[Federal Register Volume 62, Number 149 (Monday, August 4, 1997)]
[Rules and Regulations]
[Pages 41812-41839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20046]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 960

[No. 97-44]
RIN 3069-AA28


Amendment of Affordable Housing Program Regulation

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulation governing the operation of the Affordable Housing 
Program (AHP or Program). Among the significant changes made by the 
final 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 final 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: The final rule is effective on January 1, 1998. Compliance with 
Sec. 960.3(b) shall begin on September 3, 1997.

FOR FURTHER INFORMATION CONTACT: Richard Tucker, Deputy Director, 
Compliance Assistance Division, (202) 408-2848, or Diane E. Dorius, 
Associate Director, Program Development Division, (202) 408-2576, 
Office of Policy; or Sharon B. Like, Senior Attorney-Advisor, (202) 
408-2930, or Brandon B. Straus, Senior 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 seven 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, which was published in the 
Federal Register, 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 September 25, 1995, the Finance Board published a final rule 
amending the AHP regulation to permit the Banks to set aside of portion 
of their required annual AHP contributions to fund homeownership set-
aside programs to provide downpayment and closing cost assistance to 
low-and moderate-income homebuyers. See 60 FR 49327 (Sept. 25, 1995). 
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

[[Page 41813]]

25 comment letters on the Subsidy Limits Proposal.
    Given the passage of time since the 1994 and 1995 notices of 
proposed rulemaking, and the additional experience of the Finance Board 
and the Banks in overseeing and administering the Program, the Finance 
Board issued a new comprehensive proposal to revise the Program, which 
was published in the Federal Register on November 8, 1996, with a 90-
day period for public comment. See 61 FR 57799 (Nov. 8, 1996). The 
Finance Board received over 270 comments on the proposed rule. 
Commenters included: all of the Banks and their Advisory Councils; Bank 
members; not-for-profit organizations; trade associations; a member of 
Congress; a federal agency; state and local government agencies; and 
others.

II. Analysis of the Final Rule

A. In General

    The final rule makes changes to a number of the aspects of the 
Program that were highlighted in the notice of proposed rulemaking, 
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 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 final rule also reorganizes and streamlines the text of the 
regulation. The structure of the final rule is significantly revised 
from that of the proposed rule in order to, among other things: (1) 
separate Program standards from procedures; (2) integrate the 
provisions governing the Banks' homeownership set-aside programs with 
corresponding provisions governing the Banks' competitive application 
programs; (3) clarify the roles of the Banks, members, and other 
parties involved in the Program; and (4) identify the kinds of 
agreements that must be in place in order to ensure compliance with 
Program requirements.
    The Finance Board is making these changes in the larger context of 
devolving to the Banks the authority to make final funding decisions 
for AHP projects. 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' seven years of 
experience evaluating and processing AHP applications, the Banks are 
prepared to take on this new authority. A large majority of comments on 
the proposed rule supported the transfer of approval authority for AHP 
applications from the Finance Board to the Banks. The Finance Board 
will continue to exercise its supervisory oversight role through 
examinations of each Bank's Program.

B. Effective Dates and Existing AHP-Assisted Projects

1. Dates
    In order to provide the Banks sufficient time to prepare to 
administer the Program under the revised AHP regulation, the provisions 
of the final rule will become effective on January 1, 1998. However, 
compliance with Sec. 960.3(b) shall begin on September 3, 1997. As 
further discussed below, Sec. 960.3(b) requires each Bank to adopt an 
AHP implementation plan setting forth key policies and procedures 
governing the Bank's Program.
2. Application of the Final Rule to Existing AHP-Assisted Projects
    Section 960.16 of the final rule makes clear that the provisions of 
the final rule apply to all existing AHP-assisted projects. Existing 
agreements between Banks, members, sponsors, or owners regarding such 
parties' AHP obligations may have language that automatically 
incorporates any changes to the AHP regulation that may be adopted from 
time to time by the Finance Board. Section 960.16 of the final rule 
makes clear that where existing agreements do not provide for automatic 
conformity with AHP regulatory changes, the requirements of section 
10(j) of the Act and the provisions of the AHP regulation, as amended, 
are incorporated into such agreements by operation of law.
    The final rule may require Banks, members, sponsors, and owners to 
change their behavior prospectively to meet new regulatory 
requirements. However, the changes made by the final rule are not 
intended to affect the legality of actions taken prior to the effective 
date of the final rule.

