[Federal Register Volume 62, Number 103 (Thursday, May 29, 1997)]
[Rules and Regulations]
[Pages 28975-28978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14028]



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 Rules and Regulations
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  Federal Register / Vol. 62, No. 103 / Thursday, May 29, 1997 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

1 CFR Part 462

24 CFR Part 81

[Docket No. FR-4095-F-02]
RIN 2501-AC35


The Secretary of HUD's Regulation of the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac): Book-Entry Procedures

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This final rule establishes final procedures that govern the 
issuance, recordation, and transfer of Federal National Mortgage 
Association (``Fannie Mae'') and Federal Home Loan Mortgage Corporation 
(``Freddie Mac'') (collectively ``Government-Sponsored Enterprises'' or 
``GSEs'') securities in the Book-entry System. The rule makes final, 
with only minor changes, the interim rule published in the Federal 
Register on December 2, 1996 (61 FR 63944).

EFFECTIVE DATE: June 30, 1997.

FOR FURTHER INFORMATION CONTACT: Janet Tasker, Director, Office of 
Government-Sponsored Enterprises, Room 6154, telephone (202) 708-2224; 
or, for legal questions, Kenneth A. Markison, Assistant General Counsel 
for Government Sponsored Enterprises/RESPA, Office of the General 
Counsel, Room 9262, telephone (202) 708-3137. The address for both of 
these persons is: Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410. A telecommunications device 
for deaf persons (``TTY'') is available at (202) 708-9300. (The 
telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Background

    Both Fannie Mae and Freddie Mac use the Book-entry System of the 
Federal Reserve Banks to issue, record, and transfer ownership of 
certain of their respective securities. Although the Book-entry System 
was originally designed for Treasury securities, both GSEs have used 
this system under separate sets of regulations dating back to the late 
1970s. Treasury regulations govern the Book-entry System, known as the 
commercial book-entry system, when it is used to issue, record, 
transfer and maintain Treasury securities. Recently, Treasury 
substantially modified its regulations governing Treasury securities 
held in this system to reflect contemporary legal development of the 
Uniform Commercial Code (``UCC''). Treasury's regulation was published 
on August 23, 1996 (61 FR 43626).
    On December 2, 1996, pursuant to its general regulatory authority 
respecting the GSEs, HUD published in the Federal Register (61 FR 
63944) an interim rule to revise the regulations governing the book-
entry of GSE securities. As explained in the preamble to the interim 
rule, except as was necessary because of differences between the GSEs 
and their securities and Treasury and Treasury securities, HUD's 
revisions to its GSE book-entry regulations followed the revisions 
Treasury made to its book-entry regulations. The preamble to HUD's 
interim rule provided background information explaining HUD's process 
in developing the interim rule, HUD's analysis of revisions to the 
book-entry procedures, and a section-by-section comparison of the 
interim rule with Treasury's model. Since the discussion in the 
preamble to the interim rule remains applicable, HUD is not 
republishing the discussion contained in the preamble to the proposed 
rule.

II. Changes Contained in Today's Final Rule

    HUD received only two public comments on the interim rule. Both of 
those comments came from Fannie Mae. Fannie Mae suggested several 
changes, all of which have been incorporated, in one form or another, 
into the final rule.
    1. Fannie Mae suggested inserting a definition of ``participant'' 
to clarify that a participant can include a GSE, rather than using the 
definition of ``participant'' in Treasury's TRADES regulation. Using 
the TRADES definition of participant would effectively exclude a GSE 
from being a participant within the meaning in HUD's GSE book-entry 
rule, since to be a participant under the TRADES definition, the entity 
must be a ``person'' and under HUD's GSE book-entry rule a ``person'' 
does not include a GSE. The GSEs frequently hold GSE securities 
directly through Federal Reserve Banks and act as participants. HUD has 
added a definition of ``participant'' to section 81.2 which includes 
the GSEs to clarify this point.
    2. Fannie Mae suggested inserting a definition of ``entitlement 
holder'' to clarify that an entitlement holder can include a GSE, 
rather than using the definition of ``entitlement holder'' in 
Treasury's TRADES regulation. Using the TRADES definition of 
entitlement holder would effectively exclude a GSE from being an 
entitlement holder within the meaning in HUD's GSE book-entry rule, 
since to be an entitlement holder under the TRADES definition, the 
entity must be a ``person'' and under HUD's GSE book-entry rule a 
``person'' does not include a GSE. While the interim rule defined 
``entitlement holder'' in Sec. 81.2, that definition did effectively 
exclude a GSE. Since Fannie Mae and Freddie Mac frequently hold GSE 
securities directly or indirectly through Federal Reserve Banks, they 
could be entitlement holders just as they could be participants. HUD 
agrees that the interim rule should be modified. HUD has revised the 
definition of ``entitlement holder'' in Sec. 81.2 to include the GSEs 
to clarify this point.
    3. Fannie Mae suggested adding a sentence to the end of the 
definition of ``Book-entry GSE Security'' to clarify that a book-entry 
GSE Security also includes the separate interest and principal 
components of a Book-entry GSE Security if such security has been 
designated by the GSE as eligible for division into such components and 
the components are maintained separately on the books of one or more 
Federal Reserve Banks.
    Fannie Mae requested that this language be inserted to ensure that 
interest or principal ``strips'' relating to Fannie Mae securities are 
accorded the same treatment as Fannie Mae securities if they are also 
maintained on the books

