[Federal Register Volume 61, Number 196 (Tuesday, October 8, 1996)]
[Rules and Regulations]
[Pages 52686-52687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25695]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 96-61]


Terms and Conditions for Advances

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board 
(Finance Board) is adopting a final rule that amends its regulation on 
terms and conditions for advances. The final rule requires a Federal 
Home Loan Bank (FHLBank) that offers putable advances to provide 
appropriate written disclosures and to offer replacement advance 
funding in the event that the FHLBank terminates the putable advance 
prior to its stated maturity date.

EFFECTIVE DATE: The final rule will become effective November 7, 1996.

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 \1\ to its members. 
See 12 U.S.C. 1430. To ensure that the FHLBanks operate their advance 
programs in a safe and sound manner, 12 U.S.C. 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.
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    \1\ For purposes of the Finance Board regulation governing 
advances, 12 CFR part 935, 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 id. Sec. 935.1.
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    Since that time, the FHLBanks have developed a new type of advance 
product called a ``putable advance.'' A putable advance is one that a 
FHLBank may, at its discretion, put back to a member for immediate 
repayment prior to the maturity of the advance on dates specified in 
the advances agreement. Putable advances present to a member borrower 
the risk that a FHLBank will exercise the put option and terminate the 
advance prior to its maturity date thereby placing the borrower at a 
disadvantage. For example, if a FHLBank were to terminate a putable 
advance prior to its maturity date in a rising interest rate 
environment, any replacement advance funding offered to the member 
might be extended at higher market interest rates. On the other hand, 
since the member borrower is incurring the interest rate risk 
associated with putable advance funding, a FHLBank is able to offer a 
putable advance at an interest rate that can be significantly lower 
than that available on a regular advance. FHLBank members have 
expressed considerable interest in the lower cost funding available 
through the use of putable advances.
    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 uniformity and 
consistency in practice 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 approved for publication a 
proposed rule to amend its advances regulation to address specifically 
the issuance of putable advances. The proposed rule was published in 
the Federal Register on August 2, 1996, with a 30-day public comment 
period that closed on September 3, 1996. See 61 FR 40364 (Aug. 2, 
1996). The Finance Board received a total of four comments in response 
to the notice of proposed rulemaking, two from FHLBanks and two from 
industry trade associations. The commenters generally supported the 
Finance Board's proposal. Specific comments are discussed in Sec. II of 
the Supplementary Information.

II. Analysis of Public Comments and the Final Rule

    The final rule adds a new subsection (d), putable advances, to 
Sec. 935.6 of its advances regulation, which concerns the terms and 
conditions for advances.

A. Disclosure

    To ensure that members are fully apprised of the risks associated 
with putable advance funding, Sec. 935.6(d)(1) requires 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 option risk described in Sec. I of the Supplementary 
Information and the

[[Page 52687]]

potentially adverse impact on a member's liquidity if a FHLBank 
terminates a putable advance prior to the stated maturity date.
    A trade association commenter strongly supported the written 
disclosure requirement and recommended that the disclosure contain 
information regarding the interest rate environments in which a FHLBank 
might exercise the put option. The Finance Board believes that the 
disclosure required by the proposed rule already encompasses this type 
of information. However, to provide further clarification, the final 
rule states that the disclosure should include detail sufficient to 
describe the type and nature of the risks associated with putable 
advances.

