[Federal Register Volume 61, Number 218 (Friday, November 8, 1996)]
[Proposed Rules]
[Pages 57799-57830]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28319]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 960

[No. 96-72]


Amendment of Affordable Housing Program Regulation

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its regulation governing the operation of the Affordable 
Housing Program (AHP or Program). Among the significant changes made by 
the proposed rule are: Transfer of approval authority for AHP 
applications from the Finance Board to the Federal Home Loan Banks 
(Banks); modification of the competitive scoring process under which 
AHP subsidies are allocated among housing projects; establishment of 
specific standards and retention periods for monitoring of AHP-assisted 
housing projects; and clarification and expansion of the types of 
remedies available in the event of noncompliance with AHP requirements.
    The proposed rule is in furtherance of the Finance Board's 
continuing effort to devolve management and governance authority to the 
Banks. It also is consistent with the goals of the Regulatory 
Reinvention Initiative of the National Performance Review.

DATES: Comments on this proposed rule must be received in writing on or 
before February 6, 1997.

ADDRESSES: Comments should be mailed to: Elaine L. Baker, Secretary to 
the Board, 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: Charles E. McLean, Deputy Director, 
Housing and Community Development, (202) 408-2537, Richard Tucker, 
Associate Director, Housing and Community Development, (202) 408-2848, 
or Diane E. Dorius, Associate

[[Page 57800]]

Director, Housing and Community Development, (202) 408-2576, Office of 
Policy; or Sharon B. Like, Senior Attorney-Advisor, (202) 408-2930, or 
Brandon B. Straus, Attorney-Advisor, (202) 408-2589, Office of General 
Counsel, Federal Housing Finance Board, 1777 F Street, N.W., 
Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Section 10(j)(1) of the Federal Home Loan Bank Act (Act) requires 
each Bank to establish a Program to subsidize the interest rate on 
advances to members of the Federal Home Loan Bank System (Bank System) 
engaged in lending for long-term, low and moderate-income, owner-
occupied and affordable rental housing at subsidized interest rates. 
See 12 U.S.C. 1430(j)(1). The Finance Board is required to promulgate 
regulations governing the Program. See id. The Finance Board's existing 
regulation governing the operation of the Program is set forth in part 
960 of the Finance Board's regulations. See 12 CFR part 960. The 
Program has been operating successfully for approximately six years.
    As a result of the Finance Board's and the Banks' experience in 
administering the Program, on January 10, 1994, the Finance Board 
issued a notice of proposed rulemaking that proposed changes to improve 
operation of the Program. See 59 FR 1323 (Jan. 10, 1994). The Finance 
Board received over 100 comment letters. During the following 18-month 
period, the Finance Board was without a quorum and was unable to take 
action on the proposed rule. On November 1, 1995, the Finance Board 
published for comment a proposal to amend the existing AHP regulation 
to authorize the Banks, in their discretion, to establish limits on the 
maximum amount of AHP subsidy that may be requested per member, per 
project application, or per project unit, for a given funding period. 
See 60 FR 55487 (Nov. 1, 1995) (Subsidy Limits Proposal). The Finance 
Board received 25 comment letters on the Subsidy Limits Proposal.
    Given the passage of time since the 1994 notice of proposed 
rulemaking, and the experience of the Finance Board and the Banks in 
overseeing and administering the Program, the Finance Board is issuing 
a new comprehensive proposal to revise the Program. The Finance Board 
will consider all comments it receives before taking final action, 
including comments received in response to the proposed rules published 
in January 1994 and November 1995 and this notice of proposed 
rulemaking. However, those who submitted comments in response to the 
previous proposed rules may wish to update their earlier submissions.
    As further discussed below in the Analysis of Proposed Rule 
section, the proposed rule makes changes to a number of the existing 
regulatory provisions governing the Program, including: (1) scoring and 
approval of AHP applications for funding; (2) retention of AHP-assisted 
housing; (3) monitoring of AHP-assisted housing; (4) and remedies for 
noncompliance with AHP requirements. These changes are intended to 
provide clearer standards for operation of the Program and reduce 
regulatory burden, while continuing to identify and prevent misuse of 
AHP subsidies. Many of the changes codify successful practices 
developed by the Banks in implementing the Program.
    The proposed amendments also should make the Program more 
responsive to low- and moderate-income housing needs in each of the 
twelve Bank Districts (Districts), increase efficiency in the 
administration of the Program, and enhance coordination of the Program 
with other housing programs whose funds are used in conjunction with 
AHP subsidies. The proposed rule also reorganizes and streamlines the 
text of the regulation.
    The Finance Board is proposing these changes in the larger context 
of its proposal to decentralize the authority to make final funding 
decisions for AHP projects. While section 10(j) of the Act requires 
each Bank to establish a Program, and vests in the Finance Board broad 
authority to supervise the Banks' AHP activities through regulations 
implementing the Act, section 10(j) does not specifically assign the 
responsibility for operating the Program to the Finance Board. See 12 
U.S.C. 1430(j). Under the existing regulation, each Bank is largely 
responsible for the administration of its Program, including the 
evaluation and processing of applications for AHP funding. See 12 CFR 
960.5 (a) through (e). However, final funding decisions for AHP 
projects currently are made by the Finance Board. See id. 
Sec. 960.5(f)(3). The proposed rule makes a fundamental change to the 
Program by vesting the Banks, instead of the Finance Board, with the 
authority to make final funding decisions for AHP projects, subject to 
regulatory limitations. See proposed Sec. 960.8(b). Decentralization of 
funding decisions under the Program is consistent with the Finance 
Board's ongoing efforts to transfer to the Banks those functions 
performed by the Finance Board that are related to Bank management and 
governance. Further, the Finance Board believes that, in light of the 
Banks' six years of experience evaluating and processing AHP 
applications, the Banks are fully prepared to take on this new 
authority. The Finance Board will continue to exercise its supervisory 
oversight role through examinations of each Bank's Program.

II. Analysis of Proposed Rule

A. Definitions--Sec. 960.1

    Changes to individual definitions in Sec. 960.1 of the existing AHP 
regulation, see 12 CFR 960.1, are discussed below in the context of 
specific regulatory requirements, with the exception of the definitions 
of ``direct subsidy,'' ``subsidized advance,'' ``subsidy,'' and ``cost 
of funds,'' which are discussed here.
1. Definition and Calculation of AHP Subsidy
    a. In general. Under the Program, the Banks provide subsidies to 
finance AHP-eligible housing through: (1) advances with reduced 
interest rates, known as ``subsidized advances;'' and (2) direct cash 
grants, known as ``direct subsidies.'' See id. Sec. 960.3. Under the 
existing regulation, the terms ``subsidized advance'' and ``direct 
subsidy'' are not defined. However, the existing regulation defines the 
term ``subsidy'' as ``direct cash payments under the Program or the net 
present-value of the foregone interest revenues to the Bank from making 
funds available under the Program at rates below the cost of funds.'' 
See id. Sec. 960.1(n).
    The existing rule defines ``cost of funds'' as ``the estimated cost 
of issuing Bank System consolidated obligations with maturities 
comparable to those of the subsidized advances, as published from time 
to time by the Federal Home Loan Bank System's Office of Finance.'' See 
id. Sec. 960.1(f).
    Based on the Finance Board's and the Banks' experience over the 
past six years in calculating subsidies in the context of the various 
kinds of financing structures used by members and AHP projects, the 
Finance Board is proposing to add definitions of ``subsidized advance'' 
and ``direct subsidy'' and to amend the definitions of ``subsidy'' and 
``cost of funds'' to provide clearer guidance to the Banks in 
calculating the amount of AHP subsidy necessary for a proposed project. 
These changes also are intended to ensure that the AHP subsidy is 
passed through from the Bank to the ultimate borrower. See 12 U.S.C. 
1430(j)(9)(E).
    b. ``Direct subsidy''. The proposed rule defines ``direct subsidy'' 
as ``an AHP subsidy in the form of a direct cash

[[Page 57801]]

payment.'' See proposed Sec. 960.1. Direct subsidies may be used either 
as cash grants to projects or to write down the interest rate on a loan 
to the project. The new definition of ``subsidy'' includes language 
that clarifies how direct subsidies are to be calculated when they are 
used to write down the interest rate on a loan to a project. See id. 
Specifically, if a direct subsidy is used to write down the interest 
rate on a loan extended by a member, sponsor, or other party to a 
project, the direct subsidy must equal the net present value of the 
interest foregone from making the loan below the lender's market 
interest rate (calculated as of the date the AHP application is 
submitted to the Bank, and subject to adjustment under 
Sec. 960.9(c)(1)). See id.
    c. ``Subsidized advance''. The proposed rule defines ``subsidized 
advance'' as ``an advance to a member at an interest rate reduced below 
the Bank's cost of funds, by use of a subsidy.'' See id.
    The proposed rule defines ``subsidy,'' for purposes of determining 
the amount of the interest rate subsidy incorporated in a subsidized 
advance, as ``the net present value of the interest revenue foregone 
from making a subsidized advance at a rate below the Bank's cost of 
funds, determined as of the date of disbursement of the subsidized 
advance or the date prior to disbursement on which the Bank first 
manages the funding to support the subsidized advance through its 
asset/liability management system, or otherwise. See id.
    d. ``Cost of funds''. The proposed rule defines ``cost of funds'' 
as ``for purposes of a subsidized advance, the estimated cost of 
issuing Bank System consolidated obligations with maturities comparable 
to that of the subsidized advance.'' See id. The Finance Board 
specifically requests comments on whether the interest rate subsidy 
incorporated in a subsidized advance should be defined by reference to 
a Bank's market advance rate, rather than the Bank's cost of funds. 
This would allow a Bank to use AHP subsidies to pay its regular advance 
mark-up where AHP subsidy is delivered to a project through a 
subsidized advance. Arguably, this eliminates a perceived disincentive 
to the Banks to make subsidized advances, versus direct subsidies. 
However, an argument can be made that the form in which AHP subsidies 
are delivered to projects, i.e., subsidized advances versus direct 
subsidies, is determined by the financing structures used by proposed 
projects, not by the preferences of Banks in funding such projects. 
Consequently, it is argued that allowing Banks to use AHP subsidies to 
pay their regular advance mark-up would not affect the level of 
subsidized advances made by Banks and would use more AHP subsidies to 
produce the same amount of affordable housing.

B. Operation of Program and AHP Implementation Plans--Sec. 960.2

1. Program Operation
    Proposed Sec. 960.2(b) provides that each Bank's Program shall be 
governed solely by the requirements set forth in 12 U.S.C. 1430(j) and 
part 960, and a Bank shall not adopt any additional substantive AHP 
requirements, except as expressly provided in part 960. This is 
intended to make clear that the Finance Board intends its AHP 
regulation to ``occupy the field'' with regard to substantive 
requirements governing the Program. A Bank is prohibited from adopting 
additional substantive rules or policies governing its Program, unless 
expressly authorized to do so by a provision of the AHP regulation.
2. AHP Implementation Plans
    The existing regulation requires each Bank's board of directors to 
adopt an AHP implementation plan annually, a copy of which must be 
submitted to the Finance Board annually. See 12 CFR 960.2(b). Proposed 
Sec. 960.2(c) requires adoption of the plan by December 1 of each year, 
and prohibits the board of directors from delegating responsibility for 
adoption of the plan to Bank officers or other Bank employees.
    A Bank's implementation plan must set forth: (1) the Bank's project 
cost guidelines, adopted pursuant to proposed Sec. 960.3(b); (2) the 
Bank's schedule for AHP funding periods, adopted pursuant to proposed 
Sec. 960.6(a); (3) any District threshold requirements, adopted 
pursuant to proposed Sec. 960.7(b); (4) the Bank's AHP scoring 
guidelines, adopted pursuant to proposed Sec. 960.8(a); (5) the Bank's 
procedures for verifying a project's use of AHP subsidies within a 
reasonable period of time pursuant to proposed Sec. 960.9(a); (6) the 
Bank's procedures for verifying compliance upon disbursement of AHP 
subsidies pursuant to Sec. 960.9(b); (7) the requirements for any 
homeownership assistance program adopted pursuant to proposed 
Sec. 960.12; and (8) the Bank's policies and procedures for carrying 
out the Bank's monitoring obligations under proposed Sec. 960.13.
    A Bank must give its Advisory Council a reasonable period of time 
to review the Bank's plan and any subsequent amendments and provide its 
recommendations to the Bank's board of directors prior to adoption. 
This provision is intended to expand the Advisory Councils' role in 
advising the Banks on how AHP subsidies should be allocated to meet the 
low- and moderate-income housing and community development programs and 
needs in their Districts. A Bank's plan, and any amendments, must be 
made available to members of the public, upon request.
    Proposed Sec. 960.2(d) carries forward the requirement in 
Sec. 960.6(a) of the existing regulation that each Bank shall provide 
reports and documentation concerning the Program as the Finance Board 
may request from time to time. See id. Sec. 960.6(a). A Bank must 
provide promptly to the Finance Board and the Advisory Council a copy 
of the AHP implementation plan and any amendments.

C. Eligible Costs--Sec. 960.3

1. General
    The proposed rule revises Sec. 960.3 of the existing regulation by 
clarifying the kinds of activities and costs that are eligible to be 
financed with AHP subsidies. See id. Sec. 960.3. The Act requires each 
Bank to establish a Program ``to subsidize the interest rate on 
advances to members engaged in lending for long term, low- and 
moderate-income, owner-occupied and affordable rental housing * * *.'' 
See 12 U.S.C. 1430(j)(1). The Act further provides that AHP subsidized 
advances are to be used to: (1) finance homeownership by families with 
incomes at or below 80 percent of the median income for the area (i.e., 
low- or moderate-income households); or (2) finance the purchase, 
construction, or rehabilitation of rental housing, at least 20 percent 
of the units of which will be occupied by and affordable for very low-
income households for the remaining useful life of such housing or the 
mortgage term. See id. Sec. 1430(j)(2).
    Proposed Sec. 960.3(a) implements this statutory requirement. It 
provides that AHP subsidies may be used to finance: (1) the purchase, 
construction, or rehabilitation of owner-occupied housing by or for 
very low- or low- or moderate-income households; and (2) the purchase, 
construction, or rehabilitation of rental projects where at least 20 
percent of the units in the project are occupied by and affordable for 
very low-income households. The Finance Board wishes to make clear that 
those units in excess of 20 percent are not required to be, but may be 
committed to be, occupied by and

[[Page 57802]]

affordable for very low- or low- or moderate-income households.
2. Definitions of ``Low- and Moderate-Income Household'' and ``Very 
Low-Income Household''
    Section 10(j)(13)(A) of the Act defines the term ``low- or 
moderate-income household'' as a household that has an income of 80 
percent or less of the area median. See id. Sec. 1430(j)(13)(A). 
Section 10(j)(13)(B) of the Act defines the term ``very low-income 
household'' as a household that has an income of 50 percent or less of 
the area median. See id. Sec. 1430(j)(13)(B).
    The Finance Board's existing regulation defines ``low- and 
moderate-income households'' as households for which the aggregate 
income is 80 percent or less of the area median income, and ``very low-
income households'' as households for which the aggregate income is 50 
percent or less of the area median income. See 12 CFR 960.1 (g), (o). 
``Median income'' is defined as ``the median family income for an area 
as determined and published by the U.S. Department of Housing and Urban 
Development [(HUD)].'' Id. Sec. 960.1(h). ``Area'' is defined as ``a 
metropolitan statistical area, a county, or a nonmetropolitan area, as 
established by the U.S. Office of Management and Budget.'' Id. 
Sec. 960.1(c).
    Under section 3 of the United States Housing Act of 1937, the 
Secretary of HUD annually publishes median income limits for 2,700 
metropolitan statistical areas (MSAs), counties, and nonmetropolitan 
statistical areas, and makes adjustments to these limits for various 
local conditions as well as for household size. See 42 U.S.C. 
1437a(b)(2). In some areas, the Secretary adjusts the income limit 
downward to take into account prevailing construction costs, low 
housing costs, or unusually high household incomes.
    To date, the Finance Board has interpreted Sec. 960.1 (c) and (h) 
of the existing regulation to require the use of the income limits 
published by HUD, including HUD's adjustments for household size, in 
determining household eligibility under the Program. On November 5, 
1993, the Finance Board published for comment a proposal to amend the 
definitions of the terms described above in order to redefine the AHP 
income limits without certain adjustments incorporated in the HUD 
income limits. See 58 FR 58988 (Nov. 5, 1993). This proposal also was 
part of the Finance Board's January 10, 1994 proposal. See 59 FR 1323 
(Jan. 10, 1994).
    Proposed Sec. 960.1 continues to require the use of HUD income 
limits, including adjustments for household size, in determining 
household eligibility under the Program. One reason for this approach 
is that arguably, in more affluent areas, limited AHP resources should 
go to those households that have greater need for housing assistance 
relative to households at the higher end of the median income scale. 
Failure to use HUD downward adjustments may create a preference for 
relatively affluent areas over other areas within a state.
    On the other hand, the HUD adjustment may result in an 
inappropriate exclusion of certain relatively higher income households 
from affordable housing in a particular local market on the basis that 
housing costs are lower or household incomes are higher in that market 
than in other regions of the United States. Although using HUD's income 
limits, including the downward adjustment, decreases the number of 
households in an area that are eligible to receive assistance under the 
Program, such areas may continue to have many households with incomes 
below HUD's adjusted income limits who are ready and able to qualify 
for AHP-assisted housing.
    By adopting the HUD program standards, including regional caps and 
variations for family size, the Finance Board has made it obligatory to 
use the HUD schedule for all AHP projects, even where no HUD money is 
involved. There are other legitimate federal, state, and local 
government sources for area median income data which may be valid and 
more accurate measures of local economic conditions than the HUD 
schedule, which reflects internal adjustments to the data furnished by 
the U.S. Department of Commerce.
    There has been concern that the current regulation has precluded 
AHP participation in any state or local, public or private program that 
does not conform to the HUD schedule or formula for adjusting for 
family size. In some cases, a member may not be able to generate an AHP 
project in an area where it offers banking services, simply because the 
member's market area is a higher-cost area that is not compatible with 
HUD's program limits.
    The alternatives discussed below would not change the income 
eligibility standards of 80 percent and 50 percent of area median 
income, but would provide greater flexibility in determining the basis 
on which these percentages are calculated.
    In light of the Finance Board's statutory mandate to ensure that 
the AHP regulation coordinates the Program with other federal and 
federally-subsidized affordable housing activities to the maximum 
extent possible, see 12 U.S.C. 1430(j)(9)(G), a more flexible 
definition would allow the Program to continue to conform with HUD 
programs while improving its compatibility with other housing programs, 
such as state mortgage revenue bond programs, that use different income 
statistics or different household size adjustments.
    The alternatives would allow: (1) median income to be established 
using any reliable source for current area information and be 
determined for counties and other applicable state and local 
subdivisions as well as MSAs; (2) any adjustment for family size to be 
made in conformance with the requirements of the lead or controlling 
funding source or program; and (3) the use of whatever median income 
standard and adjustment is being used by the sponsoring or funding 
entity for the project, provided that the standard is from a legitimate 
state or federal source that regularly provides such information on 
income. The Finance Board specifically requests comments on these 
alternatives.
3. Definition of ``Affordable''
    The proposed rule eliminates the existing definition of 
``affordable for very low-income households,'' see 12 CFR 960.1(b), and 
replaces it with a definition of ``affordable,'' which is defined to 
mean that the monthly housing costs charged to a household for an AHP-
assisted rental unit cannot exceed 30 percent of the income of a 
household of the maximum income and size expected, under the commitment 
made in the approved AHP application, to occupy the unit (assuming 
occupancy of 1.5 persons per bedroom or 1.0 person per unit without a 
separate bedroom). See proposed Sec. 960.1. Under the revised 
definition, the affordability concept can now be applied not only to 
very low-income households, but also to low- or moderate-income 
households. In addition, the revisions clarify that the rent for those 
units designated for occupancy by households with a specific income 
level cannot exceed 30 percent of the income of a household of the 
maximum income and size expected, under the commitment made in the 
approved AHP application, to occupy the unit (assuming occupancy of 1.5 
persons per bedroom or 1.0 person per unit without a separate bedroom). 
See id. For example, if a unit is designated for occupancy by a four-
person household with a maximum income equal to 40 percent of the 
median income for the area and the household occupying the unit is a 
three-person household whose income is 35 percent of the median income 
for the

[[Page 57803]]

area, the rent should be equal to 30 percent of 40 percent of the 
median income for the area for a four-person household. This is 
necessary because project rent projections, which determine, in part, 
the amount of subsidy needed by a project, are based on the assumption 
that rents will be set based on the maximum income and size of 
households expected to occupy designated very low-income units. The 
proposed definition of ``affordable'' also incorporates the new 
proposed definition of ``monthly housing costs.'' See id.
4. Eligible Costs
    Proposed Sec. 960.3(b) clarifies the language in the existing 
regulation describing the costs that are eligible to be paid with AHP 
subsidies. See 12 CFR 960.3(c). Proposed Sec. 960.3(b) provides that 
AHP subsidies may be used to pay only for the customary and standard 
costs typically incurred, at fair market prices, to purchase, 
construct, or rehabilitate AHP-eligible housing. In addition, the Banks 
are required to evaluate the reasonableness of project costs, based 
upon project cost guidelines adopted by the Bank. Section 10(j)(9)(F) 
of the Act requires the Finance Board to establish maximum subsidy 
limitations under the Program, and section 10(j)(9)(D) of the Act 
requires the Finance Board to ensure that a preponderance of assistance 
provided under the Program is ultimately received by low- and moderate-
income households. See 12 U.S.C. 1430(j)(9)(D), (F). Requiring that 
project costs be reasonable is one way of keeping projects from being 
over-subsidized, ensuring that a preponderance of the funds are 
received by the targeted households, through the lowering of their 
housing costs and avoiding any undue benefit to the intermediaries in 
the development process. The proposal that Banks undertake a project 
cost review of each application merely codifies the existing practice 
of many of the Banks.
5. Ineligible Costs
    Proposed Sec. 960.3(c) sets forth the following costs that may not 
be paid using AHP subsidies.
    a. Pre-development expenses. Proposed Sec. 960.1 defines ``pre-
development expenses'' as ``expenses for the purpose of determining the 
feasibility of a proposed project.'' Examples of such expenses include 
architectural, legal, and engineering fees and survey costs incurred to 
determine the feasibility of a proposed project. The Finance Board 
believes that, based on its experience with the Program, there is a 
great likelihood that expenses incurred during the pre-feasibility 
period, rather than the post-feasibility period, of a project will not 
result in the actual purchase, construction, or rehabilitation of 
housing. Further, since the inception of the Program, demand for AHP 
subsidies for projects in the post-feasibility stage has significantly 
exceeded available funds. Thus, if AHP subsidies were to be approved 
for use during the pre-feasibility period, potentially significant 
amounts of subsidies that currently go toward completing projects might 
instead be paying for activities that never result in the financing or 
production of housing. Proposed Sec. 960.3(c)(1), therefore, prohibits 
the use of AHP subsidies for pre-development expenses not yet incurred 
by a proposed project as of the date the AHP application is submitted 
to the Bank. Nonetheless, projects in the post-feasibility stage may 
apply for AHP subsidies to reimburse the pre-development expenses they 
incurred during the pre-feasibility period.
    b. Prepayment and cancellation fees. Proposed Sec. 960.3(c) (2) and 
(3) prohibit the use of AHP subsidies for prepayment and cancellation 
fees and penalties imposed by a Bank on a member for a subsidized 
advance or advance commitment that is prepaid or canceled, 
respectively. The Finance Board believes that funding such fees is an 
unproductive use of AHP subsidies and does not meet the statutory 
requirement that AHP subsidies be used to finance housing. See 12 
U.S.C. 1430(j)(2).
    c. Counseling costs. Counseling can play an important role in the 
development and success of affordable housing projects. The Finance 
Board specifically requests comments on whether AHP subsidies should be 
permitted to pay for counseling costs, generally, and whether they 
should be used to pay only for counseling for homebuyers, homeowners, 
or tenants of AHP-assisted units. The Finance Board believes that if 
AHP subsidies are to be used for counseling, they should be used to 
expand the pool of resources available for counseling, rather than 
replace existing sources of funding. The Finance Board wishes to 
prevent AHP subsidies from being used to pay for counseling that, in 
the absence of the AHP subsidy, would customarily be financed by 
another source of funding for a project. Therefore, proposed 
Sec. 960.3(c)(4) prohibits the use of AHP subsidies for costs incurred 
in connection with counseling of homebuyers, homeowners, or tenants 
except for costs of homebuyer counseling where: (1) the counseling is 
provided to a household that actually purchases an AHP-assisted unit; 
and (2) the cost of the counseling has not been covered by another 
funding source, including the member.
    d. Direct subsidy processing fees. Members do not conduct the same 
level of underwriting and processing when providing direct subsidies to 
projects as they do when making loans to projects. Therefore, proposed 
Sec. 960.3(c)(5) prohibits the use of AHP subsidies for processing fees 
charged by members for providing direct subsidies to AHP-assisted 
projects. This would not preclude a member from using AHP subsidies to 
pay for an origination fee in cases where the member receives both a 
subsidized advance and a direct subsidy, or only a direct subsidy, from 
a Bank, and in turn makes both a loan and a grant to the project, 
provided the AHP subsidies are used to pay only for the loan 
origination fee and not for any fee associated with providing the 
direct subsidy.
6. Refinancing
    Proposed Sec. 960.3(d) provides that AHP subsidies may be used to 
refinance an existing single-family or multifamily mortgage loan, 
provided the equity proceeds of the refinancing are used only for the 
purchase, construction, or rehabilitation of AHP-eligible housing. This 
provision is intended to prevent the owner of an existing housing 
project from using AHP subsidies to liquidate the owner's equity stake 
in the project, for the sole benefit of the owner. Such use of AHP 
subsidies would be contrary to the Act, because there would be no 
resulting purchase, construction, or rehabilitation of AHP-eligible 
housing. See 12 U.S.C. 1430(j)(2).

