[Federal Register Volume 62, Number 39 (Thursday, February 27, 1997)]
[Rules and Regulations]
[Pages 8868-8871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4795]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 97-12]


Restrictions on Advances to Non-Qualified Thrift Lenders

AGENCY: Federal Housing Finance Board.

ACTION: Interim rule with request for comments.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board 
(Finance Board) is amending its regulations on advances to members that 
are not qualified thrift lenders to implement certain changes made by 
the Economic Growth and Regulatory Paperwork Reduction Act of 1996 
(EGRPRA). Among other things, the EGRPRA broadened the universe of 
assets that a savings association may use in meeting its qualified 
thrift lender (QTL) requirement. Non-savings association members are 
not directly subject to the QTL requirement, although their ability to 
obtain advances is restricted if they do not meet the QTL requirement. 
The amendments should prove beneficial to many non-savings association 
members by allowing them to report increases in their levels of 
qualified thrift investments and, in some cases, satisfy the QTL 
requirement. Because certain of the items authorized by EGRPRA to be 
included in the QTL calculation are not separately identified on a non-
savings association member's published financial reports, such as a 
call report, the Federal Home Loan Banks (Banks) have no readily 
available source from which to obtain or verify that information. To 
allow the Banks to include the newly authorized items when conducting 
their annual QTL calculation of their non-savings association members, 
the Finance Board has determined that the Banks may rely on a 
certification from their members of any relevant QTL financial 
information that is not available from published financial reports. 
Because the Banks must complete the annual QTL calculations for 
calendar year 1996 no later than April 15, 1997, the Finance Board is 
issuing this rule as an interim final rule. As the certification 
process raises a number of questions about how best the Banks can 
determine the QTL status of their non-savings association members, and 
because the Office of Thrift Supervision (OTS) is in the process of a 
rulemaking relating to the EGRPRA amendments, the Finance Board has 
determined to solicit comments on the interim final rule for a period 
of 30 days.

DATES: The interim rule is effective on February 27, 1997. Comments 
must be received by March 31, 1997.

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

FOR FURTHER INFORMATION CONTACT: Steven P. Wojtaszek, Financial 
Analyst, Financial Research Division, Office of Policy, (202) 408-2863, 
or Neil R. Crowley, Senior Attorney, Office of General Counsel, (202) 
408-2990, Federal Housing Finance Board, 1777 F Street, NW., 
Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    Historically, membership in the Federal Home Loan Bank System 
(System) had been comprised predominantly of savings associations, 
which tended to concentrate their investments in residential mortgage 
loans. In 1987, Congress established the QTL test, which required 
savings associations to maintain 60 percent of their assets in 
instruments related to domestic residential real estate or manufactured 
housing. Competitive Equality Banking Act of 1987, Public Law 100-86, 
section 104(c), 101 Stat. 571-573 (August 10, 1987). Among other 
things, a savings association that failed the QTL test was limited in 
the amount of advances that it could receive from its Bank. Id. section 
105. In 1989, Congress authorized commercial banks and credit unions, 
institutions that historically had not been so concentrated in 
residential mortgage lending, to become members of the System. 
Financial Institutions Reform, Recovery , and Enforcement Act of 1989 
(FIRREA), Public Law 101-73, section 704(a), 103 Stat. 415 (August 9, 
1989),

[[Page 8869]]