C. Definitions--Sec. 960.1

    Changes to individual definitions in the final rule generally are 
discussed in later sections of this SUPPLEMENTARY INFORMATION section 
in the context of specific regulatory requirements, with the exception 
of the following definitions discussed here.
1. ``Subsidized advance'' and ``Subsidy''
    The final rule carries forward the provision of the proposed rule 
defining ``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.'' The proposed rule defined ``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.'' The definition of 
``subsidy'' in the final rule makes clear that the amount of the 
interest rate subsidy in a subsidized advance is determined as of the 
earlier of the two dates mentioned above.
    The notice of proposed rulemaking requested 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, which may eliminate a perceived 
disincentive to the Banks to make subsidized advances, versus direct 
subsidies. A number of commenters stated 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, 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. The Finance Board finds merit in 
these arguments. Therefore, the final rule carries forward the 
reference to a Bank's

[[Page 41814]]

``cost of funds'' in the definition of ``subsidy.''
2. Definitions of ``Median Income for the Area,'' ``Low-and Moderate-
Income Household,'' and ``Very Low-Income Household''
    a. Median Income Standards and Family Size-Adjustments.
    (i) Statutory Standards
    Under section 10(j)(2)(A) of the Act, members are to use AHP 
subsidies to finance owner-occupied housing for ``families with incomes 
at or below 80 percent of the median income for the area.'' See 12 
U.S.C. 1430(j)(2)(A). Section 10(j)(13)(A) of the Act contains a 
corresponding definition of ``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).
    Under section 10(j)(2)(B) of the Act, members are to use AHP 
subsidies generally to finance rental housing for ``very low-income 
households.'' See id. Sec. 1430(j)(2)(B). 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 Act does not define ``median income for the area'' or ``area 
median.'' To date, the Finance Board has interpreted these terms to 
refer to the measure of median income for an area as determined and 
published by the Secretary of the Department of Housing and Urban 
Development (HUD) for approximately 2,700 metropolitan statistical 
areas (MSAs), counties, and nonmetropolitan statistical areas, 
including adjustments for various local conditions as well as for 
family size. See 42 U.S.C. 1437a(b)(2); 12 CFR 960.1(h). In practice, 
this required the use of income limits published by HUD corresponding 
to 80 percent and 50 percent, respectively, of the median income for a 
particular area, adjusted for family size.
    (ii) Proposed Regulatory Amendments.
    On November 5, 1993, the Finance Board published for comment a 
proposal to amend the AHP regulation 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).
    The November 8, 1996 proposed rule continued to require the use of 
HUD income limits, including adjustments for family size, in 
determining household eligibility under the Program. The notice of 
proposed rulemaking requested comments on the definitions in the 
proposed rule and, alternatively, on allowing: (1) Median income to be 
established using any reliable source for current area information and 
to 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 for the project; 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.
    (iii) Final Regulatory Standards
    While a number of commenters supported using HUD income limits on 
the ground that they are readily understood and available, there also 
was significant support for: (1) the use of median income standards, 
including any family-size adjustments, established using any reliable 