B. Replacement Funding

    To preclude the possibility that putable advance funding might 
cause liquidity problems for members, Sec. 935.6(d)(2) of the proposed 
rule would have required a FHLBank that terminates a putable advance 
prior to its maturity date to offer replacement funding to the member 
at the market rate for the remaining term to maturity of the putable 
advance. To provide maximum utility to FHLBank members and flexibility 
to both members and the FHLBanks, one FHLBank commenter suggested that 
the term to maturity of the replacement funding should be determined 
through negotiations between the FHLBank and the member. The other 
FHLBank commenter suggested that, in order to provide FHLBank members 
with some protection from interest rate changes, a member should be 
permitted to elect at the time of origination of the putable advance 
whether replacement funding will be priced at the market rate or a 
predetermined rate negotiated between the FHLBank and the member. The 
Finance Board has decided to incorporate these suggestions into the 
final rule.
    Section 935.6(d)(2) of the final rule requires a FHLBank that 
terminates a putable advance prior to its maturity date to offer 
replacement funding to the member. Paragraph (d)(2)(i) provides that at 
the option of the member, the term to maturity of replacement funding 
may be either the remaining term to maturity of the putable advance or 
a term to maturity agreed upon between the FHLBank and the member. 
Paragraph (d)(2)(ii) provides that at the option of the member, 
replacement funding may be priced at either the market rate or a 
predetermined rate agreed upon between the FHLBank and the member. 
Although the final rule requires a FHLBank to offer replacement 
funding, it does not obligate the member to accept the offer.
    In the notice of proposed rulemaking, the Finance Board stated that 
the FHLBanks should consider replacement funding to be a conversion of 
the outstanding advance rather than a new extension of credit. To 
ensure that there is no conflict between the putable advances provision 
and Sec. 935.5 of the Finance Board's advances regulation, 12 CFR 
935.5, which establishes limitations on access to FHLBank advances, a 
FHLBank commenter suggested clarifying the final rule. The Finance 
Board agrees with this suggestion and has added a new paragraph to the 
final rule, Sec. 936.5(d)(2)(iii), providing that, for purposes of part 
935, replacement funding is the conversion of an outstanding advance, 
not the renewal of an existing advance or the extension of a new 
advance.
    A trade association commenter supported the development of new 
advance products that help FHLBank members to meet their liquidity and 
credit needs. The commenter recommended that, in addition to putable 
advances, the FHLBanks should offer ``callable advances'' that would be 
callable at the option of the FHLBank member. A FHLBank would factor 
the cost of the call provision into the coupon, much as it includes the 
cost of the put in the price of a putable advance, rather than through 
a prepayment penalty. All of the FHLBanks currently offer callable 
advances and all but two factor the full cost of the option into the 
advance coupon.

C. Definition of ``Putable Advance''

    The Finance Board adopted the definition of the term ``putable 
advance'' in Sec. 935.6(d)(3) of the proposed rule without change. For 
purposes of Sec. 935.6(d), the term ``putable advance'' means an 
advance that a FHLBank may, at its discretion, terminate and require 
the member to repay prior to the stated maturity date of the advance.

III. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq., 
the FHLBanks are not ``small entities.'' Id. section 601(6). Since this 
final rule contains only technical revisions to an existing rule that 
applies only to the FHLBanks, it does not impose any additional 
regulatory requirements on small entities. Thus, in accordance with the 
provisions of the RFA, the Board of Directors of the Finance Board 
hereby certifies that this 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 Finance Board hereby 
amends part 935, chapter IX, title 12, 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) Disclosure. A Bank that offers a putable 
advance to a member shall disclose in writing to such member the type 
and nature of the risks associated with putable advance funding. The 
disclosure should include detail sufficient to describe such risks.
    (2) Replacement funding. If a Bank terminates a putable advance 
prior to the stated maturity date of such advance, the Bank shall offer 
to provide replacement funding to the member.
    (i) Term to maturity. At the option of the member, a Bank shall 
offer replacement funding:
    (A) For the remaining term to maturity of the putable advance; or
    (B) For a term to maturity agreed upon between the Bank and the 
member.
    (ii) Interest rate. At the option of the member, a Bank shall price 
replacement funding:
    (A) At the market rate of interest; or
    (B) At a predetermined rate of interest agreed upon between the 
Bank and the member.
    (iii) Conversion. For purposes of this part, replacement funding 
shall be considered the conversion of an outstanding advance, and shall 
not be considered the renewal of an existing advance or the extension 
of a new advance.
    (3) Definition. 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.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 96-25695 Filed 10-7-96; 8:45 am]
BILLING CODE 6725-01-U