D. Retention of AHP-Assisted Housing--Sec. 960.4

    Under the existing regulation, there is no specified minimum 
retention period for AHP-assisted owner-occupied or rental housing. 
Projects that commit to longer retention periods receive more points in 
the scoring process. See 12 CFR 960.5(d)(2). Further, the existing 
regulation does not provide specific requirements governing the kinds 
of retention mechanisms that are to be used to ensure that AHP-assisted 
housing continues to meet AHP statutory and regulatory requirements and 
the obligations committed to in applications for AHP subsidies. The 
proposed rule establishes minimum threshold retention periods for AHP-
assisted housing and clarifies the kinds of retention mechanisms that 
must be used for such housing.

[[Page 57804]]

    a. Owner-occupied units. The Finance Board believes that the 
purpose of the language in the Act directing AHP subsidies to be used 
to ``finance homeownership by families with incomes at or below 80 
percent of the median income for the area,'' is to assist low- and 
moderate-income households in achieving homeownership, and then 
permitting the households to have rights in a home to the same extent 
as other homeowners, including the benefit of appreciation of the value 
of the home. See 12 U.S.C. 1430(j)(2)(A). Unlike the statutory 
provision governing AHP-assisted rental housing, see id. 
Sec. 1430(j)(2)(B), the provision governing AHP-assisted owner-occupied 
housing does not mandate continued affordability for subsequent 
purchasers of owner-occupied units, nor does it impose restrictions on 
the resale price of such units. Therefore, the retention provisions of 
the proposed rule do not impose such requirements on owner-occupied 
units. However, to minimize opportunities for speculation, proposed 
Sec. 960.4(a) requires each AHP-assisted owner-occupied unit to be 
subject to a deed restriction, ``soft'' second mortgage, or other 
legally enforceable mechanism facilitating recovery of a portion of the 
AHP subsidy if, prior to the end of the retention period, the owner 
sells the unit to a household that is not a low- or moderate-income 
household or refinances the unit and fails to ensure that it continues 
to be subject to a retention mechanism for the remainder of the 
retention period. In the latter case, the homeowner is required to 
repay the full amount of the direct subsidy.
    Proposed Sec. 960.1 defines ``retention period'' as the period 
during which the sponsor or owner of an AHP-assisted project commits to 
comply with the requirements of 12 U.S.C. 1430(j), the AHP regulation, 
and the terms of the approved AHP application. Proposed Sec. 960.1 
provides that the minimum retention period for an owner-occupied unit 
is 5 years, and for a rental unit is 15 years from the date of project 
completion. Under proposed Sec. 960.8(a)(2)(v)(E), a Bank may establish 
a scoring priority for applications for projects with retention periods 
in excess of the required minimums.
    Proposed Sec. 960.4(a)(1) provides specifically that an owner-
occupied unit financed by a direct subsidy under the Program must be 
subject to a deed restriction, ``soft'' second mortgage, or other 
legally enforceable mechanism requiring that the Bank or its designee 
is to be given notice of any sale or refinancing of the unit occurring 
prior to the end of the retention period. In the case of a sale prior 
to the end of the retention period, a pro rata share of the direct 
subsidy, reduced for every year the seller owned the unit, must be 
repaid to the Bank from any net gain realized upon the sale of the unit 
after deduction for sales expenses, unless the purchaser is a low- or 
moderate-income household. In the case of a refinancing prior to the 
end of the retention period, the full amount of the direct subsidy must 
be repaid to the Bank from any net gain realized upon the refinancing 
of the unit, unless the unit continues to be subject to a retention 
mechanism for the remainder of the retention period. This is intended 
to ensure that the owner of an AHP-assisted unit does not circumvent 
the retention requirement by refinancing the unit.
    Proposed Sec. 960.4(a)(2) provides specifically that an owner-
occupied unit financed by a loan from the proceeds of a subsidized 
advance under the Program must be subject to a deed restriction or 
other legally enforceable mechanism requiring that the Bank or its 
designee is to be given notice of any sale or refinancing of the unit 
occurring prior to the end of the retention period. In the case of a 
refinancing prior to the end of the retention period, the full amount 
of the interest rate subsidy received by the owner, based on the pro 
rata portion of the interest rate subsidy imputed to the subsidized 
advance during the period the owner occupied the unit prior to 
refinancing, must be repaid to the Bank from any net gain realized upon 
the refinancing, unless the unit continues to be subject to a retention 
mechanism for the remainder of the retention period.
    Where a member uses the proceeds of a subsidized advance to make 
loans financing owner-occupied units, the Bank must require the member 
to agree in writing that if such loans are prepaid by the borrower, the 
member may, at its option, either: (1) repay to the Bank that portion 
of the subsidized advance used to make the loan to the borrower, and be 
subject to a fee imposed by the Bank sufficient to compensate the Bank 
for any loss the Bank experiences in reinvesting the repaid amount at a 
rate of return below the cost of funds originally used by the Bank to 
calculate the interest rate subsidy incorporated in the subsidized 
advance; or (2) continue to maintain the subsidized advance 
outstanding, subject to the Bank resetting the interest rate on that 
portion of the subsidized advance used to make the loan to the borrower 
to a rate equal to the cost of funds originally used by the Bank to 
calculate the interest rate subsidy incorporated in the subsidized 
advance.
    The Finance Board specifically requests comments on whether 
repayment of AHP subsidy should be triggered in all cases of 
refinancing by the owner prior to the end of the retention period, not 
just in cases where the owner fails to ensure that the unit continues 
to be subject to a retention mechanism after the refinancing. 
Refinancing may allow the owner of an AHP-assisted unit, in effect, to 
take the subsidy out of the unit prior to the end of the 5-year 
retention period, which, arguably, is a windfall to the owner. However, 
homeowners, generally, can take advantage of lower interest rates by 
refinancing their homes, and households that purchase AHP-assisted 
homes should not be denied this opportunity. As long as the owner of an 
AHP-assisted home ensures that after the refinancing, the home 
continues to be subject to the AHP retention requirement, the goal of 
the Program is met.
    b. Rental projects. The Act provides that AHP-assisted rental 
housing must be occupied by and affordable for very low-income 
households ``for the remaining useful life of such housing or the 
mortgage term.'' See id. Sec. 1430(j)(2). The Finance Board believes 
that the statutory requirement that AHP-assisted rental housing be 
affordable for the ``mortgage term'' should not be interpreted to refer 
to the term of the mortgage loan actually financing a particular 
housing project, because this would encourage owners to obtain the 
shortest term financing available in order to limit the time that units 
must remain affordable. The Finance Board believes that 15 years 
reflects a reasonable period of time for the imposition of 
affordability requirements on AHP-financed rental units and is within a 
reasonable range of the average mortgage terms for affordable rental 
housing. Project sponsors continue to have the option of maintaining 
the affordability of units in the project for the remaining useful life 
of the housing, see id. Sec. 1430(j)(2), but the regulatory minimum 
under the proposed rule is 15 years.
    Proposed Sec. 960.4(b)(1) provides that a rental project financed 
with a direct subsidy must be subject to a deed restriction or other 
legally enforceable mechanism requiring that the project's rental 
units, or applicable portion thereof, must remain occupied by and 
affordable for households with incomes at or below the levels committed 
to be served in the AHP application for the duration of the retention 
period, and the Bank or its designee is to be given notice of any sale 
or refinancing of the project occurring prior to the end of the

[[Page 57805]]

retention period. In the case of a sale prior to the end of the 
retention period, an amount equal to the entire amount of any direct 
subsidy received must be repaid to the Bank, unless the subsequent 
owner agrees in writing to comply with the income-eligibility and 
affordability restrictions committed to in the AHP application. In the 
case of a refinancing prior to the end of the retention period, an 
amount equal to the entire amount of any direct subsidy received must 
be repaid to the Bank, unless the project continues to be subject to a 
deed restriction or other legally enforceable mechanism requiring the 
project's rental units, or applicable portion thereof, to remain 
occupied by and affordable for households with incomes at or below the 
levels committed to be served in the AHP application for the duration 
of the retention period.
    Proposed Sec. 960.4(b)(2) provides that a rental project financed 
with a subsidized advance must be subject to a deed restriction or 
other legally enforceable mechanism requiring that the project's rental 
units, or applicable portion thereof, must remain occupied by and 
affordable for households with incomes at or below the levels committed 
to be served in the AHP application for the duration of the retention 
period, and the Bank or its designee is to be given notice of any sale 
or refinancing of the project occurring prior to the end of the 
retention period. In the case of a sale prior to the end of the 
retention period, the full amount of the interest rate subsidy received 
by the seller, based on the pro rata portion of the interest rate 
subsidy imputed to the subsidized advance during the period the seller 
owned the project prior to the sale, must be repaid to the Bank, unless 
the subsequent owner agrees in writing to comply with the income-
eligibility and affordability restrictions committed to in the AHP 
application. In the case of a refinancing prior to the end of the 
retention period, the full amount of the interest rate subsidy received 
by the owner, based on the pro rata portion of the interest rate 
subsidy imputed to the subsidized advance during the period the owner 
owned the project prior to refinancing, must be repaid to the Bank, 
unless the project continues to be subject to a deed restriction or 
other legally enforceable mechanism requiring the project's rental 
units, or applicable portion thereof, to remain occupied by and 
affordable for households with incomes at or below the levels committed 
to be served in the AHP application for the duration of the retention 
period.
    Where a member uses the proceeds of a subsidized advance to make 
loans financing a rental project, the Bank must require the member to 
agree in writing that if such loans are prepaid by the borrower, the 
member may, at its option, either: (1) repay to the Bank that portion 
of the subsidized advance used to make the loan to the borrower, and be 
subject to a fee imposed by the Bank sufficient to compensate the Bank 
for any loss the Bank experiences in reinvesting the repaid amount at a 
rate of return below the cost of funds originally used by the Bank to 
calculate the interest rate subsidy incorporated in the subsidized 
advance; or (2) continue to maintain the subsidized advance 
outstanding, subject to the Bank resetting the interest rate on that 
portion of the subsidized advance used to make the loan to the borrower 
to a rate equal to the cost of funds originally used by the Bank to 
calculate the interest rate subsidy incorporated in the subsidized 
advance.
    The Finance Board specifically requests comments on whether an 
owner of an AHP-assisted rental project should be required to repay the 
entire amount of the AHP subsidy, versus a pro rata share, where the 
project is sold prior to the end of the retention period and the 
subsequent owner fails to agree in writing to comply with the income-
eligibility and affordability restrictions committed to in the AHP 
application. This requirement arguably serves to discourage the 
conversion of AHP-assisted rental projects into projects that charge 
market rents, prior to the end of the retention period.

E. Timing of Household Income Qualification--Sec. 960.5

    Proposed Sec. 960.5 adds new provisions intended to clarify the 
time at which a household's income should be examined to determine 
whether it meets the income eligibility requirements for AHP-assisted 
housing.
1. Owner-Occupied Projects
    Proposed Sec. 960.5(a) provides that in order to qualify as a very 
low- or a low- or moderate-income household for purposes of an AHP-
assisted owner-occupied project, a household must have an income at or 
below the level committed to in the AHP application at the time the 
household is qualified by the sponsor for participation in the project, 
but no earlier than the date on which the AHP application was submitted 
to the Bank for approval.
2. Rental Projects
    Proposed Sec. 960.5(b) provides that in order to qualify as a very 
low- or a low- or moderate-income household for purposes of an AHP-
assisted rental project, a household must have an income at or below 
the level committed to in the AHP application for a particular unit 
upon initial occupancy only. The household may continue to occupy such 
designated unit even if its income subsequently increases above the 
income-eligibility requirement for that unit. The unit may continue to 
count toward meeting the targeted income-eligibility requirement, 
provided the rent charged remains affordable, as defined in proposed 
Sec. 960.1, for the targeted household.

F. Funding Periods--Sec. 960.6

1. Definition of Member
    Proposed Sec. 960.1 revises the definition of ``member'' in the 
existing AHP regulation, see 12 CFR 960.1(i), to conform the definition 
to that used in the Finance Board's regulation on membership. See id. 
Sec. 933.1(s).
2. District-Wide Competitions
    Proposed Sec. 960.6(a) continues the existing requirement that each 
Bank: (1) administer a District-wide competition for its AHP subsidies; 
(2) announce the application due dates by December 1 of the preceding 
year; and (3) offer comparable amounts of AHP subsidies in each funding 
period. See id. Sec. 960.4(a). Proposed Sec. 960.6(a) revises the 
existing regulation by permitting the Banks to accept applications from 
members for AHP funding during a specified number of funding periods 
each year, as determined by the Bank, instead of only twice a year as 
required under the existing regulation. See id. The Finance Board 
specifically requests comments on whether the Banks should be permitted 
to accept AHP applications on a rolling basis, and, if so, how 
applications would be scored under such a process.
3. Funding Availability; Notification to Members
    Proposed Sec. 960.6(b) requires each Bank to notify its members and 
other interested parties of: (1) the approximate amount of annual AHP 
subsidies available for the Bank's District; and (2) the approximate 
amount of AHP subsidies to be offered in each funding period. See id. 
Sec. 960.4(b).
    Proposed Sec. 960.6(b) also adds three new Bank notification 
requirements. Each Bank must notify its members and other interested 
parties of: (1) the applicability of any District threshold 
requirements established pursuant to proposed Sec. 960.7(b); (2) the 
scoring guidelines contained in the Bank's AHP

[[Page 57806]]

implementation plan; and (3) the application due dates. The term 
``interested parties'' in proposed Sec. 960.6(b) is meant to refer to 
those parties that have expressed an interest to the Bank in receiving 
information about AHP funding periods.

G. Application Requirements--Sec. 960.7

    Proposed Sec. 960.7(a) consolidates, streamlines, and revises the 
AHP application requirements in Secs. 960.4(c) and 960.5(a)(1) and (2) 
of the existing regulation. See 12 CFR 960.4(c), 960.5(a)(1), (2).
1. Mandatory Requirements
    Under proposed Secs. 960.7(a)(1) through (3), each Bank must 
require members to include in their AHP applications: (1) a concise 
description of the proposed project; (2) the estimated amount of AHP 
subsidy required for the proposed project; and (3) a disclosure of the 
member's direct or indirect interest, if any, in the property or 
proposed project. These requirements generally reiterate application 
requirements in the existing regulation. See id. Sec. 960.4(c) (1), 
(5), (6). However, proposed Sec. 960.7(a)(2) adds a new requirement 
that in the case of an application for a subsidized advance, the member 
shall include in its application the interest rate on the member's loan 
to the proposed project, and, for purposes of scoring the application, 
the Bank shall estimate the subsidy required for the proposed project 
based on the Bank's cost of funds as of the date on which all AHP 
applications are due for the funding period in which the application is 
submitted. This is intended to address the fact that the actual amount 
of AHP subsidy that will be incorporated in the subsidized advance for 
which the member is applying will not be determined until after the 
member submits its application to the Bank. Therefore, in order to 
treat all members applying for subsidized advances in a given funding 
period on an equal basis, the proposed rule requires that the estimate 
of the subsidy in a subsidized advance be based on the Bank's cost of 
funds as of the date on which all AHP applications are due for the 
funding period in which the application is submitted.
    Proposed Sec. 960.7(a)(4) requires that AHP applications include an 
explanation of how the proposed project will comply with the eligible 
costs provision of proposed Sec. 960.3(b). In order to meet this 
requirement, applications should include an explanation of how the AHP 
subsidy will be used. The proposed requirement is consistent with the 
existing application requirements for eligible uses of AHP subsidies. 
See id. Secs. 960.4(c)(1), 960.5(a)(1).
    Proposed Sec. 960.7(a)(5) requires that AHP applications include an 
explanation of how the proposed project will comply with the retention 
requirements of proposed Sec. 960.4. In order to meet this requirement, 
applications should include an explanation of what legal agreements, 
deed restrictions, or other legally enforceable mechanisms are or will 
be in place to ensure retention of the project in accordance with the 
requirements of proposed Sec. 960.4. This is consistent with the 
requirement in the existing regulation that the Bank consider the 
extent to which the project facilitates the maximum retention of such 
housing as evidenced through the existence of long-term guarantees, 
covenants, and similar techniques. See id. Sec. 960.5(d)(2).
    Proposed Sec. 960.7(a)(6) requires that AHP applications include an 
explanation of how the proposed project is financially viable and 
likely to be completed within a reasonable period of time, and why the 
requested AHP subsidy is needed. In evaluating the application for 
compliance with this requirement, a Bank must analyze all project 
sources and uses of funds (including the value of any donated land, 
materials, and professional labor), multi-year operating pro formas for 
rental projects, sale prices for owner-occupied units, and local market 
conditions and review the reasonableness of information relating to 
available sources and uses of funding and financing capacity, such as 
operating pro formas, to verify the proposed project's need for AHP 
subsidy.
    This provision amends the feasibility requirement in the existing 
regulation by specifying the types of information that must be included 
in the project feasibility analysis and by adding an explicit 
requirement that the Banks analyze a proposed project's need for the 
requested AHP subsidy. See id. Secs. 960.4(c)(3), 960.5(a)(2)(ii). This 
change would make clear that the Banks, in addition to reviewing the 
reasonableness of project costs, must review the reasonableness of 
operating pro formas for the proposed project to ensure that 
representations regarding the financing capacity of the project (such 
as debt servicing capacity and equity market value), and the consequent 
need for AHP subsidy, are reasonable.
    The requirement that the project is likely to be completed within a 
reasonable period of time replaces the requirement in 
Sec. 960.5(a)(2)(iv) of the existing regulation that projects be 
evaluated for their ability to begin using AHP subsidies within 12 
months of approval. See id. Sec. 960.5(a)(2)(iv).
    Proposed Sec. 960.7(a)(7) requires that AHP applications include an 
explanation of the project sponsor's qualifications and ability to 
perform its responsibilities as committed to in the AHP application. 
This provision is consistent with the sponsor qualification requirement 
in the existing regulation. See id. Sec. 960.4(c)(4). Proposed 
Sec. 960.1 defines a ``sponsor'' as a not-for-profit or for-profit 
organization or public entity that is: (1) An owner of a rental 
project; or (2) integrally involved in an owner-occupied project, such 
as by exercising control over the planning, development or management 
of such project, or by qualifying borrowers and providing or arranging 
financing for the owners of the units. This definition revises the 
definition in the existing regulation to clarify the different roles of 
sponsors in rental as opposed to owner-occupied projects.
    Proposed Sec. 960.7(a)(8) requires that AHP applications include a 
statement that the project sponsor and owner will comply with any 
applicable fair housing law requirements, and an explanation of how the 
project sponsor and owner intend to affirmatively market the proposed 
project and otherwise comply with such requirements. This provision is 
consistent with the fair housing requirements in the existing 
regulation. See id. Secs. 960.4(c)(2), 960.5(a)(2)(i).
    The proposed rule does not include the existing regulatory 
requirement that AHP applications be evaluated to ensure the member's 
ability to qualify for a subsidized advance. See id. 
Sec. 960.5(a)(2)(iii). Since a Bank is always required to determine a 
member's creditworthiness before providing funds to the member, see 12 
CFR part 935, it is not necessary to repeat this requirement in the AHP 
regulation.
    Proposed Sec. 960.7(a)(9)(i) requires that AHP applications include 
a statement that the proposed project will satisfy the maximum subsidy 
requirement, i.e., that no subsidized household in the proposed project 
shall pay less than 20 percent of such household's gross monthly income 
toward monthly housing costs, as defined in proposed Sec. 960.1 (the 20 
percent requirement), unless an exception applies. This provision 
carries forward, in revised form, the provisions of Sec. 960.9 of the 
existing regulation, which were issued by the Finance Board as an 
interim rule. See id. Sec. 960.9. The maximum subsidy provisions 
implement the maximum subsidy limitation requirement