source for current area income data determined for counties and other 
applicable state and local subdivisions as well as MSAs; or (2) 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.
    While the Finance Board favors some measure of flexibility on the 
issue of income limits for households participating in AHP-assisted 
projects, a prerequisite for any income eligibility standard is that it 
is based on data that are accepted as accurate and reliable and are 
readily available. The Finance Board wishes to avoid adopting an income 
eligibility standard that increases the risk of after-the-fact 
discrepancies between a particular income eligibility standard and the 
actual incomes of households benefiting from AHP subsidies, which 
ultimately may lead to repayment of the subsidies.
    In light of the support among commenters for the use of measures of 
median income and family-size adjustments other than those used by HUD 
in its housing programs, the final rule adds a definition of ``median 
income for the area,'' and amends the definitions of ``low-or moderate-
income household'' and ``very low-income household'' to permit the use 
of additional median income standards and their corresponding 
adjustments for family size.
    In the case of owner-occupied projects, ``median income for the 
area'' means: (1) The median income for the area, as published annually 
by HUD; (2) the applicable median family income, as determined under 
the mortgage revenue bond program set forth in 26 U.S.C. 143(f) and 
published by a State agency or instrumentality; (3) the median income 
for the area, as published by the United States Department of 
Agriculture (USDA); or (4) the median income for any definable 
geographic area, as published by a federal, state, or local government 
entity for purposes of that entity's housing programs, that has been 
approved by the Board of Directors of the Finance Board for use under 
the AHP.
    The final rule expressly includes reference to the median income 
published by the USDA in order to make clear that the Finance Board 
supports the use of the AHP by members in rural areas in order to meet 
homeownership needs in those areas.
    Under the Internal Revenue Code, household eligibility for mortgage 
financing provided by qualifying mortgage revenue bonds is based on the 
``applicable median family income,'' which is the greater of: (1) The 
area median gross income for the area in which a residence is located; 
or (2) the statewide median gross income for the State in which the 
residence is located. See 26 U.S.C. 143(f)(4). The ``applicable median 
family income'' is based on income data published by HUD. See Rev. 
Proc. 97-26, 1997-17 I.R.B 17.
    Under the mortgage revenue bond program, the applicable median 
family income may be adjusted depending on whether the residence being 
financed is in a targeted versus a non-targeted area and whether the 
residence is in a high housing cost area. See 26 U.S.C. 143(f)(3), (5). 
Adjustments also are made for family size. See id. section 
143(f)(6)(A). It should be noted that for purposes of the AHP, the 
applicable median family income may be adjusted for family size, but 
shall not be adjusted based on the location of a residence in a 
targeted area or a high housing cost area, see id. section 143(f)(3), 
(5), because in targeted areas and high housing cost areas, the 
mortgage revenue bond program does not use the ``applicable median 
family income'' as the basis for household income eligibility. In 
targeted areas, ``applicable median family income'' is adjusted by a 
factor of 120 percent based solely on the location of the residence in 
a targeted area. See id. section 143(f)(3). Consequently, the baseline 
measure of area median income in targeted areas is 120 percent of the 
``applicable median