codified at 12 U.S.C. 1424(a). FIRREA also limited the amount of 
advances that such non-savings association members could obtain from 
their Bank, and imposed a 30 percent System-wide limit on the aggregate 
amount of advances that could be outstanding to such non-QTL members. 
12 U.S.C. 1430(e).
    As a general matter, the QTL test now requires a savings 
association to maintain 65 percent or more of its portfolio assets in 
certain designated instruments, which are characterized as ``qualified 
thrift investments.'' The QTL test requires one to determine an 
institution's ``actual thrift investment percentage'' (ATIP), which is 
obtained by dividing the institution's ``qualified thrift investments'' 
by its ``portfolio assets.'' The QTL test applies directly only to 
savings associations, and OTS, as the principal federal regulator of 
savings associations, determines their QTL compliance. The QTL test 
does not apply to commercial banks, credit unions, or insurance 
companies, although if such institutions become members of the System 
their ability to obtain advances is restricted if they do not meet the 
QTL test. 12 U.S.C. 1430(e). The Banks are required to determine the 
ATIP for each non-savings association member at least annually, between 
January 1 and April 15, based on financial information as of December 
31 of the prior calendar year. 12 CFR 935.13(a)(3).
    In EGRPRA (Public Law 104-208, 110 Stat. 3009, September 30, 1996), 
Congress made it easier for all members to achieve QTL compliance by 
broadening the universe of ``qualified thrift investments'' that may be 
included in calculating an institution's ATIP. Those changes could 
benefit non-savings association members by allowing them to increase 
their ATIP, possibly to the point of satisfying the QTL test. Even 
those members that do not meet the QTL requirement should benefit from 
the amendments because an increase in their ATIP should allow them to 
obtain a greater amount of advances based on their existing level of 
Bank stock. Under the amendments made by EGRPRA, a member now may 
include without limit as ``qualified thrift investments'' the full 
amount of its loans for educational purposes, loans to small 
businesses, and loans made through credit cards or credit card 
accounts. In addition, institutions may include an increased amount of 
consumer loans, subject to certain aggregate limits. For purposes of 
the EGRPRA amendments, the director of OTS is required to define the 
terms ``small business,'' ``small business loans,'' and ``credit 
card,'' which the OTS has done by means of an interim final rule. 61 FR 
60179 (November 27, 1996), to be codified at, 12 CFR 560.3.
    Although EGRPRA clearly specifies the types of additional assets 
that may be included as qualified thrift investments (and OTS has 
defined small business loans), the Banks cannot readily incorporate 
those items into their annual QTL calculations because the call reports 
of the commercial bank and credit union members, and the comparable 
reports of insurance company members, do not separately identify those 
items. The absence of these QTL items from the available regulatory 
financial reports of the non-savings association members complicates 
the Banks' annual task of determining the ATIP for those members. As a 
consequence of the additional items added by EGRPRA, the number of 
elements within the QTL calculation for which the Banks lack accurate 
and readily available data has increased, which introduces a greater 
element of uncertainty into the accuracy of the Banks' QTL 
determinations. This is not so much of a concern with respect to 
savings association members because OTS routinely examines the 
associations for QTL compliance, and the Finance Board and the Banks 
can rely on those OTS determinations. With respect to the non-savings 
association members, however, the principal federal regulators do not 
conduct examinations for QTL compliance and the Banks cannot look to 
those regulators as a source for the required QTL information.
    For example, a commercial bank's outstanding credit card loans are 
separately stated on its Report of Condition and Income (Call Report), 
but its education loans and small business loans (at least as defined 
for QTL purposes) are not separately identified. Although the Call 
Report includes information about small business loans, that 
information does not correspond to the information that the Banks 
require when making the annual QTL calculations for their non-savings 
association members. The OTS regulation defines the term ``small 
business loans'' by incorporating the definitions from the Small 
Business Act and its implementing regulations promulgated by the Small 
Business Administration (SBA). Thus, for QTL purposes, a small business 
loan is one made to a ``small business.'' Under the SBA regulations, a 
``small business'' is an entity the gross receipts of which (or the 
number of its employees) fall below certain thresholds specified by 
SBA. By comparison, the Call Report defines a small business loan based 
on the size of the loan, not the size of the borrowing entity. Thus, 
the Banks' use of the ``small business loan'' information that is 
available from the Call Report likely will overstate the amount of 
``small business loans'' that are eligible to be used in deter mining a 
commercial bank member's QTL status. The same problem exists with 
respect to the reports submitted by credit union and insurance company 
members, neither of which separately identify the amount of loans 
meeting the SBA definition of small business loans.
    This disparity between the statutory requirements of the QTL test 
and the information that is readily available to the Banks is not 
limited to the items added by EGRPRA. For example, the QTL test 
includes within a member's ``portfolio assets'' certain government, 
agency, and other debt securities with specified maturities (from two 
to five years), none of which is separately identified by maturity on 
the published financial statements. Similarly, the QTL test includes 
within a member's ``qualified thrift investments'' certain construction 
loans related to one-to four-family residential properties, 50 percent 
of residential mortgage loans sold during a calendar quarter, 200 
percent of affordable housing-related loans, and 200 percent of service 
facility loans, none of which is separately identified on the available 
reports.
    The Finance Board believes that non-savings association members can 
benefit from the newly authorized qualified thrift investments, and 
that it is appropriate to allow the Banks to incorporate the new 
classes of investments into their ATIP calculations for the calendar 
year ending December 31, 1996. Of supervisory concern to the Finance 
Board, however, is how best to ensure that the Banks conduct their 
annual QTL determinations consistently with Section 10(e) of the 
Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1430(e). The Finance 
Board believes that it would be imprudent for the Banks to confer QTL 
status on non-savings association members that cannot demonstrate that 
their qualified thrift investments actually include the claimed amount 
of the newly authorized investments.
    One means of ensuring this result would be through an examination 
process. The Finance Board believes that it has the authority, under 
Sections 2A(a)(3), 2B(a), and 22, of the Bank Act, 12 U.S.C. 
1422a(a)(3), 1422b(a), and 1442(a), to examine, or to require the Banks 
to request an examination of, individual members if necessary to ensure 
that the Banks operate in compliance with the law. The Finance