[[Page 57807]]

contained in section 10(j)(9)(F) of the Act. See 12 U.S.C. 
1430(j)(9)(F).
    Proposed Sec. 960.7(a)(9)(ii)(A) provides that the 20 percent 
requirement shall not apply where an AHP-assisted rental project also 
receives funds from a federal or state rental housing program that 
requires qualifying households to pay as rent a certain percentage of 
their monthly income or a designated amount, and the households in the 
project meet such requirements. This provision is consistent with the 
similar exception in the existing regulation. See 12 CFR 960.9(b)(1).
    Proposed Sec. 960.7(a)(9)(ii)(B) also provides that the 20 percent 
requirement shall not apply where the total amount of the AHP subsidies 
provided to the project to finance rehabilitation of housing units 
owned by very low-income households is $10,000 or less per household, 
and for housing units owned by low- or moderate-income households, 
$5,000 or less per such household. This provision is a change from the 
existing regulation which permits an exception to the 20 percent 
requirement for rehabilitation only of units owned by very low-income 
households. See id. Sec. 960.9(b)(2).
    Proposed Sec. 960.7(a)(9)(ii)(C) further provides that the 20 
percent requirement shall not apply where the total amount of AHP 
subsidies provided to the project to finance the purchase of housing 
units is $5,000 or less per household. This is a change from the 
existing regulation, which permits an exception to the 20 percent 
requirement for purchase of units only by households that are above the 
threshold income level for very low-income households and at or below 
the income level to qualify as low- or moderate-income households. See 
id. Sec. 960.9(b)(3).
    In addition, proposed Sec. 960.7(a)(9)(ii)(D) provides that the 20 
percent requirement shall not apply where AHP subsidies are used to 
assist a household participating in a self-help, sweat equity or 
similar housing program that requires the household to contribute its 
skilled or unskilled labor valued at a minimum of $2,000 per household, 
working cooperatively with others, to construct or rehabilitate housing 
which the household or other program participants are purchasing or 
already own and occupy, and that involves supervision of the work 
performed by skilled builders or rehabilitators. This provision is 
consistent with the similar exception in the existing regulation. See 
id. Sec. 960.9(b)(4).
    Proposed Sec. 960.7(a)(9)(ii) also deletes the annual Consumer 
Price Index adjustments required in the existing regulation, in order 
to simplify implementation of the exceptions. See id. Sec. 960.9(b) 
(2), (3), (4).
    Proposed Sec. 960.7(a)(10) requires that AHP applications include 
an explanation of how the proposed project meets any applicable 
District threshold requirements adopted by the Bank pursuant to 
proposed Sec. 960.7(b), discussed further below.
    Proposed Sec. 960.7(a)(11) requires that AHP applications include 
an explanation of how the proposed project meets the priorities and 
objectives identified in proposed Sec. 960.8(a). This provision carries 
forward the similar provision in the existing regulation. See id. 
Sec. 960.4(c)(1).
    Proposed Sec. 960.7(a)(12) requires that AHP applications include a 
certification from the member, project sponsor, and project owner 
committing to comply with the requirements of 12 U.S.C. 1430(j), part 
960, and all obligations committed to in the AHP application. This 
provision incorporates the certification requirements in Secs. 960.4(c) 
(8) and (9) of the existing regulation into a general requirement for 
certification of compliance with all applicable AHP requirements and 
commitments, and requires sponsors and owners, as well as members, to 
make such certification. See 12 CFR 960.4(c) (8), (9).
    Proposed Sec. 960.7(a)(13) requires that AHP applications include 
such other information as the Bank may reasonably require in order to 
verify compliance of the AHP applications with the requirements of part 
960. This provision carries forward the comparable provision in the 
existing regulation, but establishes a standard for when the Banks may 
require other additional information not identified in proposed 
Sec. 960.7(a). See id. Sec. 960.4(c)(10).
    The proposed rule eliminates the requirement in existing 
Sec. 960.4(c)(7), see id. Sec. 960.4(c)(7), that a member must explain 
in its application how it will monitor the proposed project, because, 
as discussed further below, the proposed rule establishes specific 
monitoring requirements for all members. See proposed Sec. 960.13.
    The proposed rule also eliminates the requirement in existing 
Sec. 960.4(c)(8) that a member must explain how any excess AHP subsidy 
will be recaptured. See 12 CFR 960.4(c)(8). As discussed further below, 
the proposed rule establishes specific requirements for all members 
governing the recapture of AHP subsidies as well as other remedies for 
noncompliance. See proposed Sec. 960.14.
2. District Threshold Requirements
    As discussed in part I of the SUPPLEMENTARY INFORMATION, the 
Finance Board published a Subsidy Limits Proposal on November 1, 1995, 
see 60 FR 55487 (Nov. 1, 1995), and received 25 comment letters. 
Commenters included ten Banks, four Bank Advisory Councils, five Bank 
members, three trade associations, one private housing developer, one 
not-for-profit sponsor, and one housing authority sponsor. A majority 
of the commenters supported the Subsidy Limits Proposal. Three 
commenters opposed member subsidy limits, four commenters opposed 
project application subsidy limits, and four commenters opposed project 
unit subsidy limits.
    As discussed below, Sec. 960.7(b) of the proposed rule incorporates 
the Finance Board's Subsidy Limits Proposal, taking into account public 
comments received. Specifically, the proposed rule permits the Banks, 
in their discretion, to establish certain application threshold 
requirements in addition to those expressly set forth in Sec. 960.7(a).
    a. Member, project, and unit subsidy limits. Proposed 
Sec. 960.7(b)(1) provides that a Bank's board of directors, after 
consultation with its Advisory Council, may establish limits on the 
maximum amount of AHP subsidy available per member per year; or per 
member, per project, or per project unit in a single funding period, 
provided that such subsidy limits must apply equally to all members. 
See 12 U.S.C. 1427(j).
    Member subsidy limits may prevent a small number of members, 
especially larger members with competitive advantages, from receiving 
all of the AHP subsidy available in a given funding period. This would 
encourage participation by a greater number of members in the Program. 
The benefits of the Program may be distributed across a wider 
geographic area and among a broader variety of projects.
    There may be an effect on the AHP regulatory program goal of 
promoting competition if highly competitive projects have difficulty 
finding available members that have not exceeded their limits to submit 
AHP applications for them. However, the Finance Board believes that 
sufficient numbers of members should be available to accommodate all 
AHP applications. Any noncompetitive effect likely would be minimal in 
comparison to the benefit of greater member participation in the 
Program. Several Banks already unilaterally have adopted member subsidy 
limits.

[[Page 57808]]

    Project application and project unit subsidy limits may prevent a 
small number of projects from receiving all or most of the available 
AHP subsidies in a given funding period. This would encourage funding 
of a greater number of AHP projects. Funding more projects may serve 
housing needs in more areas of the Bank's District, and promote greater 
participation by members, especially small members that cannot handle 
large projects, in the Program. Such limits would not prevent 
competitive projects from being funded. Those projects merely would be 
funded at lower levels, with the gaps in funding made up from other 
funding sources, thereby enabling the funding of additional AHP 
projects.
    There may be an effect on the AHP regulatory program goal of 
promoting competition if otherwise highly competitive projects that 
need a large amount of subsidy, such as some rural or homeownership 
projects, have difficulty finding other available sources of funding, 
and therefore, remain financially unfeasible. There also could be an 
impact on the AHP statutory and regulatory program goal of promoting 
funding of units for very low-income households, which often need 
larger subsidies to make the projects financially feasible. See 12 
U.S.C. 1430(j)(2)(B); 12 CFR 960.5(d)(1). However, the Finance Board 
believes that any noncompetitive effect or impact on very low-income 
targeting may be outweighed by the benefit of funding a greater number 
of AHP projects, and the ability to receive additional scoring points 
under the AHP regulatory scoring criterion for very low-income 
targeting. Project unit subsidy limits also conform with the goal of 
the effectiveness scoring criterion in the existing regulation and 
proposed rule to encourage lower levels of AHP subsidy per unit by 
giving additional scoring points for projects with lower ratios. See 12 
CFR 960.5(d)(3); proposed Sec. 960.8(a)(3)(ii). Several Banks already 
unilaterally have adopted project application and project unit subsidy 
limits.
    Limits on the amount of direct subsidy per project may promote 
greater member involvement in the Program by encouraging more members 
to borrow AHP subsidized advances and, in turn, lend their own funds to 
project borrowers. This would build greater member affordable housing 
lending capacity and expertise. If members' own funds were at risk as a 
result of such limits, members may have greater incentive to underwrite 
and monitor projects for financial feasibility and AHP compliance, 
respectively. Direct subsidies, which, in some cases, are passed on by 
members to borrowers without members putting any of their own funds at 
risk, do not promote these goals. Several Banks already unilaterally 
have adopted project direct subsidy limits.
    The proposed rule provides that establishment of member, project, 
or unit subsidy limits would be optional with the Banks. The Banks 
would be required to consult with their Advisory Councils in 
establishing such limits, since Advisory Council members typically have 
affordable housing expertise that may be very useful to the Banks in 
determining the affordable housing needs of the District and how any 
subsidy limit would promote those needs. Thus, if a Bank determines 
that imposition of particular subsidy limits will have specific 
negative impacts on members or projects (e.g., as described by some 
commenters in their comments on the Subsidy Limits Proposal) that 
outweigh the benefits to the Program, the Bank can choose not to adopt 
such limits. The proposed rule, thus, provides flexibility to the 
Banks, which best understand their markets, including the availability 
of other subsidy sources and affordability levels, to respond to 
individual District needs.
    b. Sponsor subsidy limits. In the Subsidy Limits Proposal, the 
Finance Board requested comments on whether the Banks should be 
permitted to establish maximum subsidy limits per project sponsor. See 
60 FR 55489.
    One commenter supported such authority. Sponsor subsidy limits 
might encourage greater participation by sponsors in the Program, 
increase the affordable housing development capacity of more sponsors, 
and encourage the creation of more sponsors. Such limits might be 
especially beneficial where one large or particularly active sponsor in 
a District is winning a large portion of the Bank's AHP subsidies. 
However, the Finance Board believes that the competitive and market 
aspects of the Program will preclude any one sponsor from dominating 
the AHP funding process. Accordingly, the proposed rule does not 
authorize the Banks to establish a limit on the maximum amount of AHP 
subsidy that may be requested per project sponsor.
    c. Subsidy limits based on member capital stock investment. Several 
commenters proposed that the Banks be permitted to establish subsidy 
limits based on the level of a member's capital stock investment in the 
Bank. Members are required by the Act to maintain a specified amount of 
Bank capital stock to support their advance borrowings. See 12 U.S.C. 
1426(b)(2), 1430(e)(1). The argument was made that encouraging member 
advance borrowings and the corresponding investment in Bank capital 
stock would further the goal of increasing Bank earnings and, 
therefore, the AHP fund, which is derived from Bank earnings. However, 
such limits may not enlarge the AHP fund by increasing member borrowing 
because small member institutions, by virtue of their limited asset 
size, would be incapable of increasing or unwilling to increase their 
borrowings (due to the increased cost of borrowing resulting from 
investing in additional Bank stock) just to receive ``preferred 
treatment'' under such a subsidy limits policy. Accordingly, the 
proposed rule does not authorize the Banks to establish subsidy limits 
based on members' levels of capital stock investment in the Bank.
    d. Limitation on access to AHP subsidies based on member's use of 
Bank credit products. Proposed Sec. 960.7(b)(3) authorizes a Bank to 
require that members submitting AHP applications have made use of a 
credit product offered by the Bank within the previous 12 months, other 
than AHP or Community Investment Program (CIP) (see 12 U.S.C. 1430(i)) 
credit products, provided that the requirement is applied equally to 
all members.
    In the Subsidy Limits Proposal, the Finance Board specifically 
requested comments on whether the Banks should be permitted to 
establish AHP subsidy limits based on the level of a member's regular 
advance borrowings from a Bank. See 60 FR 55490-91. One Bank already 
unilaterally has adopted such a policy. Ten commenters supported such 
authority, while five commenters opposed it. One reason expressed for 
imposing such limits was that they would encourage broader 
participation by members in the Program, thereby giving sponsors more 
options for financing AHP projects, and providing experience and 
education to more members that could help them develop additional 
capacity to engage in affordable housing lending. However, such limits 
may not achieve this goal if members with high levels of borrowing who 
already participate in the Program are allowed to apply for and win the 
additional AHP subsidies no longer available to those members subject 
to the limits. Uniform limits on the amount of AHP subsidy for which 
each member may apply may have a greater likelihood of increasing 
member participation in the Program.
    It also was argued that credit-based subsidy limits may increase 
the pool of available AHP funds by encouraging greater borrowing from 
the Bank and, therefore, increasing Bank earnings,

[[Page 57809]]

from which AHP funds are derived. The argument also was made that 
members that contribute to Bank earnings by borrowing should have 
greater access than non-borrowing members to AHP subsidies derived from 
such earnings.
    The Act does not restrict availability of AHP subsidies to 
``borrowing'' members. Nor does it specify any correlation between the 
member's contribution to Bank earnings and its access to AHP subsidies. 
Bank earnings are affected by economic factors other than the amount of 
outstanding advances of members participating in the Program. Thus, 
even non-borrowing members contribute to Bank earnings and, therefore, 
to the AHP fund. The limits also may not enlarge the AHP fund by 
increasing member borrowing because, as discussed above, small member 
institutions, by virtue of their limited asset size, would be incapable 
of increasing or unwilling to increase their borrowings (due to the 
increased cost of borrowing resulting from investing in additional Bank 
stock) just to receive ``preferred treatment'' under an AHP subsidy 
limits policy.
    Instead, proposed Sec. 960.7(b)(3) authorizes a Bank to require 
that members submitting AHP applications have made use of a Bank credit 
product within the previous 12 months, other than AHP or CIP credit 
products, provided that the requirement is applied equally to all 
members. The Finance Board believes that there is some merit in tying 
access to AHP subsidies to a member's contribution to the Bank's 
housing finance mission through its use of one or more of the Bank's 
regular credit products. This type of limitation would not discriminate 
against a member based on its asset size, as all members would have the 
capability to borrow some amount from the Bank.
    e. Subsidy limits based on the level of a member's mortgage-related 
assets. The Finance Board requested comments in the Subsidy Limits 
Proposal on whether the Banks should be permitted to establish AHP 
subsidy limits based on the level of a member's mortgage-related 
assets. See 60 FR 55490-91. Seven commenters supported such authority, 
while six commenters opposed it.
    Commenters argued that such subsidy limits may encourage members to 
increase their mortgage-related lending, consistent with the provisions 
of the Act that impose less burdensome advances and stock requirements 
on institutions that devote a greater percentage of their assets to 
housing finance (qualified thrift lenders). See 12 U.S.C. 1430(e)(1), 
(2); 12 CFR 935.13. However, the Finance Board believes that such 
limits would defeat this goal since members, especially commercial 
banks, with lower levels of mortgage-related assets would have limited 
access to AHP subsidies which they could use for such housing finance 
purposes. Accordingly, the proposed rule does not authorize the Banks 
to establish AHP subsidy limits based on the level of a member's 
mortgage-related assets.
    f. Limiting or prohibiting AHP applications for out-of-District 
projects. Proposed Sec. 960.7(b)(2) authorizes the Banks, at their 
option, to establish a threshold requirement prohibiting applications 
for AHP subsidies for projects located outside the Bank's District. 
Proposed Sec. 960.8(a)(2)(v)(M) also authorizes the Banks to adopt as 
an optional Bank District scoring priority a priority for projects 
located within the Bank's District.
    In the Subsidy Limits Proposal, the Finance Board specifically 
requested comments on whether the Banks should be permitted to limit or 
prohibit members from submitting AHP applications for projects located 
outside of the Bank's District. See 60 FR 55489. Several Banks already 
unilaterally have adopted a prohibition or a scoring priority for 
projects located within a Bank's District. Seven commenters supported 
allowing the Banks to adopt a limit or prohibition, four commenters 
opposed a limit or prohibition, and three commenters supported limits 
only. Two commenters supported allowing the Banks to adopt a District 
scoring priority for projects located within the District, while one 
commenter opposed such a priority.
    The Finance Board believes that the Banks should have authority to 
prohibit AHP applications for out-of-District projects, or to give 
scoring priority to applications for in-District projects, because a 
few large multistate members could win AHP subsidies for out-of-
District projects, thereby resulting in less AHP subsidies available 
for use by other members and sponsors within the District. A 
prohibition or priority would help ensure that a Bank can adequately 
serve the affordable housing needs within its District. A priority 
would not preclude members from competing for AHP subsidies for out-of-
District projects, but would require that they score highly on other 
scoring factors in order to qualify for AHP funding. Sponsors of out-
of-District projects would not be precluded from participating in the 
Program, as they could apply for AHP subsidies through a member of 
another Bank. In addition, it may be more difficult and costly for a 
Bank to monitor projects located outside the District for compliance 
with AHP requirements.
    A prohibition or priority could limit or prevent access to AHP 
subsidies by members' out-of-District branches, which would deny that 
member the opportunity to take advantage, on behalf of a customer, of a 
source of funds it was, in part, responsible for generating. However, 
since adopting a prohibition or priority would be optional with the 
Bank, the Bank, in consultation with its Advisory Council, would 
determine whether the advantages outweigh any disadvantages. The 
proposed rule provides flexibility to the Banks to determine whether to 
adopt a prohibition or priority in response to their individual 
District needs.
    g. Member financial involvement as a threshold requirement or 
scoring criterion. Proposed Sec. 960.8(a)(2)(v)(D) provides that a Bank 
may adopt a District scoring priority for projects involving member 
financial participation (excluding the pass-through of AHP subsidy), 
such as providing market rate or concessionary financing, fee waivers, 
or donations.
    In the Subsidy Limits Proposal, the Finance Board specifically 
requested comments on whether the Banks should have authority to 
require certain types of member financial involvement in a project as a 
threshold requirement that a project must satisfy in order to be 
considered for scoring and approval for AHP funding, or whether such 
member financial involvement should be included as a scoring criterion. 
See 60 FR 55490. Six commenters supported a threshold requirement, 
while nine commenters supported a scoring criterion.
    The Finance Board believes that where a member's own funds and 
contributions are at risk in a project, the member has a greater 
incentive to underwrite the project for financial feasibility and 
monitor the project for AHP compliance. Greater member involvement in 
projects builds member affordable housing lending capacity and 
expertise. However, the Finance Board does not believe member financial 
involvement should be a threshold requirement because some projects may 
not require or be able to sustain additional debt related to member 
financial involvement, but still may contribute toward the objectives 
of the Program, particularly by those members that are not large enough 
to finance a project loan, waive fees or donate funds. In addition, 
such a threshold requirement could discourage member participation in 
the Program. Accordingly, the proposed rule permits a Bank to adopt 
member financial involvement in the project as a scoring priority, as 
further discussed below.

[[Page 57810]]

H. Application Scoring and Approvals--Sec. 960.8

1. In General
    Proposed Sec. 960.8 carries forward the existing regulatory 
framework governing the scoring of AHP applications, with revisions 
based on a new allocation of points among revised scoring categories, 
and additional discretion provided to the Banks, as further discussed 
below. The Finance Board specifically requests comments on the proposed 
scoring provisions. In particular, comments are requested on ways in 
which the scoring system can be simplified, such as by creating 
discrete scoring categories containing criteria required by the Act, 
criteria established by the Finance Board, and criteria established by 
the Banks.
    Proposed 960.8(a)(1) provides that a Bank shall score only those 
applications meeting the application requirements of proposed 
Sec. 960.7. Applications shall be scored based on the extent to which 
they meet the scoring priorities and objectives set forth in proposed 
Sec. 960.8. The Banks are required to adopt written guidelines 
implementing these scoring requirements.
    The total possible score an AHP application may receive is 100 
points. In determining the number of points to award an application for 
any given scoring category, the Bank shall evaluate applications 
relative to each other.
2. Revised Scoring Priorities Categories
    Applications that meet the application requirements of proposed 
Sec. 960.7 are scored according to the priorities in proposed 
Sec. 960.8(a)(2). Proposed Sec. 960.8(a)(2) makes the following changes 
to the existing regulatory provisions governing scoring priorities. The 
Finance Board's existing regulation contains seven priority categories: 
homeownership projects; rental projects; projects using federal 
government properties; projects with a not-for-profit or state or local 
agency sponsor; projects promoting empowerment; homeless permanent 
housing projects; and projects meeting a Bank District priority. See 12 
CFR 960.5(b). Under the existing regulation, applications meeting at 
least three of the seven priorities are scored and ranked, as a group, 
before applications meeting fewer than three of the priorities. See id. 
Sec. 960.5(a)(3).
    Proposed Sec. 960.8(a)(2) contains only six priority categories. 
The total points available for the priority categories are increased 
from 25 to 60, with the Bank required to allocate the 60 points among 
the six priority categories as discussed below. The priority categories 
are either fixed-point priorities or variable-point priorities. 
Variable-point priorities, which are listed in paragraphs (a)(2)(i) 
through (iv), and (v)(A) through (E), are those where there are varying 
degrees to which an application can satisfy the priority. Each 
variable-point priority category must be allocated at least 8 points. 
The number of points that may be awarded to an application for meeting 
a variable-point priority will vary, depending on the extent to which 
the application satisfies the priority, compared to the other 
applications being scored. The application(s) best achieving each 
variable-point priority shall receive the maximum point score available 
for that priority category, with the remaining applications scored on a 
declining scale. An application receiving at least half of the points 
allocated to a variable-point priority category shall be considered to 
have met that priority.
    Fixed-point priority categories, which are listed in paragraphs 
(a)(2)(v)(F) through (M), are those which an application must meet in 
order to receive the allocated points. Each fixed-point priority 
category must be allocated 8 points. An application meeting a fixed-
point priority shall be awarded 8 points.
    The priority selected by a Bank under paragraph (a)(2)(vi) may be 
either a variable-point or fixed-point priority, depending on the 
nature of the priority, and points must be allocated and awarded 
accordingly.
    Applications meeting at least two of the six priorities shall be 
considered priority applications, and, as a group, shall be scored 
before applications meeting fewer than two of the priorities.
    Priority applications shall be scored against each other, based on 
the extent to which they meet the priorities and the scoring objectives 
contained in paragraph (a)(3).
    As under the existing regulation, the remaining applications are 
scored only if there are insufficient priority applications to exhaust 
the total AHP subsidy amount available for the funding period. See id. 
Sec. 960.5(a)(3).
    Proposed Sec. 960.8(a)(2) eliminates the existing priority 
categories for homeownership and rental projects because a project must 
be either a rental or homeownership project in order to qualify for AHP 
funding.
    Proposed Sec. 960.8(a)(2)(i) revises the existing priority category 
for projects involving federal government properties by including 
properties owned or held by state and local governments, agencies, or 
instrumentalities thereof, and by requiring that at least 20 percent of 
the units in such projects meet this requirement. See id. 
Sec. 960.5(b)(3); 12 U.S.C. 1430(j)(3)(B). State and local government 
properties are included under this priority category because the stock 
of available federal government properties is decreasing. The 20 
percent of units requirement is intended to ensure that a reasonable 
number of units in a project previously were government owned in order 
for an AHP application to receive credit under this priority category.
    Proposed Sec. 960.8(a)(2)(ii) retains the priority category for 
projects sponsored by not-for-profit organizations, or state or local 
government entities in the existing regulation. See 12 CFR 960.5(b)(4); 
12 U.S.C. 1430(j)(3)(C).
    The existing priority category for projects that empower the poor 
is subsumed under proposed Sec. 960.7(a)(2)(v)(B), as further discussed 
below. See 12 CFR 960.5(b)(5).
    Proposed Sec. 960.8(a)(2)(iii) revises the existing homeless 
housing priority category to provide that in order to meet this 
priority, projects financing permanent or transitional housing for the 
homeless must reserve at least 20 percent of their units for occupancy 
by homeless households. See id. Sec. 960.5(b)(6). Proposed Sec. 960.1 
defines ``permanent or transitional housing'' as housing with six-month 
minimum occupancy, but excluding overnight shelters.
    Proposed Sec. 960.8(a)(2)(iv) adds a new priority category for 
projects meeting housing needs documented as part of a community 
revitalization or economic development strategy approved by a unit of 
state or local government.
    Proposed Sec. 960.8(a)(2)(v) retains the existing Bank District 
priority category but requires the Bank to select the priority, as 
recommended by the Bank's Advisory Council, for each funding period, 
from the specific priorities listed in paragraphs (a)(2)(v)(A) through 
(M) in the proposed rule, most of which are derived from priorities 
Banks have chosen in the past. The priority category in paragraph 
(a)(2)(v)(B) replaces the priority category in Sec. 960.5(b)(5) of the 
existing regulation for projects empowering the poor with a priority 
for housing incorporating the following elements of empowerment: 
programs offering employment, education, training, homeownership 
counseling, or daycare services that assist AHP-eligible residents to 
move toward better economic opportunities. See id. Sec. 960.5(b)(5).
    As discussed above, among the priority categories that a Bank may 
select are priorities for: projects involving member financial 
participation; projects with retention