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of a Federal Reserve Bank. Fannie Mae noted that the final rule 
published by the Thrift Depositor Protection Oversight Board governing 
book-entry Resolution Funding Corporation (``RFC'') securities included 
similar language. See Thrift Depositor Protection Oversight Board 
regulation governing book-entry RFC securities, Final rule, 
Secs. 1511.1 (definition of ``Book-entry Funding Corporation 
Security'') (61 FR 66874, December 19, 1996).
    HUD agrees that such a clarification is appropriate and has 
inserted language into the definition of ``Book-entry GSE Security'' 
addressing this point. HUD notes that the language in the final rule 
departs from the language in the regulation governing book-entry RFC 
securities because while the Securities Documentation for book-entry 
RFC securities specifically addresses whether the division of the 
separate interest and principal components is authorized, the 
Securities Documentation for Book-entry GSE Securities does not address 
this matter.
    4. Fannie Mae suggested clarifying in Sec. 81.92(a) that any choice 
of law provision in the Securities Documentation would be given effect 
only to the extent it is not inconsistent with HUD's regulation. HUD 
agrees with the comment. To the extent that the choice of law 
provisions in the Securities Documentation conflict with HUD's book-
entry regulations, HUD's book-entry regulations would take precedence. 
Thus, the parenthetical in Sec. 81.92(a) has been revised. This 
revision makes this provision in HUD's regulation more similar to the 
comparable provision in Treasury regulations applicable to Student Loan 
Marketing Association (``Sallie Mae'') securities. See the Bureau of 
the Public Debt, Fiscal Service, Treasury regulation governing book-
entry Sallie Mae securities, Final rule, Secs. 354.2(a) (62 FR 621, 
623, January 6, 1997).
    5. Fannie Mae also suggested several editorial changes, all which 
have been incorporated into the final rule. These changes included 
clarifying the definition of ``Eligible Book-entry GSE Security'' in a 
manner consistent with the definition used by the Farm Credit 
Administration in its book-entry rule. See Farm Credit Administration 
regulation governing book-entry Farm Credit securities, Interim rule, 
Sec. 615.5450 (definition of ``Eligible book-entry security'') (61 FR 
67188, 67192, December 20, 1996).
    In addition to these comments from Fannie Mae, during the comment 
period, HUD continued to consult with Treasury on the development of a 
final rule. Treasury suggested one change to the rule which HUD has 
incorporated into this final rule.
    The change suggested by Treasury is to delete the reference to 
``the United States'' in the following four occurrences in the interim 
rule:
    1. Section 81.92(a)(1), which specified that the rights and 
obligations of the United States with respect to a Book-entry GSE 
Security or Security Entitlement and the operation of the Book-entry 
System as it applies to GSE Securities are governed by the Book-entry 
regulations contained in this subpart H, the Securities Documentation 
(but not including any choice of law provisions in such documentation), 
and Federal Reserve Bank Operating Circulars.
    2. Section 81.92(a)(2), which specified that the rights of the 
United States with respect to a Book-entry GSE Security or Security 
Entitlement and the operation of the Book-entry System applicable to 
GSE Securities are governed by the Book-entry regulations contained in 
this subpart H, the Securities Documentation (but not including any 
choice of law provisions in such documentation), and Federal Reserve 
Bank Operating Circulars.
    3. Section 81.93(c)(1), which specified that the United states has 
no obligation to agree to act on behalf of any Person or to recognize 
the interest of any transferee of a security interest or other limited 
interest in favor of any Person except to the extent of any specific 
requirement of Federal law or regulation or to the extent set forth in 
any specific agreement with the Federal Reserve bank on whose books the 
interest of the Participant is recorded.
    4. Section 81.94(a), which specified that the United States is not 
liable to a Person asserting or having an adverse claim to a Security 
Entitlement or to a Book-entry GSE Security in a Participant's 
Securities Account, including any such claim arising as a result of the 
transfer or disposition of a Book-entry GSE Security by a Federal 
Reserve Bank pursuant to a Transfer Message that the Federal Reserve 
Bank reasonably believes to be genuine.
    The reason for eliminating the references to the United States in 
these four provisions is to avoid any unintended suggestion that there 
is an express or implied United States guarantee of GSE securities. 
Notwithstanding that the GSEs enjoy the financial market's assumption 
that the Federal Government and, ultimately, the American taxpayer 
would stand behind the obligations of the GSEs, the GSEs' obligations 
explicitly are not guaranteed by the United States. See, e.g., section 
1302(4), 1381(f) and 1382(n) of the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (Title XIII of the Housing 
and Community Development Act of 1992 (Pub. L. 102-550, approved 
October 28, 1992, and codified, generally, at 12 U.S.C. 4501-4641) 
(requiring each GSE to state in its obligations and securities that 
such obligations and securities ``are not guaranteed by the United 
States.'')).
    This change to these four provisions conforms HUD's rule to the 
book-entry rules published by other agencies with oversight of other 
Government Sponsored Enterprises. See Federal Housing Finance Board 
regulation governing book-entry Federal Home Loan Bank securities, 
Interim rule, Secs. 912.2(a), 912.4(c)(1), 912.5(a) (61 FR 64021-64027, 
December 3, 1996); Thrift Depositor Protection Oversight Board 
regulation governing book-entry RFC securities, Final rule, 
Secs. 1511.2(a)(1), 1511.2(a)(2), 1511.4(c)(1), 1511.5(a) (61 FR 66875-
66878, December 19, 1996); Bureau of the Public Debt, Fiscal Service, 
Treasury regulation governing book-entry Sallie Mae securities, Final 
rule, Secs. 354.2(a)(1), 354.2(a)(2), 354.4(c)(1), 354.5(a) (62 FR 621-
625, January 6, 1997); and Tennessee Valley Authority (``TVA'') 
regulation governing book-entry TVA Power securities, Final rule, 
Secs. 1314.4(a)(1), 1314.4(a)(2), 1314.5(c), 1314.6(a) (62 FR 920-923, 
January 7, 1997).