[[Page 41815]]

family income,'' rather than simply the ``applicable median family 
income.'' As discussed above, the Act requires that the AHP income 
limit be based on 80 percent of some measure of the ``median income for 
the area.'' Since the mortgage revenue bond program does not use the 
``applicable median family income'' as a measure of median income for 
targeted areas, use of that program's income limits for targeted areas 
would not be permissible under the Act.
    Similarly, in cases where the income limit under the mortgage 
revenue bond program is adjusted above the ``applicable median family 
income'' for high housing cost areas, see id. section 143(f)(5), use of 
the adjusted income limit would not be permissible under the Act. In 
sum, the Finance Board believes that using the ``applicable median 
family income,'' as determined under the mortgage revenue bond program 
for residences in non-targeted areas, is consistent with the 
requirements of the Act and is a viable alternative to the use of 
income limits used under HUD's housing programs because it is based on 
data that are accepted as accurate and reliable and are readily 
available from state agencies and instrumentalities that publish income 
limits for purposes of their mortgage revenue bond programs. 
Accordingly, as applied to the AHP, in the case of a one- or two-person 
household, the income limit would be 80 percent of the ``applicable 
median family income,'' and for households with three or more members, 
the income limit would be 80 percent of 115 percent of the ``applicable 
median family income.'' See id. section 143(f)(1), (6)(A).
    Under the final rule, a Bank may request approval of the Board of 
Directors of the Finance Board to use a measure of median income for 
AHP-assisted owner-occupied projects other than those used by HUD, the 
USDA, or a state mortgage revenue bond program. Such requests will 
receive prompt consideration by the Board of Directors. However, prior 
to requesting approval of an alternative median income standard, a Bank 
must amend its AHP implementation plan to permit the use of that 
standard, conditioned on Board of Directors approval. This is intended 
to ensure that a Bank receives input from its Advisory Council prior to 
proposing a new median income standard for use under the AHP.
    For purposes of rental projects, the final rule defines ``median 
income for the area'' as: (1) The median income for the area, as 
published annually by HUD; or (2) the median income for any definable 
geographic area, as published by a federal, state, or local government 
entity for purposes of that entity's housing programs, that has been 
approved by the Board of Directors of the Finance Board for use under 
the AHP.
    While the Finance Board wishes to provide the opportunity for the 
use of measures of median income in addition to those used by HUD for 
rental projects, the Finance Board wishes to address such alternatives 
on a case-by-case basis. A large majority of rental projects receiving 
AHP subsidies are otherwise required to use the income limits published 
by HUD for its housing programs because these projects have received 
funds from HUD or have been allocated federal Low-Income Housing Tax 
Credits. Consequently, there appears to be less need for flexibility at 
this time with regard to income limits for rental projects. 
Nonetheless, in view of the potential for an increasing flow of funds 
to rental housing from bonds and other state and local programs, the 
final rule permits the Banks to seek approval of alternative measures 
of median income for AHP-assisted rental projects under the same 
procedures that apply for owner-occupied projects, discussed above.
    In cases where a Bank chooses to permit the use of more that one 
median income standard (and its corresponding family-size adjustments), 
such standards must be available to all proposed projects in the Bank's 
District. Accordingly, the definition of ``median income for the area'' 
expressly states that a Bank may select a median income standard or 
standards from which all projects may choose for purposes of the AHP. 
Furthermore, under section 960.3(b)(1)(i) of the final rule, a Bank 
must set forth in its AHP implementation plan the applicable median 
income standard or standards, adopted by the Bank consistent with the 
definition of ``median income for the area.'' Two members of the Board 
of Directors of the Finance Board have requested that agency staff 
gather data regarding the impact as of the end of 1998 of the increased 
flexibility in the area median income standards.
    b. Timing of Household Income Qualification.
    The final rule incorporates in the definitions of ``very low-income 
household'' and ``low-or moderate-income household'' provisions 
governing the time at which a household's income should be examined to 
determine whether it meets the income eligibility requirements for AHP-
assisted housing.
    The final rule provides that in the case of owner-occupied 
projects, this determination is to be made at the time the household is 
qualified by the sponsor (or member, in the case of a homeownership 
set-aside program) for participation in the project. This is a change 
from the proposed rule, which required that the determination be made 
no earlier than the date on which the application for subsidy funding 
the project is submitted to the Bank for approval. Several commenters 
requested this change in order to allow project sponsors more 
flexibility in qualifying households. Commenters identified a number of 
programs, such as sweat-equity programs, that qualify households prior 
to the deadline established by the proposed rule. Under the final rule, 
households may be qualified at any time, but in all cases, sponsors 
must have adequate documentation to verify income eligibility.
    The final rule also revised the provisions of the proposed rule 
governing the timing of household income qualification for rental 
projects to take into account situations where there are current 
occupants in units receiving AHP assistance. The final rule provides 
that where rental projects involve the purchase or rehabilitation of 
units with current occupants, the income qualification determination is 
to be made at the time the purchase or rehabilitation is completed.
3. Definition of ``Affordable''
    The final rule provides that ``affordable'' means that the rent 
charged to a household for a unit that is committed to be affordable in 
an AHP application does not exceed 30 percent of the income of a 
household of the maximum income and size expected, under the commitment 
made in the AHP application, to occupy the unit (assuming occupancy of 
1.5 persons per bedroom or 1.0 person per unit without a separate 
bedroom). This language clarifies that only those units that are 
committed to be affordable in an AHP application are subject to the 30 
percent-of-income limitation. The revised definition also replaces the 
reference in the proposed rule to a household's ``monthly housing 
costs'' with a reference to the ``rent'' charged for the unit. This 
change was made to exclude utility costs from the affordability 
calculation where these costs are not part of the rent for a unit.