[[Page 57811]]

periods in excess of 5 and 15 years for owner-occupied and rental 
projects, respectively; and projects located within the Bank's 
District. See proposed Sec. 960.7(a)(2)(v) (B), (E), (M).
    Proposed Sec. 960.8(a)(2)(vi) adds a new Bank District priority 
category under which a Bank may adopt a priority for projects meeting a 
housing need in the Bank's District, as defined and recommended by the 
Bank's Advisory Council. The priority may be chosen from the list of 
priorities in proposed paragraph (a)(2)(v), provided the priority is 
different from the Bank District priority adopted under that paragraph.
    The Finance Board specifically requests comments on whether a 
seventh priority category should be added for projects involving member 
financing (excluding the pass-through of AHP subsidies). Proposed 
Sec. 960.8(a)(2)(v)(D) permits the Banks to adopt member financial 
involvement as a Bank District priority. Although members have played a 
critical role in the Program, their participation has not generally 
involved lending their own funds. Where a member lends its own funds to 
a project, it is more likely to underwrite the project for financial 
feasibility and monitor the project for AHP compliance. Greater member 
financial involvement in projects also builds member affordable housing 
lending capacity and expertise. Adding a permanent seventh priority for 
applications submitted by members that will have a financial stake in 
the AHP project may serve to encourage more of such activity. The 
Finance Board also requests comments on whether a member should be 
deemed to meet such a priority for member financial involvement based 
on the member's record of affordable housing lending activities apart 
from its lending under the Program.
3. Revised Scoring Objectives
    The Finance Board's existing regulation contains the following six 
scoring ``objectives'' categories: targeting; long-term retention; 
effectiveness (subsidy per unit); community involvement; community 
stability; and innovation. See 12 CFR 960.5(d), (e). Proposed 
Sec. 960.8(a)(3) eliminates the need for long-term retention as a 
scoring objective because proposed Sec. 960.1 establishes minimum 
retention periods of 5 and 15 years as threshold requirements for 
owner-occupied and rental projects, respectively.
    Proposed Sec. 960.8(a)(3) also eliminates the innovation objective 
category. See 12 CFR 960.5(e)(3). The Finance Board believes that 
innovation is an important part of producing affordable housing in many 
cases, but is not an objective in itself. In some cases, reliance on 
well-established approaches may better serve a project, and the project 
should not be penalized for this. Further, innovation is a highly 
subjective element that is difficult to assess consistently among 
projects.
    Proposed Sec. 960.8(a)(3) also makes the following revisions to the 
remaining four objectives categories. The total points available for 
the objectives categories are reduced from 75 to 40, with a Bank 
required to allocate the 40 points among the four objectives 
categories, provided that the targeting objective category is allocated 
no less than 8 points. The application(s) best achieving each objective 
shall receive the maximum point score available for that objective 
category, with the remaining applications scored on a declining scale.
    Under the targeting objective category in the existing regulation, 
applications for projects serving the greatest number of very low-
income households are awarded the most points. See id. 
Sec. 960.5(d)(1). Applications targeting 100 percent of the units in a 
project to very low-income households generally receive the most 
points. The Finance Board believes that this scoring practice creates 
an inappropriate bias against mixed-income rental projects. Under the 
Act, a minimum of 20 percent of the units in an AHP rental project must 
be occupied by, and affordable for, very low-income households. See 12 
U.S.C. 1430(j)(2)(B). In order to reduce the emphasis on funding 
projects that are occupied solely by very low-income households, 
proposed Sec. 960.8(a)(3)(i) provides that applications for rental 
projects shall be awarded the maximum number of points available for 
the targeting objective category if at least 60 percent of the units in 
a project are reserved for occupancy by households with incomes at or 
below 50 percent of the area median income.
    The Finance Board specifically requests comments on ways in which 
the targeting objective may be structured so that it is more closely 
compatible with the monitoring requirements for AHP projects, discussed 
below under proposed Sec. 960.13.
    Proposed Sec. 960.8(a)(3)(ii) clarifies the subsidy-per-unit 
objective (effectiveness) category in the existing regulation. See 12 
CFR 960.5(d)(3). The proposed rule provides that applications are 
awarded points based on the extent to which a project proposes to use 
the least amount of AHP subsidy per AHP-targeted unit. The Finance 
Board wishes to clarify that in calculating subsidy per unit, only AHP-
targeted units should be counted. Further, this scoring criterion may 
not include a ``leveraging'' criterion whereby the application is 
scored based on the percentage of the project's total development cost 
that is to be financed with the AHP subsidy. The subsidy-per-unit 
objective, in effect, favors projects with a shallower subsidy. Under 
the proposed scoring system, a Bank may de-emphasize this effect and 
promote deeper subsidies per unit by allocating as few as one point to 
this objective. The Finance Board specifically requests comments on 
whether this gives the Banks adequate flexibility in applying the 
subsidy-per-unit objective in their Districts.
    Proposed Sec. 960.8(a)(3) (i) and (ii) provide that applications 
for owner-occupied projects and rental projects must be scored 
separately for purposes of the targeting and subsidy-per-unit 
objectives, because these two objectives inherently favor rental 
projects, which, in general, have more units targeted to lower income 
households and lower amounts of subsidy per unit than do owner-occupied 
projects.
    Proposed Sec. 960.8(a)(3) (iii) and (iv) clarify the community 
involvement and community stability objectives in the existing 
regulation, respectively, by adding examples of activities satisfying 
the objectives. See id. Sec. 960.5(e) (1), (2).
4. Application Approvals
    Proposed Sec. 960.8(b) provides that the board of directors of each 
Bank (without delegation to Bank officers or other Bank employees) 
shall approve promptly the AHP applications in descending order 
starting with the highest scoring application until the total funding 
amount for the particular funding period, except for any amount 
insufficient to fund the next highest scoring application, has been 
allocated. The board also must approve the next four highest scoring 
applications as alternates and, within one year of approval by the 
Bank, may fund such alternates if any previously committed AHP 
subsidies become available.

I. Disbursement of AHP Subsidies--Sec. 960.9

1. Failure to Use AHP Subsidies Within Reasonable Period of Time
    Proposed Sec. 960.9(a) adds a new provision requiring a Bank to 
determine whether a member or project sponsor draws down and begins 
using AHP subsidies for an approved project within a reasonable period 
of time after application approval. If a member or project sponsor 
fails to draw down and

[[Page 57812]]

begin using AHP subsidies within a reasonable period of time, the Bank 
shall cancel its approval of the project's application, and those 
subsidies approved for the project shall be made available for other 
AHP-eligible projects.
2. Compliance Upon Disbursement of AHP Subsidies
    Proposed Sec. 960.9(b) adds provisions codifying the Banks' duty to 
verify that the member and project sponsor are in compliance with AHP 
statutory requirements, regulatory requirements, and the obligations 
committed to in the approved application, prior to initial disbursement 
of AHP subsidies by the Bank for an approved project, and prior to each 
disbursement thereafter. The Bank is required to obtain, and maintain 
in its project file, documents sufficient to demonstrate such 
compliance prior to making such disbursement, including, but not 
limited to, an independent, current (6 months or less) appraisal (or 
recertification of a prior independent appraisal, if appropriate) 
provided by the member indicating the fair market value of the property 
or project if the member has a direct or indirect interest in such 
property or project.
3. Changes in Approved AHP Subsidy Amount Where a Direct Subsidy is 
Used For a Principal or Interest Rate Write-Down
    Proposed Sec. 960.9(c) adds a new provision addressing changes in a 
project's approved AHP subsidy amount where the Banks provide direct 
subsidies to write down the principal amount or the interest rates on 
loans provided by members to projects. The proposed rule provides that 
if a member is approved to receive a direct subsidy to write down the 
principal amount or the interest rate on a loan to a project and the 
amount of subsidy required to maintain the debt service cost required 
by the project varies from the amount of subsidy initially approved by 
the Bank due to a change in interest rates between the time of approval 
and the time the lender commits to the interest rate to finance the 
project, the Bank shall modify the subsidy amount accordingly. For 
example, if, in the interim period, interest rates rise, thereby 
requiring more direct subsidy for the lender to write down its loan to 
the project (keeping the loan's interest rate constant), the Bank must 
increase the amount of direct subsidy for the project accordingly.
    Under proposed Sec. 960.9(c)(2), the amount of such increase shall 
be drawn first from any uncommitted or recaptured AHP subsidies for the 
current year and then from the Bank's required AHP contribution for the 
next year.
    Proposed Sec. 960.9(c) transfers the interest rate risk associated 
with the lag time between AHP application approval and funding from the 
AHP projects to the AHP fund in cases where direct subsidies are used 
for interest rate write-downs. The practical effect of this is to 
guarantee AHP-assisted financing at a specific interest rate in such 
cases. The Finance Board believes this is necessary to help ensure that 
changes in lenders' market interest rates do not render approved AHP 
projects financially infeasible at the time they are ready for funding.
4. Banks' Responsibility to Ensure Proper Use of AHP Subsidies
    a. In general. Proposed Sec. 960.9(d)(1) carries forward the 
existing regulatory requirements reiterating the statutory requirements 
that each Bank shall ensure that: (1) AHP subsidies provided by the 
Bank to members are passed on to the ultimate borrower; and (2) the 
preponderance of AHP subsidies provided by the Bank ultimately is 
received by very low- and low- or moderate-income households. See 12 
CFR 960.3(d); 12 U.S.C. 1430(j)(9) (D), (E).
    b. Fairness in transactions. Proposed Sec. 960.9(d)(2) adds a new 
requirement that each Bank shall ensure that the terms of any member's 
participation in a transaction benefiting from an AHP subsidy are fair 
to the Program. This provision is intended to highlight the public 
purpose of the Program--providing housing to benefit low- and moderate-
income households--and to put the Banks and members on notice that they 
should view all transactions involving the Program in light of this 
purpose.
    c. Market interest rate and charges. Proposed Sec. 960.9(d)(3) 
requires each Bank to ensure, with respect to any loan financing an AHP 
project, that the rate of interest, fees, points, and any other charges 
by the lender shall not exceed a reasonable market rate of interest, 
fees, points, and charges for a loan of similar maturity, terms, and 
risk. This provision is intended to prevent a lender from recouping 
part of the direct subsidy provided to the project by coupling the 
direct subsidy with an above-market rate loan to the project. 
Accordingly, Sec. 960.9(c) of the existing regulation, which provides 
that ``a member receiving a subsidized advance shall extend credit to 
qualified borrowers at a rate of interest discounted at least to the 
same extent as the subsidy granted to the member by the Bank,'' is 
eliminated. See 12 CFR 960.9(c).
    d. Lending direct subsidies. For various tax reasons, sponsors 
prefer to structure projects involving federal Low-Income Housing Tax 
Credits so that AHP direct subsidies are loaned to the project, with 
principal and interest payments deferred until the end of the loan 
term. This use of direct subsidies raises the question whether the 
direct subsidies, which are grants, are being passed on to the ultimate 
recipients, as required under section 10(j)(9)(E) of the Act, since 
they ultimately may be repaid by the recipients. See 12 U.S.C. 
1430(j)(9)(E).
    Proposed Sec. 960.9(d)(4) is intended to accommodate the needs of 
sponsors and the statutory requirement governing the pass-through of 
AHP subsidies. It provides that a member or a sponsor may lend a direct 
subsidy in connection with an AHP rental project involving federal Low-
Income Housing Tax Credits, provided that all payments by the borrower 
are deferred until the end of the loan term and no interest is charged. 
Upon repayment of the loan, the entire amount of the direct subsidy 
must be repaid to the Bank.
    e. Matched repayment schedules. Proposed Sec. 960.9(d)(5) requires 
the term of a subsidized advance to be no longer than the term of the 
member's loan to the AHP project funded by the advance, and the 
scheduled principal repayments for the subsidized advance to be 
reasonably related to the scheduled principal repayments for the 
member's loan to the AHP project, such that at least once in every 12-
month period, the member must pay to the Bank the principal repayments 
received by the member on its loan to the project. This new requirement 
is intended to ensure that the repayment schedules of subsidized 
advances and the loans that they fund are closely matched, because the 
closer the match, the more efficient the use of the AHP subsidy. 
Furthermore, without a close match, a portion of the interest rate 
subsidy, in effect, is retained by the member each time the project 
makes a scheduled repayment of principal. For example, if the member's 
loan to the project is fully amortizing with level periodic payments 
over the term of the loan, less subsidy is needed for a subsidized 
advance that is also fully amortizing with level periodic payments over 
the term of the advance, than for a subsidized advance with the same 
term as the member's loan, but with all principal payments due at 
maturity (a bullet advance). If a member makes a non-amortizing loan to 
a project, the member typically would match its loan structure by 
borrowing a non-amortizing, or bullet, advance.

[[Page 57813]]

    Since a member's loan typically involves an interest rate mark-up 
to cover the member's cost and profit, it is not possible to match 
perfectly the scheduled principal repayments of a member's equal-
payment amortizing loan to the AHP project with the scheduled principal 
repayments of the equal-payment amortizing advance with a similar term. 
However, the Finance Board will consider such repayments to be 
reasonably related if both the member's loan and the subsidized advance 
are fully amortized with level periodic payments over the term of the 
loan, and the member makes principal repayments on the advance no less 
frequently than once in every 12-month period. As a practical matter, 
requiring the member to make principal repayments to the Bank at least 
annually will avoid requiring the establishment of complicated systems 
to account for monthly principal repayments.
    Proposed Sec. 960.9(e) adds a new provision requiring a Bank to 
provide in its advances agreement with each member receiving a 
subsidized advance that upon prepayment of a subsidized advance, the 
Bank shall charge a prepayment fee only to the extent the Bank suffers 
an economic loss from the prepayment.

J. Modifications of Approved AHP Applications--Sec. 960.10

    The Finance Board's existing regulation does not directly address 
project modifications after approval. Under Decision Memorandum 94-DM-
27, dated July 22, 1994, the Banks, subject to certain standards, have 
authority to approve modifications to previously approved AHP 
applications, except for modifications involving increases in the 
amount of AHP subsidy approved for a project. Proposed Sec. 960.10 
establishes a procedure and standards under which a member may request 
approval by the Bank of a modification prior to completion of the 
project. The proposed procedures and standards largely codify the 
Finance Board's current procedure and standards for approving 
modifications, except that changes to a project after completion, full 
occupancy, and closing of permanent financing no longer will be 
considered modifications.
    Proposed Sec. 960.1 defines a ``project modification'' as any 
change in the project prior to the project's completion, full occupancy 
and closing of permanent financing, that materially affects the facts 
under which the project's AHP application was originally scored under 
proposed Sec. 960.8 and approved.

K. Avoidance of Actual or Apparent Conflicts of Interest--Sec. 960.11

    Proposed Sec. 960.11 adds a new requirement that the board of 
directors of each Bank, without delegation to Bank officers or other 
Bank employees, must adopt a written policy preventing a Bank director, 
officer, employee, or contractor who has a personal interest in, or who 
is a director, officer or employee of an organization involved in a 
project that is the subject of a pending or approved AHP application, 
from participating in or attempting to influence the evaluation, 
approval, funding, monitoring, or any remedial process for such project 
under the Program.

L. Homeownership Assistance Programs--Sec. 960.12

    Proposed Sec. 960.12 revises the homeownership set-aside provisions 
of Sec. 960.5(g) of the existing regulation to allow the Banks more 
flexibility in establishing AHP-funded programs targeted specifically 
to promote homeownership. See 12 CFR 960.5(g). Existing 
Sec. 960.5(g)(1) of the AHP regulation allows the Banks to establish 
such homeownership assistance programs based on a matched savings 
model, in which a Bank provides its members with matching funds for 
first-time homebuyers who are saving to pay for a downpayment and 
closing costs on the purchase of a home. See id. Sec. 960.5(g)(1). 
Under the existing regulation, Banks must establish their programs in 
accordance with the specific requirements set forth in 
Sec. 960.5(g)(1), unless they obtain Finance Board approval to 
establish ``nonconforming'' programs. See id. Sec. 960.5(g)(2).
    In the seven months following the establishment of the 
homeownership set-aside provisions of Sec. 960.5(g), five Banks 
requested and were granted Finance Board approval to establish 
nonconforming homeownership set-asides that vary from the matched 
savings model to some degree. For instance, some Banks do not have a 
matched savings requirement and do not require participating households 
to qualify as first-time homebuyers. Some Banks give priority to 
certain categories of households, such as those with incomes below 
specified levels or households located in rural areas.
    The purpose of proposed Sec. 960.12 is to revise the homeownership 
set-aside requirements in order to encompass the variations adopted by 
the Banks in their ``nonconforming'' set-asides and to allow the Banks 
flexibility to adopt new variations, within the general framework of 
Sec. 960.12, without having to obtain prior Finance Board approval. 
Among the changes made by proposed Sec. 960.12 is elimination of the 
requirement that participating households be first-time homebuyers. See 
id. Sec. 960.5(g)(1). Under proposed Sec. 960.12(b), Banks may now 
provide funds under their programs for rehabilitation by current 
homeowners, as well as for home purchases. The proposed rule clarifies 
that, notwithstanding proposed Sec. 960.3(c)(4), which permits AHP 
subsidies to be used for homebuyer counseling costs under certain 
limited circumstances, homeownership assistance program funds may not 
be used for homebuyer or homeowner counseling costs. In addition, the 
proposed rule eliminates the existing requirement that participating 
households provide matching funds through dedicated savings accounts 
with members. See 12 CFR 960.5(g)(1)(iii)(B). Under proposed 
Sec. 960.12(d)(2), Banks are free to establish their own fair and 
reasonable procedures and criteria for allocating funds under their 
programs. The proposed rule also no longer gives a Bank the option to 
extend the retention period for homes financed under the program beyond 
5 years. See 12 CFR Sec. 960.5(g)(1)(xi). Instead, proposed 
Sec. 960.12(f) provides that such homes are subject to the same 5-year 
retention period as owner-occupied units financed through the Banks' 
District-wide AHP competitions. See proposed Sec. 960.3(b)(1)(i).

M. Monitoring Requirements--Sec. 960.13

1. In General
    Section 10(j)(9)(C) of the Act requires the Finance Board to issue 
regulations ensuring ``that advances made under this program will be 
used only to assist projects for which adequate long-term monitoring is 
available to guarantee that affordability standards and other 
requirements of [section 10(j) of the Act] are satisfied.'' See 12 
U.S.C. 1430(j)(9)(C).
    The existing regulation requires each Bank to monitor member and 
project compliance with the AHP requirements, but does not establish 
procedures, standards or documentation to assist the Banks in meeting 
that requirement. See 12 CFR 960.7 (b), (c). Sections 960.6 (b) and (c) 
of the existing regulation require members to file annual reports and 
certifications on the use of AHP subsidies. See id. Sec. 960.6 (b), 
(c).
    In the absence of specific regulatory guidance, over the six years 
that the Program has been in operation, the Banks have attempted to 
comply with

[[Page 57814]]

their monitoring obligations by developing their own individual 
approaches to monitoring. This practice has led to uncertainty about 
the sufficiency of any one monitoring procedure. In addition, some 
members consider the certification and reporting requirements of the 
existing regulation to be too burdensome. As discussed below, the 
Finance Board is proposing to establish clear, uniform monitoring 
procedures and standards that take into account the costs of monitoring 
relative to the benefits, and reduce the overall monitoring burden, 
including eliminating the annual certification requirement for members 
under the existing regulation. The Finance Board's proposal is based on 
the principles that: (1) monitoring a project closely in its initial 
stages of development will ensure that less monitoring is necessary in 
the project's later stages of operation; (2) the degree of monitoring 
of AHP-assisted projects should be directly related to the amount of 
AHP subsidy invested in such projects; and (3) the Banks should be 
permitted to rely, to the extent feasible, on monitoring by housing 
credit agencies.
2. AHP Monitoring Agreements Between Members and Project Sponsors and 
Owners
    Under proposed Sec. 960.13(a), a Bank must require each member 
receiving an AHP subsidy to have in place an AHP monitoring agreement 
with each project sponsor--in the case of owner-occupied projects--or 
project owner--in the case of rental projects--under which the project 
sponsor or owner agrees to monitor the AHP project as discussed below.
    a. Owner-occupied projects. Under proposed Sec. 960.13(a)(1), 
during the period of construction or rehabilitation of an owner-
occupied project, the project sponsor must report to the member 
semiannually on whether reasonable progress is being made towards 
completion. Until all approved AHP subsidies are provided to eligible 
households in a project, the project sponsor must certify annually to 
the member and the Bank that the AHP subsidies have been used according 
to the commitments made in the AHP application, and such certifications 
shall be supported by household income verification documentation 
maintained by the project sponsor and available for review by the 
member or the Bank.
    b. Rental projects. Under proposed Sec. 960.13(a)(2), during the 
period of construction or rehabilitation of a rental project, the 
project owner must report to the member semiannually on whether 
reasonable progress is being made towards completion. Within the first 
year after project completion, the project owner must certify to the 
member and the Bank that the services and activities committed to in 
the AHP application have been provided in connection with the project. 
Within the first year after project completion to the end of the 
project's retention period, the project owner annually must provide a 
list of tenant rents and incomes to the Bank and certify that: (1) the 
tenant rents and incomes are accurate and in compliance with the rent 
and income targeting commitments made in the AHP application; (2) the 
project is habitable; and (3) the project owner regularly informs 
households applying for and occupying AHP-assisted units of the address 
of the Bank that provided the AHP subsidy to finance the project. A 
project owner must maintain tenant income verification documentation, 
available for review by the member or the Bank, to support such 
certifications.
3. AHP Monitoring Agreements Between Banks and Members
    Under proposed Sec. 960.13(b), a Bank must have in place an AHP 
monitoring agreement with each member receiving an AHP subsidy, under 
which the member agrees to monitor the AHP project as discussed below.
    a. Owner-occupied projects. Under Sec. 960.13(b)(1), during the 
period of construction or rehabilitation of an owner-occupied project, 
the member must take the steps necessary to determine whether 
reasonable progress is being made towards completion and report to the 
Bank semiannually on the status of the project. Within one year after 
disbursement to a project of all approved AHP subsidies, the member 
must review the project documentation and certify to the Bank that: (1) 
the AHP subsidies have been used according to the commitments made in 
the AHP application; and (2) the AHP-assisted units are subject to deed 
restrictions, ``soft'' second mortgages, or other legally enforceable 
mechanisms pursuant to the requirements of proposed Sec. 960.4(a).
    b. Rental projects. Under proposed Sec. 960.13(b)(2), during the 
period of construction or rehabilitation of a rental project, the 
member must take the steps necessary to determine whether reasonable 
progress is being made towards completion and report to the Bank 
semiannually on the status of the project. Within the first year after 
project completion, the member must review the project documentation 
and certify to the Bank that: (1) the project is habitable; (2) the 
project meets its low- and moderate-income targeting commitments; and 
(3) the rents charged for income-targeted units do not exceed the 
maximum levels committed to in the AHP application. For projects 
receiving $500,000 or less in AHP subsidy, during the period from the 
second year after project completion to the end of the retention 
period, the member must certify to the Bank biennially that, based on 
an exterior visual inspection, the project continues to be occupied and 
appears habitable.
4. Monitoring Requirements for Banks
    a. Owner-occupied projects. Proposed Sec. 960.13(c)(1) provides 
that each Bank must establish a monitoring procedure that provides 
reasonable assurances that, based on a review of the documentation for 
a sample of projects and units within one year of receiving the 
certification from a member described in proposed 
Sec. 960.13(b)(1)(ii): (1) the incomes of the households that own the 
AHP-assisted units did not exceed the levels committed to in the AHP 
application at the time the households qualified for the AHP subsidy; 
(2) the AHP subsidies were used for eligible purposes; and (3) the AHP-
assisted units are subject to deed restrictions, ``soft'' second 
mortgages, or other legally enforceable mechanisms pursuant to the 
requirements of proposed Sec. 960.4(a)(1).
    b. Rental projects. Proposed Sec. 960.13(c)(2) provides that each 
Bank must establish a monitoring procedure providing reasonable 
assurances that: (1) within the first year after completion of an AHP-
assisted rental project, the services and activities committed to in 
the AHP application have been provided; and (2) during the period from 
the second year after project completion to the end of the retention 
period: (i) the project is habitable; (ii) the project meets its low- 
and moderate-income targeting commitments; and (iii) the rents charged 
for income-targeted units do not exceed the maximum levels committed to 
in the AHP application.
    A Bank must use the following monitoring procedure, depending on 
the amount of AHP subsidy received by a project. For all projects, the 
Bank shall make reasonable efforts to investigate any complaints 
received about a specific project. For projects receiving $50,001 to 
$250,000 of AHP subsidies, the Bank must review tenant rent and income 
documentation, including tenant income verification documents, for a 
sample of the project's units at least once every six years, to verify 
compliance with the rent and income targeting commitments in the AHP 
application. Currently, approximately 330 projects have received 
between $0 and $50,000 of AHP subsidy, and