Findings and Certifications

Public Reporting Burden

    This rule contains no new information collection requirements that 
would require review by the Office of Management and Budget under the 
Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520).

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this interim rule, and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. This rule affects the 
operation of two entities, Fannie Mae and Freddie Mac, neither of which 
is a small entity.

Environmental Impact

    This rule is exempt from the requirement for an environmental 
assessment under section 102(2)(C) of the National Environmental Policy 
Act of 1969 (42 U.S.C. 4332), in accordance with HUD regulations at 24 
CFR 50.19(c)(1), as revised by a final rule on September 27, 1996 (61 
FR 50919). In

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accordance with 24 CFR 50.19(a), other Federal environmental laws, as 
described in 24 CFR 50.4, are not applicable to this rule.

Federalism Impact

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this rule's 
preemption of State law to the extent that it applies the newly revised 
Article 8 of the Uniform Commercial Code has sufficient effect on 
States to require consideration of the impact of the rule under the 
Order. The General Counsel has assessed this preemption in light of the 
principles, criteria, and requirements of the Executive Order and 
determined that it is not inconsistent with them. The policy does not 
impose additional costs or burdens on the States and it does not affect 
the States' ability to discharge traditional State governmental 
functions.
    This rule makes explicit the preemption applicable to the rights 
and obligations of the Federal Reserve Banks and the GSEs that was 
implicit under the prior rule. The rule continues to accommodate State 
law, to the maximum extent possible, given market methodologies. 
Ultimately, as States proceed to adopt the revised Article 8, the rule 
will provide no greater preemption of State law than under the prior 
rule.
    The rule is justified, despite the preemption it effects, by the 
fact that the preemption is no greater than necessary to accommodate 
the nationwide application of the rule and the nationwide market for 
the GSE Securities, as was the preemption under the book-entry rules 
this rule replaces. It should be noted that section 304(d) of the 
Fannie Mae Charter Act (12 U.S.C. 1719(d)) and section 306(g) of the 
Freddie Mac Act (12 U.S.C. 1455(f)) specifically provide for the 
exemption of GSE securities from State securities registration 
requirements (as well as the registration requirements of the 
Securities and Exchange Commission). See also 15 U.S.C. 77r-1.