D. Operation of Program and Adoption of AHP Implementation Plan--
Sec. 960.3

1. Program Operation
    The proposed rule provided that each Bank's Program shall be 
governed solely

[[Page 41816]]

by the requirements set forth in 12 U.S.C. 1430(j) and part 960, and 
prohibited a Bank from adopting any additional substantive AHP 
requirements, except as expressly provided in part 960. This was 
intended to make clear that the AHP regulation is to ``occupy the 
field'' with regard to substantive requirements governing the Program. 
The final rule omits this general prohibition and identifies specific 
areas where the Banks are prohibited from imposing additional 
substantive Program requirements, namely optional and mandatory 
eligibility requirements and scoring criteria.
    A significant number of commenters objected to the proposed 
language on the ground that it would reduce the Banks' ability to adopt 
Program requirements in addition to those in the AHP regulation in 
order to address what the Banks have characterized as special 
circumstances in their Districts. While the Finance Board agrees that 
the Banks should have discretion in making decisions regarding Program 
implementation in order to meet regional needs, the Finance Board has a 
legal mandate to exercise independent judgment, in light of the public 
interest, as to the purpose of the AHP and the standards needed to 
effect that purpose. The Act makes clear that the authority to adopt 
regulations governing the AHP rests with the Finance Board. See 12 
U.S.C. 1430(j) (1) and (9). In order to address concerns about 
flexibility, the Finance Board has attempted to provide the Banks 
discretion in those areas of the Program that, over the past seven 
years, have shown a need for flexibility.
2. Allocation of AHP Contributions
    Section 960.3(a) of the final rule consolidates provisions of the 
proposed rule related to the allocation of a Bank's required annual AHP 
contribution to its competitive application program and homeownership 
set-aside program or programs. Section 960.3(a)(1) of the final rule 
provides that a Bank, after consultation with its Advisory Council, may 
set aside annually, in the aggregate, up to the greater of $1.5 million 
or 15 percent of its annual required AHP contribution to provide funds 
to members participating in the Bank's homeownership set-aside program 
or programs. This is a change from the proposed rule, which limited 
homeownership program set-aside amounts to the greater of $1 million or 
10 percent of a Bank's required annual AHP contribution. A number of 
commenters supported an increase in the maximum set-aside amount in 
light of the high demand for such funds. Moreover, the Finance Board 
has approved funding as high as $1.5 million for one Bank's set-aside 
program. The final rule continues to permit a Bank to allocate funds 
from the subsequent year in instances where demand for funds in the 
current year exceeds that year's set-aside amount.
    Section 960.3(a)(2) of the final rule provides that the portion of 
a Bank's required annual AHP contribution that is not set aside to fund 
homeownership set-aside programs shall be provided to members through 
the Bank's competitive application program.
3. AHP Implementation Plans
    The proposed rule required each Bank's board of directors to adopt 
an AHP implementation plan and any amendments to the plan by December 1 
of each year, after providing its Advisory Council a reasonable period 
of time to review the plan and any amendments and provide its 
recommendations. Section 960.3(b) of the final rule carries forward 
this requirement generally, but omits a specific deadline for adoption 
of the plan. Once a Bank's board of directors has adopted its plan, or 
any amendments, the Bank must submit the plan or amendments to the 
Finance Board and the Bank's Advisory Council at least 60 days prior to 
distributing requests for applications for AHP subsidies for the 
funding period in which the plan, or amendments, will be effective. A 
Bank's implementation plan is the vehicle through which the Bank 
determines the standards for its Program, consistent with the 
requirements of the final rule. Section 960.3(b)(1) of the final rule 
identifies Bank procedures and other information that must be included 
in a Bank's implementation plan. Compliance by the Bank with its 
implementation plan will provide the basis for Finance Board 
examination of the Bank's implementation of its Program.
4. Conflicts of Interest Policies
    Section 960.3(c) of the final rule consolidates provisions of the 
proposed rule that required the boards of directors of the Banks to 
adopt conflicts of interest policies governing Bank directors and 
employees and Advisory Council members. The proposed rule required each 
Bank to have a policy providing that a Bank director, officer, or 
employee or 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.
    Section 960.3(c) of the final rule contains two substantive changes 
to the proposed language. First, the reference to a ``personal 
interest'' of a party in a project is replaced with a reference to a 
``financial interest'' of a party or that party's ``family member.'' A 
``family member'' is defined in Sec. 960.1 as any individual related to 
a person by blood, marriage or adoption. This change is intended to 
respond to comments requesting clarification of the scope of the 
intended prohibition in this provision.
    Second, the final rule no longer prohibits an interested Advisory 
Council member from being involved in decisions of the Bank regarding 
the evaluation, funding, monitoring or any remedial process for a 
project that is the subject of a pending or approved AHP application. 
As some commenters pointed out, many Advisory Council members, who by 
law are drawn from community and not-for-profit organizations, may in 
many cases be integrally involved in projects that are the subject of 
pending or approved AHP applications. Consequently, Advisory Council 
members often must work with the Banks in resolving issues related to 
the evaluation, funding, monitoring, and compliance of such projects. 
This is reflected in the revised language of the final rule.