[[Page 57815]]

approximately 1,000 projects have received between $50,001 and $250,000 
of AHP subsidy. For projects receiving $250,001 to $500,000 of AHP 
subsidies, the Bank must review tenant rent and income documentation, 
including tenant income verification documents, for a sample of the 
project's units at least once every four years, to verify compliance 
with the rent and income targeting commitments in the AHP application. 
Currently, approximately 200 projects have received between $250,001 to 
$500,000 of AHP subsidies. For projects receiving over $500,000 of AHP 
subsidies, the Bank must perform an annual on-site inspection of the 
project, including review of tenant rent and income verification 
documentation, for a sample of the project's units, to verify 
compliance with the rent and income targeting commitments in the AHP 
application. Currently, only 60 projects have received over $500,000 of 
AHP subsidy.
    A Bank may use a reasonable sampling plan to select the projects 
monitored each year and to review the documentation supporting the 
certifications made by members and project sponsors and owners.
5. Monitoring by a Housing Credit Agency
    In order to take advantage of opportunities to reduce the costs of 
monitoring where there are multiple funders of AHP-assisted projects, 
the Finance Board is proposing to permit the Banks to rely on 
monitoring by state or local housing agencies that have provided 
federal Low-Income Housing Tax Credits to an AHP project. Under 26 CFR 
1.42-5, housing credit agencies administering such Tax Credits must 
establish a procedure for monitoring for compliance with the applicable 
provisions of the Internal Revenue Code governing use of federal Low-
Income Housing Tax Credits. See 26 U.S.C. 42; 26 CFR 1.42-5. The 
Finance Board believes that where a housing credit agency undertakes 
such monitoring, it would be unnecessarily duplicative for the Banks to 
undertake independent monitoring if the income targeting requirements, 
the rent requirements, and the retention period requirements being 
monitored by the housing credit agency are the same as, or more 
restrictive than, those committed to for purposes of the Program.
    Therefore, proposed Sec. 960.13(c)(iv) provides that for projects 
receiving $500,000 or less of AHP subsidies, a Bank may rely on 
monitoring by a housing credit agency that also has provided funds to 
the project if: (1) the income targeting requirements, the rent 
requirements, and the retention period monitored by the housing credit 
agency are the same as, or more restrictive than, those committed to in 
the AHP application; (2) the housing credit agency agrees to inform the 
Bank of instances where tenant rents or incomes are found to be in 
noncompliance with the rent and income targeting requirements being 
monitored by the housing credit agency or where the project is not in a 
habitable condition; (3) the Bank does not have information that 
monitoring by such housing credit agency is not occurring or is 
inadequate; and (4) the Bank makes reasonable efforts to investigate 
any complaints received about the project. In projects involving more 
than $500,000 in AHP subsidies, the Finance Board believes that 
monitoring should remain the responsibility of the Bank, rather than a 
third party, in light of the substantial amount of the AHP subsidy.
    In cases where a Bank relies on a housing credit agency to monitor 
a project, the project owner annually must provide a list of tenant 
rents and incomes to the Bank and certify that they are accurate and in 
compliance with the rent and income targeting commitments made in the 
AHP application.
    The Finance Board specifically requests comments on whether there 
are any other state or local government entities, in addition to 
housing credit agencies, that monitor rental projects for compliance 
with requirements comparable to AHP requirements. In order to be able 
to rely on the monitoring of another government housing program that 
also has funded an AHP project, that program's income targeting, rent, 
and retention requirements must be the same as, or more restrictive 
than, those committed to by the project for purposes of the AHP. The 
Act requires that AHP subsidies be used to finance homeownership by 
low- or moderate-income households, or finance rental housing where at 
least 20 percent of the units are occupied by and affordable for very 
low-income households. See 12 U.S.C. 1430(j)(2). On their face, these 
statutory minimum income targeting and rent requirements are consistent 
with the requirements of certain other government housing programs that 
also fund AHP projects, such as the federal Low-Income Housing Tax 
Credit, HOME, and Section 8 programs. However, the targeting scoring 
criterion in the existing and proposed AHP regulation appears to 
encourage projects to target greater numbers of very low-income 
households in order to receive higher scores and AHP funding. See 12 
CFR 960.5(d)(1); proposed Sec. 960.8(a)(3)(i). Most AHP projects have 
AHP income targeting and rent commitments that are more restrictive 
than those required and monitored by other government housing programs 
also funding the project, thereby preventing reliance on such third 
parties for monitoring of AHP compliance.
    Under the Act, the Finance Board's AHP regulation must ``coordinate 
activities under [the Program] with other Federal or federally-
subsidized affordable housing activities to the maximum extent 
possible.'' See 12 U.S.C. 1430(j)(9)(G). The Finance Board specifically 
requests comments on ways in which the targeting scoring objective in 
the proposed rule may be modified, or whether it should be eliminated, 
so that the income targeting and rent requirements for AHP projects 
will be compatible with those required and monitored by other 
government housing entities.
    The following table summarizes the proposed monitoring framework 
discussed above for AHP-assisted rental projects:

                                                         Rental Project Monitoring Requirements                                                         
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(2) Projects for which there is no    Projects monitored by  All projects receiving                                                                     
 qualifying 3rd party monitoring         a qualifying 3rd      over $500,000 of AHP                                                                     
                                          party monitor              subsidy                                                                            
--------------------------------------------------------------------------------------------------------------------------------------------------------
Project Construction or                                                                                                                                 
 Rehabilitation.                                                                                                                                        
(4)--Member and owner submit semi-                                                                                                                      
 annual progress reports for each                                                                                                                       
 project.                                                                                                                                               
--------------------------------------------------------------------------------------------------------------------------------------------------------
Within First Year After                                                                                                                                 
(4)--Owner certifies project                                                                                                                            
 habitability, provision of                                                                                                                             
 services promised in AHP                                                                                                                               
 application, compliance of project                                                                                                                     
 rents                                                                                                                                                  
  Project Completion...............                                                                                                                     
(4)  and tenant incomes                                                                                                                                 
                                                                                                                                                        
(4)--Member certifies compliance of                                                                                                                     
 project rents and tenant incomes                                                                                                                       

[[Page 57816]]

                                                                                                                                                        
                                                                                                                                                        
(4)--Bank monitors compliance with                                                                                                                      
 provision of services promised in                                                                                                                      
 AHP application, and compliance of                                                                                                                     
 project rents                                                                                                                                          
                                                                                                                                                        
(4)  and tenant incomes                                                                                                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
2nd Year After Project                                                                                                                                  
(4)--Bank responds to any                                                                                                                               
 complaints about projects                                                                                                                              
  Completion to the                                                                                                                                     
(4)--Owner certifies annually to                                                                                                                        
 project habitability, accuracy of                                                                                                                      
 tenant rents and incomes, and that                                                                                                                     
 tenants of, and                                                                                                                                        
  End of the Retention                                                                                                                                  
(4)  applicants for, project units                                                                                                                      
 are notified of the Bank's                                                                                                                             
 address.                                                                                                                                               
  Period                                                                                                                                                
(4)                                                                                                                                                     
                                    --------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(2)Member visually inspects                                                                                                                             
 exterior of project every 2 years                                                                                                                      
                                    -----------------------------------------------------------------------                                             
                                                                                                                                                        
(2)$AHP Subsidy in Project                                                                                                                              
                                    -----------------------------------------------------------------------                                             
                                           $0-$50,000           $50,001-$250,000       $250,001-$500,000                                                
                                    -----------------------------------------------------------------------                                             
                                     No Bank review........  Bank reviews tenant     Bank reviews tenant    3rd party reports to   Bank performs annual 
                                                              incomes and rents       incomes and rents      Bank on any failure    on-site inspection  
                                                              every 6 years.          every 4 years.         to meet rent and       of project, and     
                                                                                                             income requirements    reviews tenant rents
                                                                                                             and on habitability.   and incomes         
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The Finance Board specifically requests comments on the proposed 
monitoring requirements.

N. Corrective and Remedial Actions for Noncompliance--Sec. 960.14

    Section 10(j) of the Act is silent on what specific corrective and 
remedial actions should be imposed when there is noncompliance with the 
requirements of the Program. See 12 U.S.C. 1430(j). The existing 
regulation provides that, where funds provided under the Program will 
not be or are no longer being used for their approved purposes, the 
amount of committed but unused subsidy or improperly used subsidy shall 
be recovered and made available by the Bank for future AHP projects. 
See 12 CFR 960.8(a). The existing regulation requires the Bank, in 
recapturing such funds, to take any or all of the following actions, 
without limitation on other remedies, in its discretion: (1) reprice 
the advance at the interest rate charged to members on non-subsidized 
advances of comparable type and maturity at the time of the original 
advance; (2) call the advance; (3) assess a prepayment fee; or (4) 
require the member to reimburse the Bank for the amount of the unused 
or improperly used subsidy on the advance or other assistance. See id. 
Sec. 960.8(b). In addition, some Banks have adopted procedures that 
require a direct subsidy to be converted to an advance if the project 
is found to be in noncompliance with the requirements of the AHP 
regulation.
    A number of concerns have been raised about the recapture 
provisions of the existing regulation. Given the range of potential 
circumstances of noncompliance, limiting the universe of remedies to 
one--recapture--is by necessity assuring that the remedy will be too 
harsh in some cases, and too liberal in others. For instance, it may 
not always be equitable to require the member to reimburse the Bank 
when the project sponsor is in noncompliance with AHP requirements. 
Requiring recapture of the AHP subsidy could in some situations result 
in the member having to foreclose against a property in order to 
recover the funds to repay an advance to the Bank, thereby eliminating 
affordable housing units even when only a few of the units in the 
project may be out of compliance with AHP requirements. In short, it 
has become clear through the operation of the Program that recapture 
will not be the appropriate remedial action in all circumstances. Other 
less severe remedial actions may be more appropriate depending on the 
nature of the noncompliance that has occurred. In addition, the 
remedial actions should be directed only at the parties that are in 
noncompliance. Accordingly, the proposed rule contains a wider range of 
remedies and tailors the remedial actions required to the nature of the 
noncompliance and the party committing the noncompliance, as discussed 
further below.
1. Noncompliance by Project Sponsors and Project Owners
    Proposed Sec. 960.14(a) provides that a Bank shall require a member 
receiving an AHP subsidy to have in place a recapture agreement with 
each sponsor of an owner-occupied project and each owner of a rental 
project, under which the sponsor or owner agrees: (1) to ensure that 
the AHP subsidy is used in compliance with the requirements of 12 
U.S.C. 1430(j), part 960, and the obligations committed to in the AHP 
application; (2) to make reasonable efforts to cure any noncompliance, 
pursuant to a compliance plan approved by the Bank; and (3) to repay 
the amount of any misused AHP subsidy (plus interest, if appropriate) 
resulting from the sponsor's or owner's noncompliance, if the 
noncompliance is not cured within a reasonable period of time.
2. Noncompliance by Members
    Proposed Sec. 960.14(b) requires a Bank to have in place a 
recapture agreement with each member receiving an AHP subsidy under 
which the member agrees: (1) to ensure that the AHP subsidy is used in 
compliance with the requirements of 12 U.S.C. 1430(j), part 960, and 
the obligations committed to, and to be performed, by the member in its 
AHP application; (2) to make reasonable efforts to cure any 
noncompliance by the member; (3) to repay the amount of any misused AHP 
subsidy (plus interest, if appropriate) resulting from the member's 
noncompliance, if the noncompliance is not cured within a reasonable 
period of time; (4) to recover any misused AHP subsidy from a project 
sponsor or owner under the terms of the member's recapture agreement 
with the project sponsor or owner, provided that the member shall not 
be liable to the Bank for failure to return amounts that cannot be 
recovered from the project sponsor or owner despite reasonable 
collection efforts by the member; and (5) to return any misused subsidy 
recovered by the

[[Page 57817]]

member from a project sponsor or owner to the Bank.
3. Noncompliance by Banks
    Proposed Sec. 960.14(c)(1) provides that the Finance Board, upon 
determining that a misuse of AHP subsidy, or the failure to recover 
misused AHP subsidy, is attributable to the action or inaction of a 
Bank, may order the Bank to reimburse its AHP fund in an amount equal 
to the misused subsidy, plus interest, if appropriate.
    Proposed Sec. 960.14(c)(2) is intended to eliminate uncertainty 
about the sufficiency of a Bank's recovery of misused subsidies in 
cases of noncompliance by members or project sponsors or owners, 
including cases where misuse results from ``acts of God'' or from 
personal or financial hardship. If a Bank enters into a settlement 
agreement or other arrangement with a member resulting in the return of 
a sum that is less than the full amount of any misused AHP subsidy, the 
Finance Board may, in its sole discretion, require the Bank to 
reimburse its AHP fund in an amount equal to the difference between the 
full amount of the misused subsidy and the sum actually recovered by 
the Bank, plus interest, if appropriate, unless: (1) the Bank has 
sufficient documentation showing that the sum agreed to be repaid under 
any settlement agreement or other arrangement is reasonably justified, 
based on the facts and circumstances of the noncompliance (including 
the degree of culpability of the noncomplying parties and the extent of 
the Bank's recovery efforts); or (2) the Bank obtains a determination 
from the Finance Board that the sum agreed to be repaid under any 
settlement agreement or other arrangement is reasonably justified, 
based on the facts and circumstances of the noncompliance (including 
the degree of culpability of the noncomplying parties and the extent of 
the Bank's recovery efforts). The latter provision would avoid a later 
determination by the Finance Board that such recovery was legally 
insufficient.
    Proposed Sec. 960.14(d) provides that AHP subsidies recovered by a 
Bank under this section shall be made available for other AHP projects. 
This is a change from the requirement of Sec. 960.8(a) of the existing 
regulation that recaptured subsidies must be made available for future 
AHP projects. See 12 CFR 960.8(a). The change is intended to make clear 
that recovered subsidies may be made available for alternate projects 
previously approved by a Bank pursuant to proposed Sec. 960.8(b), as 
well as other AHP projects.
    Proposed Sec. 960.14(e) provides that a Bank or the Finance Board, 
after notice and opportunity for a hearing, may suspend or debar a 
member, project sponsor, or project owner from participation in the 
Program if such party shows a pattern of noncompliance, or engages in a 
single instance of flagrant noncompliance, with the requirements of 12 
U.S.C. 1430(j), part 960, or the obligations committed to in AHP 
applications. Under the existing regulation, each AHP application must 
include a general statement of the project sponsor's qualifications. 
See 12 CFR 960.4(c)(4). However, the existing regulation does not 
expressly require those members, project sponsors, and project owners 
that previously have received AHP subsidies to be in compliance with 
AHP requirements in order to receive additional AHP subsidies. Proposed 
Sec. 960.8(e) expressly allows the Banks and the Finance Board to use 
their experience with a member's or project sponsor's or owner's 
compliance with AHP requirements on an ongoing basis to bar those 
participants with a pattern of noncompliance, or who have committed a 
single instance of flagrant noncompliance, from future participation in 
the Program.
    Under proposed Sec. 960.14(f), without limitation on other 
remedies, the Finance Board, upon determining that a Bank has engaged 
in mismanagement of its Program, may designate another Bank to 
administer all or a portion of the first Bank's annual AHP 
contribution, for the benefit of the first Bank's members, under such 
terms and conditions as the Finance Board may prescribe. The Finance 
Board has broad powers under the Act to issue remedial orders directing 
a Bank to take action in response to a situation that the Finance Board 
considers mismanagement of the Bank's Program. See 12 U.S.C. 
1422b(a)(1). Proposed Sec. 960.14(f) describes one of several actions 
the Finance Board could take in response to a Bank's mismanagement of 
its Program, depending on the relevant facts and circumstances.

O. Required Annual AHP Contributions--Sec. 960.15

    Proposed Sec. 960.15 revises Sec. 960.10 of the existing 
regulation, which provides for the Banks' annual contributions to their 
Program, to delete obsolete language regarding required contributions 
for 1990 through 1994. See 12 CFR 960.10. Proposed Sec. 960.1 revises 
the definition of the term ``net earnings of a Bank'' in the existing 
regulation, to conform it to the definition of that term in the Act. 
See 12 U.S.C. 1430(j)(8); 12 CFR 960.1(j).

P. Temporary Suspension of AHP Contributions--Sec. 960.16

    Proposed Sec. 960.16 sets forth the provisions governing temporary 
suspensions by Banks of their required annual AHP contributions. A 
number of revisions have been made to the provisions in the existing 
regulation in order to more accurately track the language in section 
10(j)(6) of the Act and to provide greater clarity. See 12 U.S.C. 
1430(j)(6); 12 CFR 960.11.
1. Application for Temporary Suspension
    Proposed Sec. 960.16(a)(1) provides that if a Bank finds that the 
contributions required pursuant to proposed Sec. 960.15 are 
contributing to the financial instability of the Bank, the Bank shall 
notify the Finance Board promptly, and may apply in writing to the 
Finance Board for a temporary suspension of such contributions.
    Proposed Sec. 960.16(a)(2) provides that a Bank's application for a 
temporary suspension of contributions shall include: (1) the period of 
time for which the Bank seeks a suspension; (2) the grounds for a 
suspension; (3) a plan for returning the Bank to a financially stable 
position; and (4) the Bank's annual financial report for the preceding 
year, if available, and the Bank's most recent quarterly and monthly 
financial statements and any other financial data the Bank wishes the 
Finance Board to consider.
    The requirement in proposed Sec. 960.16(a)(2)(ii) to include the 
grounds for a suspension is not explicitly required in the existing 
regulation. See 12 CFR 960.11(a).
    The provision in proposed Sec. 960.16(a)(2)(iv) that a Bank may 
include any other financial data it wishes the Finance Board to 
consider is not required in the existing regulation.
2. Finance Board Review of Application for Temporary Suspension
    a. Grounds for approval of application. Proposed Sec. 960.16(b)(1) 
provides that, in determining the financial instability of a Bank, the 
Finance Board shall consider such factors as: (1) whether the Bank's 
earnings are severely depressed; (2) whether there has been a 
substantial decline in the Bank's membership capital; and (3) whether 
there has been a substantial reduction in the Bank's advances 
outstanding.
    b. Limitations on grounds for approval of application. Proposed 
Sec. 960.16(b)(2) provides that the Finance

[[Page 57818]]