[[Page 8870]]

Board believes, however, that the more reasonable and efficient 
approach is to allow the Banks to obtain that information from their 
members. As a matter of practice, some Banks already obtain from their 
members information regarding certain QTL items that are not separately 
identified on the published financial reports. For example, some Banks 
obtain all QTL-related financial data from the member and use the 
published financial reports, such as a Call Report, to confirm the 
general accuracy of the information. Other Banks calculate a member's 
ATIP as a service to their members using the most recently published 
financial reports and either obtain any additional data from the member 
or estimate it from other known sources.
    Accordingly, through this interim final rule the Finance Board will 
allow the Banks to accept from their non-savings association members 
supplemental QTL information that does not appear in the published 
financial statements. The chief executive officer (CEO) of the member 
must certify to the Bank that the information is accurate and complete 
as of the date provided. The Finance Board believes that such an 
arrangement strikes an appropriate balance between its need to ensure 
that the Banks base their QTL calculations on accurate financial 
information, and the practice of allowing the Banks to manage their own 
business. To allow the Banks to make use of the newly authorized QTL 
categories prior to the April 15, 1997, deadline for their QTL 
calculations, the Finance Board has determined to issue this rule as an 
interim final rule, but also is soliciting comments on the specific 
provisions of the rule. The Finance Board appreciates that OTS may yet 
revise the QTL definitions established through its recent interim rule, 
and intends to monitor the OTS rulemaking proceeding. The Finance Board 
anticipates that it will make corresponding changes to its advances 
regulation should the OTS further amend the QTL regulation in any 
material respect.

II. Description of the Interim Final Rule

    The interim rule amends the definitions of ``actual thrift 
investment percentage,'' ``Qualified Thrift Lender,'' and ``Qualified 
Thrift Lender test,'' in the Finance Board's advances regulation, 12 
CFR 935.1, to delete references to OTS regulations that no longer 
exist. The interim rule also amends the Finance Board's advances 
regulations, 12 CFR 935.13(a)(3), to direct the Banks to use the 
financial information from the call report (which term is defined to 
include the published financial reports submitted by credit union and 
insurance company members) as the primary source for QTL 
determinations. In those cases in which not all of the information 
needed to perform an accurate QTL calculation is included in the call 
report, the Bank may accept other information submitted by the member, 
provided that the CEO of the member certifies in writing that the 
information is accurate and complete as of the relevant date. As it 
appears to have been the practice of some Banks to obtain the required 
financial information for the QTL calculation from their members and 
then compare that information to the call report, the rule allows the 
Banks to continue to obtain information from their members as the first 
step in the process, provided that any information not in the call 
report must be subject to the same certification requirement. By 
requiring the formality of a certification from the CEO the Finance 
Board believes that the Banks will have sufficient assurance that the 
information on which they conduct their determinations is accurate, 
which is the minimum effort required to ensure compliance with the Bank 
Act.
    The Finance Board does not intend to require the Banks to obtain a 
CEO certification from every non-savings association member as a matter 
of course. Such a certification is necessary only when a member wishes 
the Bank to include in its annual ATIP calculation qualified thrift 
investments or portfolio assets that do not appear in its published 
financial reports. If a member has no such investments or assets, then 
the Bank need not require a certification from the member. Similarly, 
if a member has a portfolio of small business loans or education loans, 
but the inclusion of those items in the calculation would not 
materially change the member's ATIP, then a member could elect not to 
provide a certification. If a member were to have a substantial 
portfolio of education loans, for example, but only minor investment in 
small business loans, the member could opt to certify the number of 
education loans and omit, or indicate a zero balance, for the category 
of small business loans. The Finance Board specifically requests public 
comment on the certification process, as well as the content and format 
for the certification.

III. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq., 
the Banks are not ``small entities.'' Id. 601(6). As the interim final 
rule would apply only to the Banks, it does not impose any additional 
regulatory requirements on small entities of the type contemplated by 
the RFA. Thus, in accordance with the provisions of the RFA, the Board 
of Directors of the Finance Board hereby certifies that this interim 
final rule will not have a significant economic impact on a substantial 
number of small entities. Id. 605(b).

IV. Paperwork Reduction Act

    The Finance Board has submitted to the Office of Management and 
Budget (OMB) an analysis of the collection of information contained in 
Sec. 935.13 of the interim rule, described more fully in the 
SUPPLEMENTARY INFORMATION. The Banks will use the information 
collection to determine whether a non-savings association member 
satisfies the statutory QTL requirement. Only Bank members that meet 
the QTL standards may maintain unrestricted access to long-term Bank 
advances. See 12 U.S.C. 1430(e). Responses are required to obtain or 
retain a benefit. See id. The Finance Board will maintain the 
confidentiality of information obtained from respondents pursuant to 
the collection of information as required by applicable statute, 
regulation, and agency policy.
    Likely respondents and/or recordkeepers will be non-savings 
association members of a Bank. 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 OMB. See 44 U.S.C. 3512(a).

The estimated annual reporting and recordkeeping hour                   
 burden is:                                                             
  a. Number of respondents.................................        4,272
  b. Total annual responses................................        4,272
Percentage of these responses collected electronically.....            0
  c. Total annual hours requested..........................        3,930
  d. Current OMB inventory.................................            0
  e. Difference............................................        3,930
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.......................     $126,660
  d. Current OMB inventory.................................            0
  e. Difference............................................     $126,000
                                                                        

    The Finance Board has submitted the collection of information to 
OMB for review in accordance with section 3507 of the Paperwork 
Reduction Act of 1995. See 44 U.S.C. 3507. Comments regarding the 
collection of information may be submitted in writing to the

[[Page 8871]]

Finance Board at the address above, and to the Office of Information 
and Regulatory Affairs of OMB, Attention: Desk Officer for Federal 
Housing Finance Board, Washington, DC 20503 by March 31, 1997.

V. Other Procedural Requirements

    The interim final rule does not meet the criteria for a 
``significant regulatory action'' under Executive Order 12866.
    The Finance Board has determined that the notice and comment 
procedure ordinarily required by the Administrative Procedure Act (APA) 
is not required in this instance. The APA authorizes agencies to waive 
the notice and comment procedures when the agency ``for good cause 
finds . . . that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' 5 U.S.C. 
553(b)(3)(B). The Finance Board has determined that compliance with the 
APA procedure in this instance would be impracticable, unnecessary, and 
contrary to the public interest because it effectively would deny the 
Banks the opportunity to incorporate the newly authorized QTL 
investments into their annual QTL calculations for the current year. As 
described in the SUPPLEMENTARY INFORMATION, the Banks must calculate 
the QTL ratio of each non-savings association member between January 1 
and April 15 of each year. If the Finance Board were to observe the 
notice and comment procedures, it is unlikely that the Finance Board 
could promulgate a final rule sufficiently in advance of the April 15 
deadline for the Banks to incorporate its provisions into their current 
QTL calculations. Nonetheless, because the Finance Board believes that 
public comments aid in effective rulemaking, it will accept written 
comments on the interim rule until March 31, 1997.
    The Finance Board also has determined that the 30-day delay of the 
effectiveness provisions of the APA may be waived in these 
circumstances. Section 553(d) of the APA permits waiver of the 30-day 
delayed effective date requirement, among other things, where a 
substantive rule relieves a restriction, or otherwise for good cause 
found by the agency. As with the APA notice and comment procedures, 
described above, the Finance Board finds that there is good cause for 
making the interim rule effective on February 27, 1997, because it will 
allow the Banks to take advantage of the EGRPRA's amendments in 
calculating the QTL ratios for the current year. Moreover, the absence 
of accurate call report information about the categories of newly 
authorized QTL assets impairs the ability of the Banks to implement the 
EGRPRA's amendments, which problem is remedied by the interim rule. By 
eliminating a practical impediment to the implementation of the QTL 
amendments the interim rule relieves a restriction that might otherwise 
prevent the Banks from realizing the benefits intended by Congress.