E. Advisory Councils--Sec. 960.4

    Section 960.4 of the final rule carries forward the provisions of 
the proposed rule governing Advisory Councils, with the following 
changes. First, Sec. 960.4(d) of the final rule provides that Advisory 
Council members may be appointed to serve for up to three consecutive 
three-year terms. The proposed rule permitted a maximum of two 
consecutive three-year terms. Some commenters suggested that there be 
no term limit for Advisory Council members in order to 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. The Finance Board believes permitting Advisory Council members 
to serve for up to nine consecutive years will promote this goal.
    Second, the final rule omits the proposed requirement that a Bank 
allow Advisory Council members to examine AHP applications under the 
Bank's competitive application program from prior funding periods. Some 
commenters opposed this provision on the ground that it would provide 
Advisory Council members who, in

[[Page 41817]]

many cases, are associated with organizations that have projects in a 
Bank's competitive application program, access to information that may 
give them an unfair competitive advantage. Accordingly, this provision 
is deleted, but Sec. 960.4(f)(2) of the final rule retains the proposed 
requirement that a Bank comply with requests from its Advisory Council 
for summary information regarding AHP applications from prior funding 
periods. Access to this information will aid Advisory Council members 
in evaluating how a Bank's scoring guidelines affect the allocation of 
AHP subsidies among different types of housing projects.
    The notice of proposed rulemaking requested comments on the role, 
selection, and compensation of Advisory Council members. Commenters 
supported the Advisory Councils' expanded role in providing 
recommendations on the Banks' AHP implementation plans. Commenters also 
generally supported expanding the role of Advisory Councils to include 
providing advice on ways in which the Banks can better carry out their 
housing finance and community investment mission. Sections 960.3(b)(3) 
and 960.4(f)(1) of the final rule, respectively, retain these 
provisions of the proposed rule.
    Section 960.4(b) of the final rule carries forward the proposed 
provision requiring the Banks to appoint Advisory Council members 
giving consideration to the size of the Banks' District and the 
diversity of low- and moderate-income housing needs and activities 
within the District. 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. Accordingly, the proposed rule required the Banks 
to draw Advisory Council members from a diverse range of organizations, 
provided that representatives of no one group constitute an undue 
proportion of the membership of an Advisory Council. Commenters 
generally supported this provision. Therefore, Sec. 960.4(c) of the 
final rule carries forward the proposed provision without change.
    Section 960.4(g) of the final rule carries forward the proposed 
requirement, which also is a requirement of the existing regulation, 
that a Bank 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. In 
addition, the final rule requires a Bank to pay Advisory Council 
members' travel expenses, including transportation and subsistence, for 
each day devoted to attending meetings requested by the Finance Board. 
The Finance Board believes that meetings with Finance Board 
representatives provide an important forum for Advisory Council members 
to communicate their views to the agency. Consequently, where the 
Finance Board requests such meetings, it is appropriate for the Banks 
to reimburse the transportation and subsistence expenses of those 
Advisory Council members who attend.
    Several commenters suggested that the Banks be required to pay fees 
to Advisory Council members for attending such meetings. While this is 
not required by the final rule, nothing precludes the Banks, in their 
discretion, from paying such fees.