Board shall disapprove an application for a temporary suspension if it 
determines that the Bank's reduction in earnings is a result of: (1) a 
change in the terms of advances to members which is not justified by 
market conditions; (2) inordinate operating and administrative 
expenses; or (3) mismanagement.
    The ``reduction in earnings'' language replaces the term 
``financial instability'' used in the existing regulation, because the 
former is the term used in the Act. See 12 U.S.C. 1430(j)(6); 12 CFR 
960.11(c).
    In addition, the requirement in Sec. 960.11(c)(5) of the existing 
regulation that the Finance Board shall disapprove an application if 
for any other reason the temporary suspension is not warranted, is 
deleted in the proposed rule because it is not required by the Act. See 
12 U.S.C. 1430(j)(6); 12 CFR 960.11(c)(5).
3. Finance Board Decision
    Proposed Sec. 960.16(c) provides that the Finance Board's decision 
shall be in writing and shall be accompanied by specific findings and 
reasons for its action. If the Finance Board approves a Bank's 
application for a temporary suspension, the Finance Board's written 
decision shall specify the period of time such suspension shall remain 
in effect. The proposed rule removes the 30-day requirement for Finance 
Board action in the existing regulation, which is not required by the 
Act. See 12 U.S.C. 1430(j)(6)(C); 12 CFR 960.11(d).
4. Monitoring
    Proposed Sec. 960.16(d) provides that during the term of a 
temporary suspension approved by the Finance Board, the affected Bank 
shall provide to the Finance Board such financial reports as the 
Finance Board shall require to monitor the financial condition of the 
Bank.
5. Termination of Suspension
    Proposed Sec. 960.16(e) provides that if, prior to the conclusion 
of the temporary suspension period, the Finance Board determines that 
the Bank has returned to a position of financial stability, the Finance 
Board may, upon written notice to the Bank, terminate the temporary 
suspension.
6. Application for Extension of Temporary Suspension Period
    Proposed Sec. 960.16(f) provides that if a Bank's board of 
directors determines that the Bank has not returned to, or is not 
likely to return to, a position of financial stability at the 
conclusion of the temporary suspension period, the Bank may apply in 
writing for an extension of the temporary suspension period, stating 
the grounds for such extension. The proposed rule removes the 30-day 
requirement for Finance Board action in the existing regulation, which 
is not required by the Act. See 12 U.S.C. 1430(j)(6); 12 CFR 960.11(f).
    The proposed rule deletes the provisions in the existing regulation 
on Finance Board notice to Congress, which are governed by the Act and 
need not be included in the regulation. See 12 U.S.C. 1430(j)(6)(F); 12 
CFR 960.11(f), (g).
Q. Affordable Housing Reserve Fund--Sec. 960.17
    Consistent with the existing regulation and the Act, proposed 
Sec. 960.17(a) provides that if a Bank fails to use or commit the full 
amount of its required annual contribution to the Program, 90 percent 
of the amount that has not been used or committed in that year shall be 
deposited by the Bank in an Affordable Housing Reserve Fund established 
and administered by the Finance Board. See 12 U.S.C. 1430(j)(7); 12 CFR 
960.12(a). The remaining 10 percent of the unused and uncommitted 
amount retained by the Bank should be fully used or committed by the 
Bank during the following year, and any remaining portion must be 
deposited in the Affordable Housing Reserve Fund. See id. Approval of 
AHP applications sufficient to exhaust the amount a Bank is required to 
contribute pursuant to proposed Sec. 960.15 shall constitute use or 
commitment of funds.
    Proposed Sec. 960.17(b) provides that by January 15 of each year, 
each Bank shall provide to the Finance Board a statement indicating the 
amount of unused and uncommitted funds from the prior year, if any, 
which will be deposited in the Affordable Housing Reserve Fund.
    Proposed Sec. 960.17(c) provides that by January 31 of each year, 
the Finance Board will notify the Banks of the total amount of funds, 
if any, available in the Affordable Housing Reserve Fund.
    Section 960.12(d) of the existing regulation governing how funds in 
an Affordable Housing Reserve Fund would be made available to the 
Banks, is deleted in the proposed rule. See 12 CFR 960.12(d). The Act 
states that such provisions would be determined pursuant to regulations 
issued by the Finance Board. See 12 U.S.C. 1430(j)(7). Since there 
currently are no such funds and it is not anticipated that there will 
be any such funds in the near future, it is not necessary at this time 
to include provisions in the proposed rule dealing with this issue. The 
Finance Board can issue regulations on this issue at a future date if 
such eventuality should arise.
R. Advisory Councils--Sec. 960.18
    Proposed Sec. 960.18 implements section 10(j)(11) of the Act 
governing the appointment and operations of Bank Advisory Councils. See 
12 U.S.C. 1430(j)(11). Proposed Sec. 960.18(a) requires each Bank to 
appoint an Advisory Council of 7 to 15 persons, who reside in the 
Bank's District and are drawn from community and not-for-profit 
organizations actively involved in providing or promoting low- and 
moderate-income housing in the District.
    Proposed Sec. 960.18(b) continues the existing regulatory 
requirement that each Bank shall solicit nominations for membership on 
the Advisory Council from community and not-for-profit organizations 
pursuant to a nomination process that is as broad and as participatory 
as possible, allowing sufficient lead time for responses. See 12 CFR 
960.14(d). The Bank shall appoint Advisory Council members giving 
consideration to the size of the District and the diversity of low- and 
moderate-income housing needs and activities within the District. See 
id. Sec. 960.14(b).
    Under Sec. 960.14(c) of the existing regulation, state and local 
housing officials are considered to qualify as persons drawn from 
``community and nonprofit organizations,'' and, therefore, are 
permitted to serve on Advisory Councils, provided such officials do not 
constitute an ``undue proportion'' of any Advisory Council's 
membership. See id. Sec. 960.14(c). Proposed Sec. 960.14(c) broadens 
the ``undue proportion requirement'' to apply to all groups represented 
on an Advisory Council and adds an affirmative requirement that the 
membership of Advisory Councils include persons drawn from a diverse 
range of organizations. While the Finance Board does not believe that 
there should be absolute limits on the membership of any one group on 
the Advisory Councils, the Finance Board wishes to ensure a diversity 
of viewpoints so that no one group consistently has a dominant voice on 
an Advisory Council. In appointing Advisory Council members, the Banks 
are to draw from a diverse range of organizations, provided that 
representatives of no one group shall constitute an undue proportion of 
the membership of an Advisory Council.
    Proposed Sec. 960.18(d) provides that Advisory Council members 
shall serve for terms of three years, and such terms shall be staggered 
to provide continuity

[[Page 57819]]

in experience and service to theAdvisory Council. This is a change from 
the two-year terms required under the existing regulation. See id. 
Sec. 960.14(f). The Finance Board believes that extending Advisory 
Council members' terms by a year will allow the Banks to benefit from 
the experience and familiarity with the Program that Advisory Council 
members develop the longer they serve on an Advisory Council.
    Proposed Sec. 960.18(d) also provides that an Advisory Council 
member may not serve for more than two consecutive terms. This 
provision is intended to ensure that the membership of the Advisory 
Councils reflects the diverse and changing viewpoints of private sector 
community and not-for-profit organizations on the housing and community 
development programs and needs of the Bank Districts.
    Proposed Sec. 960.18(e) provides that each Advisory Council may 
elect from among its members a chairperson, a vice chairperson, and any 
other officers the Advisory Council deems appropriate. The Finance 
Board believes that allowing the Advisory Council members to elect 
their own officers, rather than having their officers appointed by each 
Bank, will enhance each Advisory Council's ability to assess 
independently the Bank's low- and moderate-income housing and community 
development activity.
    Proposed Sec. 960.18(f)(1) carries forward the requirement in the 
existing regulation that representatives of the board of directors of 
the Bank shall meet with the Advisory Council at least quarterly to 
obtain the Advisory Council's advice on the low- and moderate-income 
housing programs and needs in the Bank's District, and expands the 
Advisory Council's role to include providing advice on ways in which 
the Bank can better carry out its housing finance mission, including 
the utilization of AHP subsidies, Bank advances, and other Bank credit 
products for community development programs and needs. The Finance 
Board expects that the Advisory Councils will assume a central role in 
advising the Banks on carrying out their overall housing finance 
mission, in addition to their specific focus on affordable housing and 
community development. Further, nothing in the proposed rule precludes 
Advisory Councils from meeting with representatives of the board of 
directors of the Bank more frequently than quarterly.
    Proposed Sec. 960.14(f)(2) adds a new requirement that a Bank shall 
comply with requests from the Advisory Council for summary information 
regarding AHP applications from prior funding periods. Upon the request 
of the Advisory Council, the Bank shall allow Advisory Council members 
to examine, on the Bank's premises, any AHP applications from prior 
funding periods. The Finance Board believes that this will aid the 
Advisory Council members in evaluating how the AHP application scoring 
guidelines adopted by the Bank affect the allocation of AHP subsidies 
among different types of housing projects. Due to cost considerations, 
the Banks are not required to distribute copies of the applications to 
the Advisory Councils, but may do so, at their discretion. In making 
AHP applications available for inspection, the Banks are subject to any 
confidentiality requirements of other laws that may apply. The Banks 
should take adequate precautions to maintain confidentiality and avoid 
conflicts of interest. Such precautions may include redacting portions 
of the AHP applications, as well as requiring Advisory Council members 
to agree not to disclose information from AHP applications.
    Proposed Sec. 960.14(f)(3) carries forward the annual reporting 
requirement in Sec. 960.14(j) of the existing regulation, see id. 
Sec. 960.14(j), but moves back the date of submission to the Finance 
Board from January 31 to March 1, and requires that the Advisory 
Council's report include an analysis of the community development 
activity of its Bank, in addition to its low- and moderate-income 
housing activity. The change in the reporting date is intended to give 
the Advisory Councils sufficient time after the end of the year to 
compile and evaluate year-end data in order to prepare their reports to 
the Finance Board.
    Proposed Sec. 960.18(g) continues the existing regulatory 
requirement that the Bank shall pay Advisory Council members travel 
expenses, including transportation and subsistence, for each day 
devoted to attending meetings with representatives of the board of 
directors of the Bank. Nothing in the proposed rule precludes the Banks 
from paying fees to Advisory Council members for attending meetings 
with representatives of the Banks' boards of directors. The Banks may 
do so at their discretion. Advisory Council members often are employed 
by organizations that make a financial sacrifice to lend housing and 
community development expertise to a Bank. Therefore, individual Banks 
should consider payment of fees to Advisory Council members.
    Proposed Sec. 960.18(h) adds a new requirement that an Advisory 
Council member who has a personal interest in, or who is a director, 
officer or employee of an organization involved in a project that is 
the subject of a pending or approved AHP application, may not 
participate in or attempt to influence the evaluation, approval, 
funding, monitoring, or any remedial process for such project under the 
Program. Each Bank's board of directors shall adopt a written policy 
applicable to the Bank's Advisory Council members to prevent actual or 
apparent conflicts of interest under the Program.
    The Finance Board specifically requests comments on the role, 
selection, compensation, and all other aspects of Advisory Councils.

III. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance 
with section 605(b) of the RFA, see id. section 605(b), 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.

IV. Paperwork Reduction Act

    The current information collection has been approved by the Office 
of Management and Budget (OMB) and assigned OMB control number 3096-
0006. The Finance Board has submitted to OMB for its approval an 
analysis of the proposed changes to the collection of information 
resulting from the proposed rule. The collection of information, as 
proposed to be revised, is described more fully in part II of the 
SUPPLEMENTARY INFORMATION. The information collection is necessary to 
enable the Banks and, where appropriate, the Finance Board, to 
determine: (1) whether AHP applications satisfy the statutory and 
regulatory requirements for the award of AHP subsidies; and (2) whether 
the use of AHP subsidies awarded to members is consistent with 
applicable requirements. See 12 U.S.C. 1430(j).
    Likely respondents and/or recordkeepers will be financial 
institutions that are members of a Bank, housing developers, and owners 
of multifamily housing projects. Respondents are required to meet the 
collection and recordkeeping requirements in order to obtain and retain 
a benefit. Confidentiality of information obtained from respondents 
pursuant to this proposed revision of the currently approved 
information collection will be maintained by the Finance Board as 
required by applicable

[[Page 57820]]

statute, regulation, and agency policy.Potential respondents are not 
required to respond to the collection 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--7462
b. Total annual responses--9949
Percentage of these responses collected electronically--0%
c. Total annual hours requested--64,274
d. Current OMB inventory--33,067
e. Difference--31,207

    The estimated annual reporting and recordkeeping cost burden is:

a. Total annualized capital/startup costs--0
b. Total annual costs (O&M)--0
c. Total annualized cost requested--$2,117,450.00
d. Current OMB inventory--0
e. Difference--$2,117,450.00

    The current OMB inventory for the estimated annual reporting and 
recordkeeping hour burden is based on the information collection 
contained in the proposed amendments to the AHP regulation that were 
issued by the Finance Board on January 10, 1994, but were never 
finalized. See 59 FR 1323 (Jan. 10, 1994). 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.
    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 February 6, 
1996.

List of Subjects in 12 CFR Part 960

    Credit, Federal home loan banks, Housing, Reporting and 
recordkeeping requirements. Accordingly, the Finance Board hereby 
proposes to revise title 12, chapter IX, part 960, Code of Federal 
Regulations, to read as follows:

PART 960--AFFORDABLE HOUSING PROGRAM

Sec.
960.1  Definitions.
960.2  Operation of Program and adoption of AHP implementation plan.
960.3  Eligible costs.
960.4  Retention of AHP-assisted housing.
960.5  Timing of household income qualification.
960.6  Funding periods.
960.7  Application requirements.
960.8  Application scoring and approvals.
960.9  Disbursement of AHP subsidies.
960.10  Modifications of approved AHP applications.
960.11  Avoidance of actual or apparent conflicts of interest.
960.12  Homeownership assistance programs.
960.13  Monitoring requirements.
960.14  Corrective and remedial actions for noncompliance.
960.15  Required annual AHP contributions.
960.16  Temporary suspension of AHP contributions.
960.17  Affordable Housing Reserve Fund.
960.18  Advisory Councils.

    Authority: 12 U.S.C. 1430(j).


Sec. 960.1  Definitions.

    As used in this part:
    Act means the Federal Home Loan Bank Act, as amended (12 U.S.C. 
1421 et seq.).
    Advance means a loan to a member from a Bank that is:
    (1) Provided pursuant to a written agreement;
    (2) Supported by a note or other written evidence of the borrower's 
obligation; and
    (3) Fully secured by collateral in accordance with the Act and part 
935 of this chapter.
    Affordable means, for purposes of an AHP-assisted rental unit, that 
the monthly housing costs charged to a household for such unit not 
exceed 30 percent of the income of a household of the maximum income 
and size expected, under the commitment made in the approved AHP 
application, to occupy the unit (assuming occupancy of 1.5 persons per 
bedroom or 1.0 person per unit without a separate bedroom).
    AHP or Program means the Affordable Housing Program established 
pursuant to 12 U.S.C. 1430(j) and this part.
    Area has the same meaning as that used by the Department of Housing 
and Urban Development for purposes of determining its annually 
published area median income limits.
    Bank means a Federal Home Loan Bank established under the authority 
of the Act.
    CIP means a Bank's Community Investment Program established under 
section 10(i) of the Act (12 U.S.C. 1430(i)).
    Cost of funds means, for purposes of a subsidized advance, the 
estimated cost of issuing Bank System consolidated obligations with 
maturities comparable to that of the subsidized advance.
    Direct subsidy means an AHP subsidy in the form of a direct cash 
payment.
    Finance Board means the agency established as the Federal Housing 
Finance Board.
    Homeless means an individual, other than an individual imprisoned 
or otherwise detained pursuant to state or federal law, who:
    (1) Lacks a fixed, regular, and adequate nighttime residence; or
    (2) Has a primary nighttime residence that is:
    (i) A supervised publicly or privately operated shelter designed to 
provide temporary living accommodations (including welfare hotels, 
congregate shelters, and transitional housing for the mentally ill);
    (ii) An institution that provides a temporary residence for 
individuals intended to be institutionalized; or
    (iii) A public or private place not designed for, or ordinarily 
used as, a regular sleeping accommodation for human beings.
    Housing credit agency means a state or local government agency 
authorized to allocate federal Low-Income Housing Tax Credits under 26 
U.S.C. 42.
    Low-or moderate-income household means a household which has an 
income of 80 percent or less of the median income for the area, 
adjusted for family size, as published annually by the U.S. Department 
of Housing and Urban Development.
    Low-or moderate-income neighborhood means any neighborhood in which 
51 percent or more of the households are low-or moderate-income 
households.
    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 and 933.24 of this chapter.
    Monthly housing costs means:
    (1) For households in AHP-assisted owner-occupied units, mortgage 
principal and interest payments, real property taxes, homeowners' 
insurance, a reasonable estimate of utility costs excluding telephone 
service, and for households in AHP-assisted condominium, cooperative, 
mutual housing or other housing projects involving common ownership, 
those portions of any regular operating assessment or fee allocated for 
principal and interest payments, taxes, insurance and a reasonable 
estimate of utilities attributable to the household's share of the 
common area and/or the individual unit; and
    (2) For households in AHP-assisted rental units, rent payments, and 
where they are not already included in rent payments, a reasonable 
estimate of utility costs, excluding telephone service.
    Net earnings of a Bank means the net earnings of a Bank for a 
calendar year after deducting the Bank's pro rata share

[[Page 57821]]

of the annual contribution to the Resolution Funding Corporation 
required under sections 21A or 21B of the Act (12 U.S.C. 1441a, 1441b), 
and before declaring any dividend under section 16 of the Act (12 
U.S.C. 1436).
    Owner-occupied project means a project involving the purchase, 
construction, or rehabilitation of owner-occupied housing.
    Permanent or transitional housing means housing with six-month 
minimum occupancy, but excluding overnight shelters.
    Pre-development expenses means expenses for the purpose of 
determining the feasibility of a proposed project.
    Project modification means any change in the project prior to the 
project's completion, full occupancy and closing of permanent 
financing, that materially affects the facts under which the project's 
AHP application was originally scored under Sec. 960.8 and approved.
    Rental project means a project involving the purchase, 
construction, or rehabilitation of rental housing.
    Retention period means the period during which the sponsor or owner 
of an AHP-assisted project commits to comply with the requirements of 
12 U.S.C. 1430(j), this part, and the terms of the approved AHP 
application. The minimum retention period for an owner-occupied unit is 
5 years, and for a rental unit is 15 years from the date of project 
completion.
    Sponsor means a not-for-profit or for-profit organization or public 
entity that is:
    (1) An owner of a rental project; or
    (2) Integrally involved in an owner-occupied project, such as by 
exercising control over the planning, development, or management of the 
project, or by qualifying borrowers and providing or arranging 
financing for the owners of the housing units.
    State means a state of the United States, the District of Columbia, 
Guam, Puerto Rico, or the U.S. Virgin Islands.
    Subsidized advance means an advance to a member at an interest rate 
reduced below the Bank's cost of funds, by use of a subsidy.
    Subsidy means:
    (1) A direct subsidy, provided that if a direct subsidy is used to 
write down the interest rate on a loan extended by a member, sponsor, 
or other party to a project, the subsidy shall equal the net present 
value of the interest foregone from making the loan below the lender's 
market interest rate (calculated as of the date the AHP application is 
submitted to the Bank, and subject to adjustment under 
Sec. 960.9(c)(1)); or
    (2) The net present value of the interest revenue foregone from 
making a subsidized advance at a rate below the Bank's cost of funds, 
determined as of the date of disbursement of the subsidized advance or 
the date prior to disbursement on which the Bank first manages the 
funding to support the subsidized advance through its asset/liability 
management system, or otherwise.
    Very low-income household means a household which has an income of 
50 percent or less of the median income for the area, adjusted for 
family size, as published annually by the U.S. Department of Housing 
and Urban Development.


Sec. 960.2  Operation of Program and adoption of AHP implementation 
plan.

    (a) Policy of the Finance Board. It is the policy of the Finance 
Board and the Banks to promote decent and safe affordable housing and 
to address critical affordable housing needs through use of subsidized 
advances and direct subsidies.
    (b) Program operation. Each Bank's Program shall be governed solely 
by the requirements set forth in 12 U.S.C. 1430(j) and this part. A 
Bank shall not adopt any additional substantive AHP requirements, 
except as expressly provided in this part.
    (c) AHP implementation plan.--(1) Adoption of plan. Consistent with 
the requirements of this part, each Bank's board of directors by 
December 1 each year shall adopt a written AHP implementation plan for 
the subsequent year, and any subsequent amendments thereto, which shall 
set forth:
    (i) The Bank's project cost guidelines, adopted pursuant to 
Sec. 960.3(b);
    (ii) The Bank's schedule for AHP funding periods, adopted pursuant 
to Sec. 960.6(a);
    (iii) Any District threshold requirement, adopted by the Bank 
pursuant to Sec. 960.7(b);
    (iv) The Bank's AHP scoring guidelines, adopted by the Bank 
pursuant to Sec. 960.8(a);
    (v) The Bank's procedures for verifying a project's use of AHP 
subsidies within a reasonable period of time pursuant to Sec. 960.9(a);
    (vi) The Bank's procedures for verifying compliance upon 
disbursement of AHP subsidies pursuant to Sec. 960.9(b);
    (vii) The requirements for any homeownership assistance program 
adopted by the Bank pursuant to Sec. 960.12; and
    (viii) The Bank's policies and procedures for carrying out the 
Bank's monitoring obligations under Sec. 960.13.
    (2) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility for 
adopting the AHP implementation plan, or any subsequent amendments 
thereto.
    (3) Advisory Council review. Prior to adoption of the Bank's AHP 
implementation plan, and any subsequent amendments thereto, the Bank 
shall provide its Advisory Council a reasonable period of time to 
review the plan and any subsequent amendments, and the Advisory Council 
shall provide its recommendations to the Bank's board of directors.
    (4) Public Access. A Bank's AHP implementation plan, and any 
amendments, shall be made available to members of the public, upon 
request.
    (d) Reporting. Each Bank shall provide reports and documentation 
concerning the Program as the Finance Board may request from time to 
time. The Bank shall provide promptly copies of its AHP implementation 
plan and any subsequent amendments to the Finance Board and the Bank's 
Advisory Council.


Sec. 960.3  Eligible costs.

    (a) Owner-occupied and rental housing. AHP subsidies may be used to 
finance:
    (1) The purchase, construction, or rehabilitation of owner-occupied 
housing by or for very low-or low- or moderate-income households; and
    (2) The purchase, construction, or rehabilitation of rental 
projects where at least 20 percent of the units in the project are 
occupied by and affordable for very low-income households.
    (b) Eligible costs. AHP subsidies may be used to pay only for the 
customary and standard costs typically incurred, at fair market prices, 
to purchase, construct, or rehabilitate housing meeting the 
requirements of paragraph (a) of this section. A Bank shall evaluate 
the reasonableness of project costs, based upon project cost guidelines 
adopted by the Bank.
    (c) Ineligible costs. AHP subsidies may not be used to pay for:
    (1) Pre-development expenses not yet incurred by the proposed 
project as of the date the AHP application is submitted to the Bank;
    (2) Prepayment fees and penalties imposed by a Bank on a member for 
a subsidized advance that is prepaid;
    (3) Cancellation fees and penalties imposed by a Bank on a member 
for a subsidized advance commitment that is canceled;
    (4) Costs incurred in connection with counseling of homebuyers, 
homeowners, or tenants, except for costs of homebuyer counseling where:

[[Page 57822]]

    (i) The counseling is provided to a household that actually 
purchases an AHP-assisted unit; and
    (ii) The cost of the counseling has not been covered by another 
funding source, including the member; or
    (5) Processing fees charged by members for providing direct 
subsidies to AHP-assisted housing projects.
    (d) Refinancing. AHP subsidies may be used to refinance an existing 
single-family or multifamily mortgage loan, provided the equity 
proceeds of the refinancing are used only for the purchase, 
construction, or rehabilitation of AHP-eligible housing.


Sec. 960.4  Retention of AHP-assisted housing.