Unfunded Mandates Reform Act

    The Secretary, in accordance with the Unfunded Mandates Reform Act 
of 1995, 2 U.S.C. 1532, has reviewed this rule before publication and 
by approving it certifies that this rule does not impose a Federal 
mandate that will result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year.

Catalog

    There is no Catalog of Federal Domestic Assistance number for the 
program affected by this rule.

List of Subjects

1 CFR Part 462

    Accounting, Banks, Banking, Securities.

24 CFR Part 81

    Accounting, Federal Reserve System, Mortgages, Reporting and 
recordkeeping requirements, Securities.
    Accordingly, for the reasons set out in the preamble, under the 
authority of 42 U.S.C. 3535(d), the amendments to part 462 of title 1 
of the Code of Federal Regulations and part 81 of title 24 of the Code 
of Federal Regulations published in the interim rule on December 2, 
1996 are adopted as final with the following additional amendments:

TITLE 24--DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL 
MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN 
MORTGAGE CORPORATION (FREDDIE MAC)

    1. The authority citation for Part 81 continues to read as follows:

    Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42 
U.S.C. 3535(d) and 3601-3619.

    2. In Sec. 81.2(b), the definitions of ``Book-entry GSE Security'', 
``Eligible Book-entry GSE Security'', ``Entitlement Holder'', and 
``Securities documentation'' are revised and a new definition of 
``Participant'' is added, in appropriate alphabetical order location, 
to read as follows:


Sec. 81.2  Definitions.

* * * * *
    Book-entry GSE Security means a GSE Security issued or maintained 
in the Book-entry System. Book-entry GSE Security also means the 
separate interest and principal components of a Book-entry GSE Security 
if such security has been designated by the GSE as eligible for 
division into such components and the components are maintained 
separately on the books of one or more Federal Reserve Banks.
* * * * *
    Eligible Book-entry GSE Security means a Book-entry GSE Security 
issued or maintained in the Book-entry System which by the terms of its 
Security Documentation is eligible to be converted from book-entry form 
into definitive form.
    Entitlement Holder means a Person or a GSE to whose account an 
interest in a Book-entry GSE Security is credited on the records of a 
Securities Intermediary.
* * * * *
    Participant means a Person or GSE that maintains a Participant's 
Securities Account with a Federal Reserve Bank.
* * * * *
    Securities Documentation means the applicable statement of terms, 
trust indenture, securities agreement or other documents establishing 
the terms of a Book-entry GSE Security.
* * * * *
    3. In Sec. 81.92, paragraph (a) is revised to read as follows:


Sec. 81.92  Law governing rights and obligations of Federal Reserve 
Banks and GSEs; rights of any Person against Federal Reserve Banks and 
GSEs; Law governing other interests.

    (a) Except as provided in paragraph (b) of this section, the 
following rights and obligations are governed solely by the book-entry 
regulations contained in this subpart H, the Securities Documentation, 
and Federal Reserve Bank Operating Circulars (but not including any 
choice of law provisions in the Security Documentation to the extent 
such provisions conflict with the Book-entry regulations contained in 
this subpart H):
    (1) The rights and obligations of a GSE and the Federal Reserve 
Banks with respect to:
    (i) A Book-entry GSE Security or Security Entitlement; and
    (ii) The operation of the Book-entry System as it applies to GSE 
Securities; and
    (2) The rights of any Person, including a Participant, against a 
GSE and the Federal Reserve Banks with respect to:
    (i) A Book-entry GSE Security or Security Entitlement; and
    (ii) The operation of the Book-entry System as it applies to GSE 
Securities;
* * * * *


Sec. 81.93  [Amended]

    4. In Sec. 81.93, paragraph (c)(1) is amended by removing the 
phrase ``, the United States,''.


Sec. 81.94  [Amended]

    5. In Sec. 81.94, paragraph (a) is amended by removing the phrase 
``, the United States,''; and paragraph (b)(2) is amended by removing 
the words ``principal and interest'' and by adding the words 
``redemption proceeds'' in their place.


Sec. 81.96  [Amended]

    6. In Sec. 81.96, paragraph (d) is amended by removing the words 
``offering circular'' and by adding in their place the words 
``Securities Documentation''.


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    Dated: May 20, 1997.
Andrew Cuomo,
Secretary.
[FR Doc. 97-14028 Filed 5-28-97; 8:45 am]
BILLING CODE 4210-32-P