a)(3)(A), and
pursuant to its authority to supervise the FHLBanks and ensure that the
FHLBanks carry out their housing finance mission and remain adequately
capitalized and able to raise funds in the capital markets, id.
Sec. 1422a(a)(3)(B), the Finance Board promulgated a final rule
governing FHLBank advance programs in May 1993. See 58 FR 29456 (May
20, 1993), codified at 12 CFR part 935.
Since that time, the FHLBanks have developed a new type of advance
\1\ product called a ``putable advance.'' A ``putable advance'' is an
advance that a FHLBank may, at its discretion, terminate and put back
to the member for immediate repayment after a specified period of time
and on certain dates prior to the maturity date of the putable advance.
A member borrowing a putable advance faces the risk that the FHLBank
will exercise its discretion and terminate the putable advance prior to
its maturity date. For example, a FHLBank might terminate a putable
advance prior to its maturity date in a rising interest rate
environment. Any replacement advance funding offered to the member
would be extended at then current higher market interest rates. Since
the member takes on the interest rate risk associated with putable
advances, the FHLBank is able to offer advance funding at an interest
rate that can be significantly lower than the market interest rate.
Members have expressed considerable interest in taking advantage of the
lower cost funding a FHLBank can offer through putable advances.
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\1\ An ``advance'' is a loan from a FHLBank that is provided
pursuant to a written agreement, supported by a note or other
written evidence of the borrower's obligation, and fully secured by
collateral in accordance with the Bank Act and Finance Board
regulations. See 12 CFR 935.1.
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The Finance Board's advances regulation does not address putable
advances, and the practices with respect to this type of advance
funding vary from FHLBank to FHLBank. To provide for consistency among
the FHLBanks that offer putable advances and to reinforce the role of
the FHLBanks as sources of liquidity for member institutions, the
Finance Board is proposing to amend its advances regulation to address
specifically the issuance of putable advances. The Finance Board
requests comment on any aspect of this proposed rule.
II. Analysis of the Proposed Rule
The Finance Board proposes to add a new paragraph (d), putable
advances, to Sec. 935.6 of its advances regulation, which concerns the
terms and conditions for advances. To ensure that members are fully
apprised of the risks associated with putable advance funding, proposed
Sec. 935.6(d)(1) would require a FHLBank that provides a putable
advance to a member to disclose in writing to such member the risks
associated with putable advance funding. Such risks include the
interest rate risk described above in section I and the potentially
adverse impact on a member's liquidity if a FHLBank exercises its
discretion to terminate a putable advance prior to the stated maturity
date. To preclude the possibility that putable advance funding might
cause undue liquidity problems for members, proposed Sec. 935.6(d)(2)
would require a FHLBank that terminates a putable advance prior to its
maturity date to offer replacement funding to the member at current
market rates for the remaining term to maturity of the putable advance.
The replacement funding would be considered a conversion of the putable
advance rather than the extension of a new advance.
Proposed Sec. 935.6(d)(3) provides a definition of the term
``putable advance.'' For purposes of proposed Sec. 935.6(d), a putable
advance would mean an advance that a FHLBank may, at its discretion,
terminate and require the member to repay prior to the stated maturity
date of the putable advance.
III. Regulatory Flexibility Act
This proposed rule contains only technical revisions to an existing
rule and, therefore, does not impose any additional regulatory
requirements on small entities. Thus, in accordance with the provisions
of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., the Board of
Directors of the Finance Board hereby certifies that this proposed
rule, if promulgated as a final rule, will not have a significant
economic impact on a substantial number of small entities. Id. section
605(b).
List of Subjects in 12 CFR Part 935
Credit, Federal home loan banks.
Accordingly, the Board of Directors of the Federal Housing Finance
Board hereby proposes to amend chapter IX, title 12, part 935, Code of
Federal Regulations, as follows:
PART 935--ADVANCES
1. The authority citation for part 935 continues to read as
follows:
Authority: 12 U.S.C. 1422b(a)(1), 1426, 1429, 1430, 1430(b), and
1431.
2. In Sec. 935.6, paragraph (d) is added to read as follows:
Sec. 935.6 Terms and conditions for advances.
* * * * *
(d) Putable advances. (1) A Bank that provides a putable advance to
a member shall disclose in writing to such member
[[Page 40365]]
the risks associated with putable advance funding.
(2) If a Bank terminates a putable advance prior to the stated
maturity date of such advance, the Bank shall offer to provide market
rate replacement funding to the member for the remaining term to
maturity of the putable advance.
(3) For purposes of this paragraph (d), the term putable advance
means an advance that a Bank may, at its discretion, terminate and
require the member to repay prior to the stated maturity date of the
advance.
Dated: July 3, 1996.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 96-19526 Filed 8-01-96; 8:45 am]
BILLING CODE 6725-01-U