    (a) Owner-occupied units.--(1) Unit assisted by direct subsidy. An 
owner-occupied unit financed by a direct subsidy under the Program must 
be subject to a deed restriction, ``soft'' second mortgage, or other 
legally enforceable mechanism requiring that:
    (i) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period;
    (ii) In the case of a sale prior to the end of the retention 
period, an amount equal to a pro rata share of the direct subsidy, 
reduced for every year the seller owned the unit, shall be repaid to 
the Bank from any net gain realized upon the sale of the unit after 
deduction for sales expenses, unless the purchaser is a low- or 
moderate-income household; and
    (iii) In the case of a refinancing prior to the end of the 
retention period, the full amount of the direct subsidy shall be repaid 
to the Bank from any net gain realized upon the refinancing of the 
unit, unless the unit continues to be subject to a deed restriction, 
``soft'' second mortgage, or other legally enforceable mechanism 
described in this paragraph (a)(1).
    (2) Unit assisted by a subsidized advance. (i) An owner-occupied 
unit financed by a loan from the proceeds of a subsidized advance under 
the Program must be subject to a deed restriction or other legally 
enforceable mechanism requiring that:
    (A) The Bank or its designee is to be given notice of any sale or 
refinancing of the unit occurring prior to the end of the retention 
period; and
    (B) In the case of a refinancing prior to the end of the retention 
period, the full amount of the interest rate subsidy received by the 
owner, based on the pro rata portion of the interest rate subsidy 
imputed to the subsidized advance during the period the owner occupied 
the unit prior to refinancing, shall be repaid to the Bank from any net 
gain realized upon the refinancing, unless the unit continues to be 
subject to a deed restriction, ``soft'' second mortgage, or other 
legally enforceable mechanism described in this paragraph (a)(2).
    (ii) Where a member uses the proceeds of a subsidized advance to 
make loans financing owner-occupied units, the Bank must require the 
member to agree in writing that if such loans are prepaid by the 
borrower, the member may, at its option, either:
    (A) Repay to the Bank that portion of the subsidized advance used 
to make the loan to the borrower, and be subject to a fee imposed by 
the Bank sufficient to compensate the Bank for any loss the Bank 
experiences in reinvesting the repaid amount at a rate of return below 
the cost of funds originally used by the Bank to calculate the interest 
rate subsidy incorporated in the subsidized advance; or
    (B) Continue to maintain the subsidized advance outstanding, 
subject to the Bank resetting the interest rate on that portion of the 
subsidized advance used to make the loan to the borrower to a rate 
equal to the cost of funds originally used by the Bank to calculate the 
interest rate subsidy incorporated in the subsidized advance.
    (b) Rental projects.--(1) Project assisted by direct subsidy. (i) A 
rental project financed with a direct subsidy must be subject to a deed 
restriction or other legally enforceable mechanism requiring that:
    (A) The project's rental units, or applicable portion thereof, must 
remain occupied by and affordable for households with incomes at or 
below the levels committed to be served in the AHP application for the 
duration of the retention period;
    (B) The Bank or its designee is to be given notice of the sale or 
refinancing of the project occurring prior to the end of the retention 
period;
    (C) In the case of a sale prior to the end of the retention period, 
an amount equal to the entire amount of any direct subsidy received 
must be repaid to the Bank, unless the subsequent owner agrees in 
writing to comply with the income-eligibility and affordability 
restrictions committed to in the AHP application; and
    (D) In the case of a refinancing prior to the end of the retention 
period, an amount equal to the entire amount of any direct subsidy 
received must be repaid to the Bank, unless the project continues to be 
subject to a deed restriction or other legally enforceable mechanism 
requiring the project's rental units, or applicable portion thereof, to 
remain occupied by and affordable for households with incomes at or 
below the levels committed to be served in the AHP application for the 
duration of the retention period.
    (2) Project assisted by a subsidized advance. (i) A rental project 
financed with a subsidized advance must be subject to a deed 
restriction or other legally enforceable mechanism requiring that:
    (A) The project's rental units, or applicable portion thereof, must 
remain occupied by and affordable for households with incomes at or 
below the levels committed to be served in the AHP application for the 
duration of the retention period;
    (B) The Bank or its designee is to be given notice of the sale or 
refinancing of the project occurring prior to the end of the retention 
period;
    (C) In the case of a sale prior to the end of the retention period, 
the full amount of the interest rate subsidy received by the seller, 
based on the pro rata portion of the interest rate subsidy imputed to 
the subsidized advance during the period the seller owned the project 
prior to the sale, shall be repaid to the Bank, unless the subsequent 
owner agrees in writing to comply with the income-eligibility and 
affordability restrictions committed to in the AHP application; and
    (D) In the case of a refinancing prior to the end of the retention 
period, the full amount of the interest rate subsidy received by the 
owner, based on the pro rata portion of the interest rate subsidy 
imputed to the subsidized advance during the period the owner owned the 
project prior to the refinancing, shall be repaid to the Bank, unless 
the project continues to be subject to a deed restriction or other 
legally enforceable mechanism requiring the project's rental units, or 
applicable portion thereof, to remain occupied by and affordable for 
households with incomes at or below the levels committed to be served 
in the AHP application for the duration of the retention period.
    (ii) Where a member uses the proceeds of a subsidized advance to 
make loans financing a rental project, the Bank must require the member 
to agree in writing that if such loans are prepaid by the borrower, the 
member may, at its option, either:
    (A) Repay to the Bank that portion of the subsidized advance used 
to make the loan to the borrower, and be subject to a fee imposed by 
the Bank sufficient to compensate the Bank for any loss the Bank 
experiences in reinvesting the repaid amount at a rate of return below 
the cost of funds originally used by the Bank to calculate the interest 
rate

[[Page 57823]]

subsidy incorporated in the subsidized advance; or
    (B) Continue to maintain the subsidized advance outstanding, 
subject to the Bank resetting the interest rate on that portion of the 
subsidized advance used to make the loan to the borrower to a rate 
equal to the cost of funds originally used by the Bank to calculate the 
interest rate subsidy incorporated in the subsidized advance.
    (c) Use of recovered subsidies. AHP subsidies recovered by a Bank 
pursuant to this section shall be made available for other AHP 
projects.


Sec. 960.5  Timing of household income qualification.

    (a) Owner-occupied projects. In order to qualify as a very low- or 
a low- or moderate-income household for purposes of an AHP-assisted 
owner-occupied project, a household must have an income at or below the 
level committed to in the AHP application at the time the household is 
qualified by the sponsor for participation in the project, but no 
earlier than the date on which the AHP application was submitted to the 
Bank for approval.
    (b) Rental projects. In order to qualify as a very low- or a low- 
or moderate-income household for purposes of an AHP-assisted rental 
project, a household must have an income at or below the level 
committed to in the AHP application for a particular unit upon initial 
occupancy only. The household may continue to occupy such designated 
unit even if its income subsequently increases above the income-
eligibility requirement for that unit. The unit may continue to count 
toward meeting the targeted income-eligibility requirement, provided 
the rent charged remains affordable, as defined in Sec. 960.1, for the 
targeted household.


Sec. 960.6  Funding periods.

    (a) District-wide competition. Except as provided in Sec. 960.12, 
each Bank shall administer a District-wide competition for its AHP 
subsidies. Banks may accept applications from members for funding 
during a specified number of funding periods each year, as determined 
by the Bank, and shall announce the application due dates for such 
periods no later than December 1 of the preceding year. The amount of 
subsidies offered in each funding period shall be comparable.
    (b) Funding availability; notification to members. Each Bank shall 
notify its members and other interested parties of:
    (1) The approximate amount of annual AHP subsidies available for 
the Bank's District;
    (2) The approximate amount of AHP subsidies to be offered in each 
funding period;
    (3) The applicability of any District threshold requirements 
established pursuant to Sec. 960.7(b);
    (4) The scoring guidelines contained in the Bank's AHP 
implementation plan; and
    (5) The application due dates.


Sec. 960.7  Application requirements.

    (a) Mandatory requirements. Each Bank shall require members to 
include in their AHP applications:
    (1) Description of project. A concise description of the proposed 
project;
    (2) Amount of AHP subsidy. The estimated amount of AHP subsidy 
required for the proposed project. In the case of an application for a 
subsidized advance, the member shall include in its application the 
interest rate on the member's loan to the proposed project, and, for 
purposes of scoring the application, the Bank shall estimate the 
subsidy required for the proposed project based on the Bank's cost of 
funds as of the date on which all AHP applications are due for the 
funding period in which the application is submitted;
    (3) Member interest in property or project. A disclosure of the 
member's direct or indirect interest, if any, in the property or 
proposed project;
    (4) Eligible costs. An explanation of how the proposed project will 
comply with the eligible costs provision of Sec. 960.3(b);
    (5) Retention requirements. An explanation of how the proposed 
project will comply with the retention requirements of Sec. 960.4;
    (6) Project feasibility and need for subsidy. An explanation of how 
the proposed project is financially viable and likely to be completed 
within a reasonable period of time; and why the requested AHP subsidy 
is needed, based on:
    (i) The Bank's analysis of all project sources and uses of funds 
(including the value of any donated land, materials, and professional 
labor), multi-year operating pro formas for rental projects, sale 
prices for owner-occupied units, and local market conditions; and
    (ii) A review of the reasonableness of information relating to 
available sources and uses of funding and financing capacity, such as 
operating pro formas, to verify the proposed project's need for AHP 
subsidy;
    (7) Project sponsor qualifications. An explanation of the project 
sponsor's qualifications and ability to perform its responsibilities as 
committed to in the AHP application;
    (8) Fair housing law requirements. A statement that the project 
sponsor and owner will comply with any applicable fair housing law 
requirements, and an explanation of how the project sponsor and owner 
intend to affirmatively market the proposed project and otherwise 
comply with such requirements;
    (9) Maximum subsidy requirement. (i) A statement that, except as 
otherwise provided in paragraph (a)(9)(ii) of this section, no 
subsidized household in the proposed project shall pay less than 20 
percent of such household's gross monthly income toward monthly housing 
costs, as defined in Sec. 960.1.
    (ii) Exceptions. The requirement in paragraph (a)(9)(i) of this 
section shall not apply where:
    (A) An AHP-assisted rental project also receives funds from a 
federal or state rental housing program that requires qualifying 
households to pay as rent a certain percentage of their monthly income 
or a designated amount, and the households in the project meet such 
requirements;
    (B) The total amount of the AHP subsidies provided to the project 
to finance rehabilitation of housing units owned by very low-income 
households is $10,000 or less per such household and for housing units 
owned by low- or moderate-income households is $5,000 or less per such 
household;
    (C) The total amount of the AHP subsidies provided to the project 
to finance the purchase of housing units is $5,000 or less per 
household; or
    (D) AHP subsidies are used to assist a household participating in a 
self-help, sweat equity or similar housing program that requires the 
household to contribute its skilled or unskilled labor valued at a 
minimum of $2,000 per household, working cooperatively with others, to 
construct or rehabilitate housing which the household or other program 
participants are purchasing or already own and occupy, and that 
involves supervision of the work performed by skilled builders or 
rehabilitators;
    (10) District threshold requirements. An explanation of how the 
proposed project meets any applicable District threshold requirements 
adopted by the Bank pursuant to paragraph (b) of this section;
    (11) Scoring requirements. An explanation of how the proposed 
project meets the priorities and objectives identified in 
Sec. 960.8(a);
    (12) Certification. A certification from the member, project 
sponsor, and project owner committing to comply with all requirements 
of 12 U.S.C. 1430(j), this part, and all obligations

[[Page 57824]]

committed to in the AHP application; and
    (13) Other information. Such other information as the Bank may 
reasonably require in order to verify compliance of the AHP 
applications with the requirements of this part.
    (b) District threshold requirements. A Bank's board of directors, 
after consultation with its Advisory Council, may establish one or more 
of the following additional threshold requirements for AHP 
applications, provided that any such additional threshold requirements 
must apply equally to all members:
    (1) A maximum amount of AHP subsidy available per member each year; 
or per member, per project, or per project unit in a single funding 
round;
    (2) An exclusion of applications for funding for projects located 
outside the Bank's District; or
    (3) A requirement that the member submitting the application has 
made use of a credit product offered by the Bank within the previous 12 
months, other than AHP or CIP credit products.


Sec. 960.8  Application scoring and approvals.

    (a) Application scoring.--(1) General. A Bank shall score only 
those applications meeting the application requirements of Sec. 960.7. 
Applications shall be scored based on the extent to which they meet the 
scoring priorities and objectives set forth in this section. A Bank 
shall adopt written guidelines implementing the scoring requirements of 
this section. The total possible score an AHP application may receive 
is 100 points. In determining the number of points to award an 
application for any given scoring category, the Bank shall evaluate 
applications relative to each other.
    (2) Priority applications--60 points. A Bank shall allocate 60 
points among the six priority categories identified in this paragraph 
(a)(2). The priority categories are either fixed-point priorities or 
variable-point priorities. Variable-point priorities, which are listed 
in paragraphs (a)(2)(i) through (iv) and (a)(2)(v)(A) through (E) of 
this section, are those where there are varying degrees to which an 
application can satisfy the priority. Each variable-point priority 
category must be allocated at least 8 points. The number of points that 
may be awarded to an application for meeting a variable-point priority 
will vary, depending on the extent to which the application satisfies 
the priority, compared to the other applications being scored. The 
application(s) best achieving each variable-point priority shall 
receive the maximum point score available for that priority category, 
with the remaining applications scored on a declining scale. An 
application receiving at least half of the points allocated to a 
variable-point priority category shall be considered to have met that 
priority. Fixed-point priority categories, which are listed in 
paragraphs (a)(2)(v)(F) through (M) of this section, are those an 
application must meet in order to receive the allocated points. Each 
fixed-point priority category must be allocated 8 points. An 
application meeting a fixed-point priority shall be awarded 8 points. 
The priority selected by a Bank under paragraph (a)(2)(vi) of this 
section may be either a variable-point or fixed-point priority, 
depending on the nature of the priority. Applications meeting at least 
two of the six priorities shall be considered priority applications, 
and, as a group, shall be scored before applications meeting fewer than 
two of the priorities. Priority applications shall be scored against 
each other, based on the extent to which they meet the priorities of 
this paragraph (a)(2) and the scoring objectives contained in paragraph 
(a)(3) of this section. The remaining applications shall be scored only 
if there are insufficient priority applications to exhaust the AHP 
subsidy amount available for the funding period. The six priority 
categories are as follows:
    (i) Government-owned properties (variable point). Projects 
financing the purchase or rehabilitation of housing, at least 20 
percent of the units of which are owned or held by federal, state, or 
local governments or any agency or instrumentality thereof;
    (ii) Not-for-profit or state or local government sponsored projects 
(variable point). Projects financing the purchase, construction, or 
rehabilitation of housing, the sponsor of which is a not-for-profit 
organization, a state or political subdivision of a state, a local 
housing authority, or a state housing agency;
    (iii) Permanent or transitional housing for the homeless (variable 
point). Projects financing permanent or transitional housing for the 
homeless by reserving at least 20 percent of units for occupancy by 
homeless households;
    (iv) Community development (variable point). Projects meeting 
housing needs documented as part of a community revitalization or 
economic development strategy approved by a unit of state or local 
government;
    (v) District priority. Projects meeting one of the following 
criteria, as recommended by the Bank's Advisory Council and adopted by 
the Bank's board of directors for a particular funding period:
    (A) Variable point. Projects in which at least 20 percent of the 
units are reserved for occupancy by households who have special needs, 
such as the elderly, mentally or physically disabled persons, persons 
recovering from physical abuse or alcohol or drug abuse, or persons 
with AIDS;
    (B) Variable point. Projects providing housing in combination with 
a program offering employment, education, training, homeownership 
counseling, or daycare services that assist AHP-eligible residents to 
move toward better economic opportunities;
    (C) Variable point. Projects financing housing for first-time 
homebuyers;
    (D) Variable point. Projects involving member financial 
participation (excluding the pass-through of AHP subsidy), such as 
providing market rate or concessionary financing, fee waivers, or 
donations;
    (E) Variable point. Projects with retention periods in excess of 5 
and 15 years for owner-occupied and rental housing, respectively;
    (F) Fixed point. Projects financing housing located in federally 
declared disaster areas;
    (G) Fixed point. Projects financing housing located in rural areas;
    (H) Fixed point. Projects financing urban in-fill and/or urban 
rehabilitation housing;
    (I) Fixed point. Projects that are part of a strategy to end 
isolation of very low-income households by providing economic diversity 
through mixed-income housing in low- or moderate-income neighborhoods, 
or providing very low- or low- or moderate-income households with 
housing opportunities in areas where the median household income 
exceeds 80 percent of the area median income;
    (J) Fixed point. Projects financing housing as part of a remedy 
undertaken by a jurisdiction adjudicated by a federal, state, or local 
court to be in violation of title VI of the Civil Rights Act of 1964 
(42 U.S.C. 2000d et seq.), the Fair Housing Act (42 U.S.C. 3601 et 
seq.), or any other federal state, or local fair housing law, or as 
part of a settlement of such claims;
    (K) Fixed point. Projects involving sweat-equity and/or self-help 
housing;
    (L) Fixed point. Projects involving financing by a consortium of at 
least two financial institutions; or
    (M) Fixed point. Projects located within the Bank's District; and
    (vi) District priority--defined housing need in the District. 
Projects meeting a housing need in the Bank's District, as defined and 
recommended by the Bank's Advisory Council and adopted by the Bank's 
board of directors for a

[[Page 57825]]

particular funding period. The Bank may use one of the criteria listed 
in paragraph (a)(2)(v) of this section, provided it is different from 
the District priority adopted by the Bank under paragraph (a)(2)(v) of 
this section.
    (3) Objectives--40 points. A Bank shall allocate 40 points among 
the four objectives categories identified in this paragraph (a)(3), 
provided that no less than 8 points are allocated to the targeting 
objective category. The application(s) best achieving each objective 
shall receive the maximum point score available for that objective 
category, with the remaining applications scored on a declining scale. 
The four objectives categories are as follows:
    (i) Targeting. A Bank shall award points to applications based on 
the extent to which units in a project are to be sold initially to, or 
rehabilitated by, households with incomes at or below 80 percent of the 
area median income, in the case of owner-occupied housing projects, or 
occupied by and affordable for households with incomes at or below 50 
percent of the area median income, in the case of rental housing 
projects. More points shall be awarded to applications for projects 
with greater numbers of units targeted to households with lower income 
levels. An application for a rental housing project shall be awarded 
the maximum number of points available under this scoring category if 
60 percent or more of the units in the project are reserved for 
occupancy by households with incomes at or below 50 percent of the area 
median income. For purposes of this scoring category, applications for 
owner-occupied projects and rental projects shall be scored separately;
    (ii) AHP subsidy per unit. A Bank shall award points to 
applications based on the extent to which a project proposes to use the 
least amount of AHP subsidy per AHP-targeted unit. For purposes of this 
scoring category, applications for owner-occupied projects and rental 
projects shall be scored separately;
    (iii) Community involvement. A Bank shall award points to 
applications based on the extent to which there is demonstrated support 
for the project by local community organizations and individuals other 
than as project sponsors, such as through the commitment by such 
organizations and individuals of funds, goods and services, and 
volunteer labor; and
    (iv) Community stability. A Bank shall award points to applications 
based on the extent to which a project maximizes community stability, 
such as by: Revitalizing vacant or abandoned properties; being 
integrally part of a neighborhood stabilization plan; and not 
displacing low- or moderate-income households, or if such displacement 
will occur, indicating how such households will be assisted to minimize 
the impact of such displacement.
    (b) Application approvals.--(1) Approval by Bank's board. The board 
of directors of each Bank shall approve promptly the AHP applications 
in descending order starting with the highest scoring application until 
the total funding amount for the particular funding period, except for 
any amount insufficient to fund the next highest scoring application, 
has been allocated. The board of directors also shall approve the next 
four highest scoring applications as alternates and, within one year of 
approval, may fund such alternates if any previously committed AHP 
subsidies become available.
    (2) No delegation. A Bank's board of directors may not delegate to 
Bank officers or other Bank employees the responsibility to approve or 
disapprove AHP applications.


Sec. 960.9  Disbursement of AHP subsidies.

    (a) Failure to use AHP subsidies within reasonable period of time. 
A Bank shall determine whether a member or project sponsor draws down 
and begins using AHP subsidies for an approved project within a 
reasonable period of time after application approval. If a member or 
project sponsor fails to draw down and begin using AHP subsidies within 
a reasonable period of time, the Bank shall cancel its approval of the 
application, and those subsidies approved for the project shall be made 
available for other AHP-eligible projects.
    (b) Compliance upon disbursement of AHP subsidies. The Bank shall 
verify prior to initial disbursement of AHP subsidies by the Bank for 
an approved project, and prior to each disbursement thereafter, that 
the member and project sponsor are in compliance with all applicable 
requirements of 12 U.S.C. 1430(j), this part, and all obligations 
committed to in the approved application. The Bank shall obtain, and 
maintain in its project file, documents sufficient to demonstrate such 
compliance prior to making such disbursement, including, but not 
limited to, an independent, current (6 months or less) appraisal (or 
recertification of a prior independent appraisal, if appropriate) 
provided by the member indicating the fair market value of the property 
or project if the member has a direct or indirect interest in such 
property or project.
    (c) Changes in approved AHP subsidy amount where a direct subsidy 
is used for a principal or interest rate write-down.--(1) Change in 
subsidy amount. If a member is approved to receive a direct subsidy to 
write down the principal amount or the interest rate on a loan to a 
project and the amount of subsidy required to maintain the debt service 
cost required by the project varies from the amount of subsidy 
initially approved by the Bank due to a change in interest rates 
between the time of approval and the time the lender commits to the 
interest rate to finance the project, the Bank shall modify the subsidy 
amount accordingly.
    (2) Reconciliation of AHP fund. If a Bank increases the amount of 
AHP subsidy approved for a project, the amount of such increase shall 
be drawn first from any uncommitted or recaptured AHP subsidies for the 
current year and then from the Bank's required AHP contribution for the 
next year. If a Bank reduces the amount of AHP subsidy approved for a 
project, the amount of such reduction shall be returned to the Bank's 
AHP fund.
    (d) Bank's responsibility to ensure proper use of AHP subsidies.--
(1) In general. Each Bank shall ensure that the AHP subsidies provided 
by the Bank to members are passed on to the ultimate borrower, and that 
the preponderance of AHP subsidies provided by the Bank is ultimately 
received by very low- and low- or moderate-income households.
    (2) Fairness in transactions. Each Bank shall ensure that the terms 
of any member's participation in a transaction benefiting from an AHP 
subsidy are fair to the Program.
    (3) Market interest rate and charges. Each Bank shall ensure that, 
with respect to any loan financing an AHP project, the rate of 
interest, fees, points, and any other charges by the lender shall not 
exceed a reasonable market rate of interest, fees, points, and charges 
for a loan of similar maturity, terms, and risk.
    (4) Lending direct subsidies. A member or a project sponsor may 
lend a direct subsidy in connection with an AHP rental project 
involving federal Low-Income Housing Tax Credits, provided that all 
payments by the borrower are deferred until the end of the loan term 
and no interest is charged. Upon repayment of the loan, the entire 
amount of the direct subsidy must be repaid to the Bank.
    (5) Matched repayment schedules. The term of a subsidized advance 
shall be no longer than the term of the member's loan to the AHP 
project funded by the advance, and the scheduled principal repayments 
for the subsidized advance shall be reasonably related to the scheduled 
principal

[[Page 57826]]

repayments for the member's loan to the AHP project, such that at least 
once in every 12-month period, the member must pay to the Bank the 
principal repayments received by the member on its loan to the project.
    (e) Prepayment fees charged by the Banks. A Bank shall provide in 
its advances agreement with each member receiving a subsidized advance 
that upon prepayment of a subsidized advance, the Bank shall charge a 
prepayment fee only to the extent the Bank suffers an economic loss 
from the prepayment.


Sec. 960.10  Modifications of approved AHP applications.

    (a) Modification request. A member seeking a modification of its 
approved AHP application due to a project modification, as defined in 
Sec. 960.1, must submit a request for such modification in writing to 
the Bank for review and approval. A modification request must include, 
at a minimum:
    (1) A description of any changes in the terms of the approved 
application;
    (2) The reason for the proposed modification;
    (3) In cases of requests for additional AHP subsidies, revised 
financial statements, sources and uses of funds, development budgets, 
and, in the case of rental housing projects, operating pro formas; and
    (4) Any other information that the Bank determines is necessary to 
take action on the proposed modification.
    (b) Approval of modification request. (1) In the case of a 
modification request other than for an increase in AHP subsidy, the 
Bank's board of directors shall approve such request, in writing, if 
the project:
    (i) Continues to meet all of the requirements of 12 U.S.C. 1430(j) 
and this part; and
    (ii) Continues to score high enough, as proposed to be modified, to 
have been approved in its original application funding period.
    (2) In the case of a modification request for an increase in AHP 
subsidy, the Bank's board of directors may, in its discretion, approve 
such request, in writing, if the project satisfies the requirements of 
paragraph (b)(1)(i) and (ii) of this section.
    (c) No delegation. A Bank's board of directors may not delegate to 
Bank officers or other Bank employees the responsibility to take action 
on AHP modification requests.