List of Subjects in 12 CFR Part 935

    Credit, Federal home loan banks.

    Accordingly, the Board of Directors of the Federal Housing Finance 
Board hereby amends title 12, chapter IX, part 935 of the Code of 
Federal Regulations, as follows:

PART 935--ADVANCES

    1. The authority citation for part 935 continues to read as 
follows:

    Authority: 12 U.S.C. 1422b(a)(1), 1426, 1429, 1430, 1430b, and 
1431.

    2. Section 935.1 is amended by republishing the introductory text 
and revising the definitions for ``Actual thrift investment 
percentage'', ``Qualified Thrift Lender'', and ``Qualified Thrift 
Lender test'' to read as follows:


Sec. 935.1  Definitions

    As used in this part:
* * * * *
    Actual thrift investment percentage or ATIP has the same meaning as 
used in section 10(m)(4) of the Home Owners' Loan Act (12 U.S.C. 
1467a(m)(4)), except that the ATIP will be calculated and applied for 
purposes of this part to all members of the Banks, whether or not they 
are savings associations.
* * * * *
    Qualified Thrift Lender or QTL means the term as defined in section 
10(m)(1) of the Home Owners' Loan Act (12 U.S.C. 1467a(m)(1)). A non-
savings association member which meets the QTL test as applied by the 
Banks will be treated as a QTL for purposes of this part.
    Qualified Thrift Lender test or QTL test means the asset test 
described in section 10(m) of the Home Owners' Loan Act (12 U.S.C. 
1467a(m)), except that the QTL test will be applied for purposes of 
this part to all members of the Banks, whether or not they are savings 
associations.
* * * * *
    3. In Sec. 935.13, paragraph (a)(3) is revised to read as follows:


Sec. 935.13  Restrictions on advances to members that are not qualified 
thrift lenders

    (a) Restrictions on advances to non-QTL members. * * *
    (3)(i) A Bank shall calculate each non-savings association member's 
ATIP at least annually, between January 1 and April 15, based upon 
financial data as of December 31 of the prior calendar year. The Bank 
may, in its discretion, calculate a member's ATIP more frequently than 
annually.
    (ii) In determining a non-savings association member's annual ATIP, 
a Bank shall use the financial information from the member's December 
31 call report as the primary source of information. A Bank making ATIP 
determinations more frequently than annually shall use the member's 
most recent call report. If any information necessary for determining 
the member's ATIP is not separately identified on a member's call 
report, the Bank may rely on a written certification provided by the 
member as to the dollar amount and composition of those other assets 
that meet the definitions of ``qualified thrift investments'' or 
``portfolio assets.'' Notwithstanding the preceding two sentences, a 
Bank may, at its option, accept a certification from a non-savings 
association member as to the dollar amount and composition of all 
assets that meet the definitions of ``qualified thrift investments'' or 
``portfolio assets.'' In any case in which a Bank relies on a 
certification from a non-savings association member as to its level of 
``qualified thrift investments'' or ``portfolio assets,'' the 
certification must be in writing and signed by the chief executive 
officer of the member.
    (iii) As used in this section, the term ``call report'' shall 
include:
    (A) With respect to a commercial bank, the annual or quarterly 
``Report of Condition and Income'' submitted to its appropriate Federal 
banking agency;
    (B) With respect to a credit union, the quarterly or semi-annual 
call report submitted to the National Credit Union Administration; and
    (C) With respect to an insurance company, its National Association 
of Insurance Commissioners annual regulatory filing.
* * * * *
    Dated: February 6, 1997.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 97-4795 Filed 2-26-97; 8:45 am]
BILLING CODE 6725-01-U