[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