Sec. 960.11  Avoidance of actual or apparent conflicts of interest.

    (a) In general. A Bank director, officer, employee, or contractor 
who has a personal interest in, or who is a director, officer or 
employee of an organization involved in a project that is the subject 
of a pending or approved AHP application, may not participate in or 
attempt to influence the evaluation, approval, funding, monitoring, or 
any remedial process for such project under the Program.
    (b) Adoption of written policy. Each Bank's board of directors 
shall adopt a written policy applicable to the Bank's directors, 
officers, employees, and contractors to prevent actual or apparent 
conflicts of interest under the Program.
    (c) No delegation. A Bank's board of directors may not delegate to 
Bank officers or other Bank employees the responsibility to adopt such 
policy.


Sec. 960.12  Homeownership assistance programs.

    (a) A Bank, after consultation with its Advisory Council, may set 
aside annually up to the greater of $1 million or 10 percent of its 
annual required AHP contribution to fund a homeownership assistance 
program, pursuant to the requirements of this section. Homeownership 
assistance programs established by a Bank under this section shall be 
considered priority projects under section 10(j)(3) of the Act (12 
U.S.C. 1430(j)(3)).
    (b) Use of program funds. Pursuant to written policies established 
by each Bank, a Bank may provide homeownership assistance program funds 
to members as grants to be used to provide downpayment, closing cost, 
or rehabilitation assistance to participating households in connection 
with a household's purchase of a one-to-four family property (including 
a condominium or cooperative housing unit) to be used as the 
household's primary residence. Notwithstanding Sec. 960.3(c)(4), 
homeownership assistance program funds shall not be used for homebuyer 
or homeowner counseling costs. A Bank may administer its homeownership 
assistance program through independent not-for-profit organizations 
with a demonstrated ability to administer program funds effectively and 
impartially.
    (c) Household eligibility criteria. In order to be eligible to 
receive homeownership assistance program funds from a member 
participant, a household must:
    (1) Be a low- or moderate-income household, as defined in 
Sec. 960.1, at the time the household is approved for participation in 
the program;
    (2) In the case of home purchase, complete a homebuyer counseling 
program provided by the member or another organization that is based on 
those offered by or in conjunction with a not-for-profit housing agency 
or other organization recognized as experienced in homebuyer 
counseling; and
    (3) Meet such other eligibility criteria as may be established by 
the Bank, in its discretion, such as a matching funds or matched 
savings requirement on the part of the household, provided that such 
criteria are consistent with, and in furtherance of, the requirements 
and goals of the Program and the National Homeownership Strategy 
coordinated by the Department of Housing and Urban Development.
    (d) Notification of availability and allocation of program funds to 
member participants. (1) A Bank shall notify its members of the amount 
of funds available under its homeownership assistance program within a 
reasonable period of time prior to the date that applications for such 
funds are due from members.
    (2) A Bank may allocate homeownership assistance program funds 
among its members on a first-come-first-served basis, or pursuant to 
such other fair and reasonable procedures and criteria established by 
the Bank and disclosed to members, including but not limited to:
    (i) Priorities for specific kinds of housing, such as housing for 
first-time homebuyers or housing in rural areas;
    (ii) Maximum amounts of homeownership assistance program funds 
available to each member participant; and
    (iii) Maximum amounts of homeownership assistance program funds 
available to each participating household.
    (3) The maximum amount of homeownership assistance program funds 
allocated per participating household shall not exceed $5,000.
    (4) In cases where the amount of homeownership assistance program 
funds applied for by members in a given year exceeds the amount of set-
aside funds available for that year, a Bank may:
    (i) Make available up to an additional $1 million from the next 
year's set-aside of funds for the homeownership assistance program;
    (ii) Allocate funds among member participants by a random selection 
process;
    (iii) Reduce each member participant's allocation of funds and the 
maximum amount of funds available to each participating household, 
based on fair and reasonable criteria established by the Bank and 
disclosed to member participants; or
    (iv) Establish a waiting list by which member participants would be 
allocated

[[Page 57827]]

funds on a household-by-household basis, as funds become available.
    (5) After determining the allocation of homeownership assistance 
program funds among member participants, the Bank shall notify each 
member participant of the amount of its allocation.
    (e) Disbursement of funds to member participants. Prior to 
disbursement of funds by the Bank to a member participant, the Bank 
shall require the member to certify that:
    (1) The funds received from the Bank will be provided to a 
participating household meeting the eligibility requirements of 
paragraph (c) of this section; and
    (2) If the member is providing mortgage financing to the 
participating household, the member has provided financial or other 
incentives in connection with such mortgage financing, and the interest 
rate, fees, points, and any other charges by the member do not exceed a 
reasonable market interest rate, fees, points, and charges for a loan 
of similar maturity, terms, and risk.
    (f) Retention requirements. A home purchased or rehabilitated using 
homeownership assistance program funds is subject to the retention 
requirements of Sec. 960.4(a)(1).
    (g) Use of recaptured funds. Recaptured homeownership assistance 
program funds shall be returned to the Bank to be made available to 
other participating households under its homeownership assistance 
program or to other AHP projects.


Sec. 960.13  Monitoring requirements.

    (a) AHP monitoring agreements between members and project sponsors 
and owners. A Bank shall require a member to have in place an AHP 
monitoring agreement with each project sponsor or owner, as applicable, 
under which the project sponsor or owner agrees to monitor the AHP 
project according to the following requirements:
    (1) Owner-occupied projects. (i) During the period of construction 
or rehabilitation of an owner-occupied project, the project sponsor 
must report to the member semiannually on whether reasonable progress 
is being made towards completion; and
    (ii) Until all approved AHP subsidies are provided to eligible 
households in a project, the project sponsor must certify annually to 
the member and the Bank that the AHP subsidies have been used according 
to the commitments made in the AHP application, and such certifications 
shall be supported by household income verification documentation 
maintained by the project sponsor and available for review by the 
member or the Bank; and
    (2) Rental projects. (i) During the period of construction or 
rehabilitation of a rental project, the project owner must report to 
the member semiannually on whether reasonable progress is being made 
towards completion;
    (ii) Within the first year after project completion, the project 
owner must certify to the member and the Bank that the services and 
activities committed to in the AHP application have been provided in 
connection with the project;
    (iii) Within the first year after project completion to the end of 
the project's retention period, the project owner annually must provide 
a list of tenant rents and incomes to the Bank and certify that:
    (A) The tenant rents and incomes are accurate and in compliance 
with the rent and income targeting commitments made in the AHP 
application;
    (B) The project is habitable; and
    (C) The project owner regularly informs households applying for and 
occupying AHP-assisted units of the address of the Bank that provided 
the AHP subsidy to finance the project; and
    (iv) A project owner must maintain tenant income verification 
documentation, available for review by the member or the Bank, to 
support such certifications.
    (b) AHP monitoring agreements between Banks and members. A Bank 
shall have in place an AHP monitoring agreement with each member 
receiving an AHP subsidy, under which the member agrees to monitor the 
AHP project according to the following requirements:
    (1) Owner-occupied projects. (i) During the period of construction 
or rehabilitation of an owner-occupied project, the member must take 
the steps necessary to determine whether reasonable progress is being 
made towards completion and must report to the Bank semiannually on the 
status of the project; and
    (ii) Within one year after disbursement to a project of all 
approved AHP subsidies, the member must review the project 
documentation and certify to the Bank that:
    (A) The AHP subsidies have been used according to the commitments 
made in the AHP application; and
    (B) The AHP-assisted units are subject to deed restrictions, 
``soft'' second mortgages, or other legally enforceable mechanisms 
pursuant to the requirements of Sec. 960.4(a); and
    (2) Rental projects. (i) During the period of construction or 
rehabilitation of a rental project, the member must take the steps 
necessary to determine whether reasonable progress is being made 
towards completion and must report to the Bank semiannually on the 
status of the project;
    (ii) Within the first year after project completion, the member 
must review the project documentation and certify to the Bank that:
    (A) The project is habitable;
    (B) The project meets its low- and moderate-income targeting 
commitments; and
    (C) The rents charged for income-targeted units do not exceed the 
maximum levels committed to in the AHP application; and
    (iii) For projects receiving $500,000 or less in AHP subsidy, 
during the period from the second year after project completion to the 
end of the retention period, the member must certify to the Bank 
biennially that, based on an exterior visual inspection, the project 
continues to be occupied and appears habitable.
    (c) Monitoring requirements for Banks.--(1) Owner-occupied 
projects. Each Bank must take the steps necessary to determine that, 
based on a review of the documentation for a sample of projects and 
units within one year of receiving the certification described in 
paragraph (b)(1)(ii) of this section:
    (i) The incomes of the households that own the AHP-assisted units 
did not exceed the levels committed to in the AHP application at the 
time the households qualified for the AHP subsidy;
    (ii) The AHP subsidies were used for eligible purposes; and
    (iii) The AHP-assisted units are subject to deed restrictions, 
``soft'' second mortgages, or other legally enforceable mechanisms 
pursuant to the requirements of Sec. 960.4(a)(1).
    (2) Rental projects.--(i) In general. Each Bank must take the steps 
necessary to determine that:
    (A) Within the first year after completion of an AHP-assisted 
rental project, the services and activities committed to in the AHP 
application have been provided; and
    (B) During the period from the second year after project completion 
to the end of the retention period:
    (1) The project is habitable;
    (2) The project meets its low- and moderate-income targeting 
commitments; and
    (3) The rents charged for income-targeted units do not exceed the 
maximum levels committed to in the AHP application.
    (ii) Monitoring schedule. A Bank's monitoring procedure shall 
include the following elements:

[[Page 57828]]

    (A) All projects. For all projects, the Bank shall make reasonable 
efforts to investigate any complaints received about a specific 
project;
    (B) $50,001 to $250,000. For projects receiving $50,001 to $250,000 
of AHP subsidies, the Bank must review tenant rent and income 
documentation, including tenant income verification documents, for a 
sample of the project's units at least once every six years, to verify 
compliance with the rent and income targeting commitments in the AHP 
application;
    (C) $250,001 to $500,000. For projects receiving $250,001 to 
$500,000 of AHP subsidies, the Bank must review tenant rent and income 
documentation, including tenant income verification documents, for a 
sample of the project's units at least once every four years, to verify 
compliance with the rent and income targeting commitments in the AHP 
application; and
    (D) Over $500,000. For projects receiving over $500,000 of AHP 
subsidies, the Bank must perform an annual on-site inspection of the 
project, including review of tenant rent and income verification 
documentation, for a sample of the project's units, to verify 
compliance with the rent and income targeting commitments in the AHP 
application.
    (iii) Sampling plan. A Bank may use a reasonable sampling plan to 
select the projects monitored each year and to review the documentation 
supporting the certifications made by members and project sponsors and 
owners.
    (iv) Monitoring by a housing credit agency--for projects receiving 
$500,000 or less of AHP subsidy. (A) In general. For projects receiving 
$500,000 or less of AHP subsidies, a Bank may rely on monitoring by a 
housing credit agency that also has provided funds to the project if:
    (1) The income targeting requirements, the rent requirements, and 
the retention period monitored by the housing credit agency are the 
same as, or more restrictive than, those committed to in the AHP 
application;
    (2) The housing credit agency agrees to inform the Bank of 
instances where tenant rents or incomes are found to be in 
noncompliance with the requirements being monitored by the housing 
credit agency or where the project is not in a habitable condition;
    (3) The Bank does not have information that monitoring by such 
housing credit agency is not occurring or is inadequate; and
    (4) The Bank makes reasonable efforts to investigate any complaints 
received about the project.
    (B) Annual certification requirement for project owner. In cases 
where a Bank relies on a housing credit agency to monitor a project, 
the project owner annually must provide a list of tenant rents and 
incomes to the Bank and certify that they are accurate and in 
compliance with the rent and income targeting commitments made in the 
AHP application.


Sec. 960.14  Corrective and remedial actions for noncompliance.

    (a) Noncompliance by project sponsors and owners. A Bank shall 
require a member receiving an AHP subsidy to have in place a recapture 
agreement with each sponsor of an owner-occupied project and each owner 
of a rental project, under which the sponsor or owner agrees:
    (1) To ensure that the AHP subsidy is used in compliance with the 
requirements of 12 U.S.C. 1430(j), this part, and the obligations 
committed to in the AHP application;
    (2) To make reasonable efforts to cure any noncompliance, pursuant 
to a compliance plan approved by the Bank; and
    (3) To repay the amount of any misused AHP subsidy (plus interest, 
if appropriate) resulting from the sponsor's or owner's noncompliance, 
if the noncompliance is not cured within a reasonable period of time.
    (b) Noncompliance by members. A Bank shall have in place with each 
member receiving an AHP subsidy a recapture agreement under which the 
member agrees:
    (1) To ensure that the AHP subsidy is used in compliance with the 
requirements of 12 U.S.C. 1430(j), this part, and the obligations 
committed to, and to be performed, by the member in its AHP 
application;
    (2) To make reasonable efforts to cure any noncompliance by the 
member;
    (3) To repay the amount of any misused AHP subsidy (plus interest, 
if appropriate) resulting from the member's noncompliance, if the 
noncompliance is not cured within a reasonable period of time;
    (4) To recover any misused AHP subsidy from a project sponsor or 
owner under the terms of the member's recapture agreement with the 
project sponsor or owner, provided that the member shall not be liable 
to the Bank for failure to return amounts that cannot be recovered from 
the project sponsor or owner despite reasonable collection efforts by 
the member; and
    (5) To return any misused subsidy recovered by the member from a 
project sponsor or owner to the Bank.
    (c) Noncompliance by Banks--(1) In general. The Finance Board, upon 
determining that the misuse of AHP subsidy, or the failure to recover 
misused AHP subsidy, is attributable to the action or inaction of a 
Bank, may order the Bank to reimburse its AHP fund in an amount equal 
to the misused subsidy, plus interest, if appropriate.
    (2) Adequacy of settlements. If, in a case of noncompliance by a 
member or a project sponsor or owner, a Bank enters into a settlement 
agreement or other arrangement with a member resulting in the return of 
a sum that is less than the full amount of any misused AHP subsidy, the 
Finance Board may, in its sole discretion, require the Bank to 
reimburse its AHP fund in an amount equal to the difference between the 
full amount of the misused subsidy and the sum actually recovered by 
the Bank, plus interest, if appropriate, unless:
    (i) The Bank has sufficient documentation showing that the sum 
agreed to be repaid under any settlement agreement or other arrangement 
is reasonably justified, based on the facts and circumstances of the 
noncompliance (including the degree of culpability of the noncomplying 
parties and the extent of the Bank's recovery efforts); or
    (ii) The Bank obtains a determination from the Finance Board that 
the sum agreed to be repaid under any settlement agreement or other 
arrangement is reasonably justified, based on the facts and 
circumstances of the noncompliance (including the degree of culpability 
of the noncomplying parties and the extent of the Bank's recovery 
efforts).
    (d) Use of recovered subsidies. AHP subsidies recovered by a Bank 
pursuant to this section shall be made available for other AHP 
projects.
    (e) Suspension and debarment. A Bank or the Finance Board, after 
notice and opportunity for a hearing, may suspend or debar a member, 
project sponsor, or owner from participation in the Program if such 
party shows a pattern of noncompliance, or engages in a single instance 
of flagrant noncompliance, with the requirements of 12 U.S.C. 1430(j), 
this part, or the obligations committed to in AHP applications.
    (f) Transfer of Program administration. Without limitation on other 
remedies, the Finance Board, upon determining that a Bank has engaged 
in mismanagement of its Program, may designate another Bank to 
administer all or a portion of the first Bank's annual AHP 
contribution, for the benefit of the first Bank's members,

[[Page 57829]]

under such terms and conditions as the Finance Board may prescribe.


Sec. 960.15  Required annual AHP contributions.

    Each Bank shall contribute annually to its Program the greater of:
    (a) 10 percent of the Bank's net earnings for the previous year; or
    (b) That Bank's pro rata share of an aggregate of $100 million to 
be contributed in total by the Banks, such proration being made on the 
basis of the net earnings of the Banks for the previous year.


Sec. 960.16  Temporary suspension of AHP contributions.

    (a) Application for temporary suspension--(1) Notification to 
Finance Board. If a Bank finds that the contributions required pursuant 
to Sec. 960.15 are contributing to the financial instability of the 
Bank, the Bank shall notify the Finance Board promptly, and may apply 
in writing to the Finance Board for a temporary suspension of such 
contributions.
    (2) Contents. A Bank's application for a temporary suspension of 
contributions shall include:
    (i) The period of time for which the Bank seeks a suspension;
    (ii) The grounds for a suspension;
    (iii) A plan for returning the Bank to a financially stable 
position; and
    (iv) The Bank's annual financial report for the preceding year, if 
available, and the Bank's most recent quarterly and monthly financial 
statements and any other financial data the Bank wishes the Finance 
Board to consider.
    (b) Finance Board review of application for temporary suspension--
(1) Determination of financial instability. In determining the 
financial instability of a Bank, the Finance Board shall consider such 
factors as:
    (i) Whether the Bank's earnings are severely depressed;
    (ii) Whether there has been a substantial decline in the Bank's 
membership capital; and
    (iii) Whether there has been a substantial reduction in the Bank's 
advances outstanding.
    (2) Limitations on grounds for suspension. The Finance Board shall 
disapprove an application for a temporary suspension if it determines 
that the Bank's reduction in earnings is a result of:
    (i) A change in the terms of advances to members which is not 
justified by market conditions;
    (ii) Inordinate operating and administrative expenses; or
    (iii) Mismanagement.
    (c) Finance Board decision. The Finance Board's decision shall be 
in writing and shall be accompanied by specific findings and reasons 
for its action. If the Finance Board approves a Bank's application for 
a temporary suspension, the Finance Board's written decision shall 
specify the period of time such suspension shall remain in effect.
    (d) Monitoring. During the term of a temporary suspension approved 
by the Finance Board, the affected Bank shall provide to the Finance 
Board such financial reports as the Finance Board shall require to 
monitor the financial condition of the Bank.
    (e) Termination of suspension. If, prior to the conclusion of the 
temporary suspension period, the Finance Board determines that the Bank 
has returned to a position of financial stability, the Finance Board 
may, upon written notice to the Bank, terminate the temporary 
suspension.
    (f) Application for extension of temporary suspension period. If a 
Bank's board of directors determines that the Bank has not returned to, 
or is not likely to return to, a position of financial stability at the 
conclusion of the temporary suspension period, the Bank may apply in 
writing for an extension of the temporary suspension period, stating 
the grounds for such extension.


Sec. 960.17  Affordable Housing Reserve Fund.

    (a) Deposits. If a Bank fails to use or commit the full amount it 
is required to contribute to the Program in any year pursuant to 
Sec. 960.15, 90 percent of the amount that has not been used or 
committed in that year shall be deposited by the Bank in an Affordable 
Housing Reserve Fund established and administered by the Finance Board. 
The remaining 10 percent of the unused and uncommitted amount retained 
by the Bank should be fully used or committed by the Bank during the 
following year, and any remaining portion must be deposited in the 
Affordable Housing Reserve Fund. Approval of AHP applications 
sufficient to exhaust the amount a Bank is required to contribute 
pursuant to Sec. 960.15 shall constitute use or commitment of funds.
    (b) Annual statement. By January 15 of each year, each Bank shall 
provide to the Finance Board a statement indicating the amount of 
unused and uncommitted funds from the prior year, if any, which will be 
deposited in the Affordable Housing Reserve Fund.
    (c) Annual notification. By January 31 of each year, the Finance 
Board shall notify the Banks of the total amount of funds, if any, 
available in the Affordable Housing Reserve Fund.


Sec. 960.18  Advisory Councils.

    (a) In general. Each Bank shall appoint an Advisory Council of 7 to 
15 persons, who reside in the Bank's District and are drawn from 
community and not-for-profit organizations actively involved in 
providing or promoting low- and moderate-income housing in the 
District.
    (b) Nominations and appointments. Each Bank shall solicit 
nominations for membership on the Advisory Council from community and 
not-for-profit organizations pursuant to a nomination process that is 
as broad and as participatory as possible, allowing sufficient lead 
time for responses. The Bank shall appoint Advisory Council members 
giving consideration to the size of the District and the diversity of 
low- and moderate-income housing needs and activities within the 
District.
    (c) Diversity of membership. In appointing its Advisory Council, a 
Bank shall ensure that the membership includes persons drawn from a 
diverse range of organizations, provided that representatives of no one 
group shall constitute an undue proportion of the membership of the 
Advisory Council.
    (d) Terms of Advisory Council members. The Bank shall appoint 
Advisory Council members to serve for no more than two consecutive 
terms of three years each, and such terms shall be staggered to provide 
continuity in experience and service to the Advisory Council.
    (e) Election of officers. Each Advisory Council may elect from 
among its members a chairperson, a vice chairperson, and any other 
officers the Advisory Council deems appropriate.
    (f) Duties.--(1) Meetings with the Banks. Representatives of the 
board of directors of the Bank shall meet with the Advisory Council at 
least quarterly to obtain the Advisory Council's advice on ways in 
which the Bank can better carry out its housing finance mission, 
including, but not limited to, advice on the low- and moderate-income 
housing and community development programs and needs in the Bank's 
District, and on the utilization of AHP subsidies, Bank advances, and 
other Bank credit products for these purposes.
    (2) Review of prior AHP applications. The Bank shall comply with 
requests from the Advisory Council for summary information regarding 
AHP applications from prior funding periods. Upon the request of the 
Advisory Council, the Bank shall allow Advisory Council members to 
examine, on the Bank's

[[Page 57830]]

premises, any AHP applications from prior funding periods.
    (3) Annual report to the Finance Board. Each Advisory Council shall 
submit to the Finance Board annually by March 1 its analysis of the 
low- and moderate-income housing and community development activity of 
the Bank by which it is appointed.
    (g) Expenses. The Bank shall pay Advisory Council members travel 
expenses, including transportation and subsistence, for each day 
devoted to attending meetings with representatives of the board of 
directors of the Bank.
    (h) Avoidance of actual or apparent conflicts of interest.--(1) In 
general. An Advisory Council member who has a personal interest in, or 
who is a director, officer or employee of an organization involved in a 
project that is the subject of a pending or approved AHP application, 
may not participate in or attempt to influence the evaluation, 
approval, funding, monitoring, or any remedial process for such project 
under the Program.
    (2) Adoption of written policy. Each Bank's board of directors 
shall adopt a written policy applicable to the Bank's Advisory Council 
members to prevent actual or apparent conflicts of interest under the 
Program.
    (3) No delegation. A Bank's board of directors may not delegate to 
Bank officers or other Bank employees the responsibility to adopt such 
policy.

    Dated: October 9, 1996.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-28319 Filed 11-7-96; 8:45 am]
BILLING CODE 6725-01-U