F. Minimum Eligibility Standards for AHP Projects--Sec. 960.5

1. In General
    As part of the reorganization of the structure of the proposed 
rule, those provisions of the proposed rule that constitute minimum 
eligibility standards for AHP projects have been consolidated into a 
single section in the final rule, as described below.
2. Homeownership Set-Aside Programs
    Under the existing regulation, Banks must establish their 
homeownership set-aside programs in accordance with the specific 
requirements set forth therein, unless they obtain Finance Board 
approval to establish ``nonconforming'' programs. See 12 CFR 960.5(g). 
The proposed rule revised the existing regulation to allow the Banks 
more flexibility in establishing their homeownership set-aside 
programs, including the program eligibility requirements, without 
having to obtain prior Finance Board approval.
    Section 960.5(a) of the final rule sets forth the minimum 
eligibility standards for a Bank's homeownership set-aside programs. 
The final rule carries forward the proposed eligibility standards with 
the following changes. First, under Sec. 960.5(a)(3), the maximum 
amount of funds available per household is increased from $5,000 to 
$10,000. Several commenters suggested this change in order to serve 
lower income homebuyers in high cost areas.
    Second, Sec. 960.5(a)(4) of the final rule includes rehabilitation 
by current homeowners as an eligible use of homeownership set-aside 
funds. The language of the proposed rule limited the use of 
homeownership set-aside funds to home purchases. As indicated in the 
SUPPLEMENTARY INFORMATION section of the proposed rule, the Finance 
Board intended to allow homeownership set-aside funds to be used also 
for rehabilitation by current homeowners. See 61 FR 57799, 57813 (Nov. 
8, 1996).
    Third, the Finance Board received a number of comments suggesting 
that homeownership set-aside funds be permitted to be used for 
homebuyer counseling costs, which was prohibited by the proposed rule. 
Sections 960.5 (a)(4) and (a)(7) of the final rule permit homeownership 
set-aside funds to be used to pay for counseling costs where: (i) Such 
costs are incurred in connection with counseling of homebuyers who 
actually purchase an AHP-assisted unit; (ii) the cost of the counseling 
has not been covered by another funding source, including the member; 
and (iii) the homeownership set-aside funds are used to pay only for 
the amount of such reasonable and customary costs that exceeds the 
highest amount the member has spent annually on homebuyer counseling 
costs within the preceding three years. The Finance Board believes that 
if homeownership set-aside funds are to be used for counseling costs, 
they should be used to expand the pool of resources available for 
counseling, rather than replace existing sources of funding. These 
provisions are intended to prevent homeownership set-aside funds from 
being used to pay for counseling that, in the absence of such funds, 
customarily would be financed by members participating in a 
homeownership set-aside program.
    Fourth, Sec. 960.5(a)(8) of the final rule requires homeownership 
set-aside funds to be drawn down and used by eligible households within 
a period of time specified by the Bank in its AHP implementation plan. 
This parallels a similar requirement for a Bank's competitive 
application program, as discussed further below, and is currently a 
requirement in several of the Banks' existing homeownership set-aside 
programs.
    Fifth, the final rule omits the requirement that any program 
eligibility criteria adopted by a Bank be consistent with the National 
Homeownership Strategy coordinated by HUD. The minimum eligibility 
requirements set forth in the final rule ensure that homeownership set-
aside funds are provided to households for uses that are consistent 
with the National Homeownership Strategy. Therefore, the explicit 
reference to the Strategy is omitted in the final rule.

[[Page 41818]]

3. Competitive Application Program
    Section 960.5(b) of the final rule sets forth the minimum 
eligibility standards for a Bank's competitive application program. The 
final rule carries forward the provisions of the proposed rule, with 
the following changes regarding project feasibility and need for 
subsidy, and timing of subsidy use. As discussed below, the final rule 
also omits the maximum subsidy requirement in the proposed rule, which 
provided that no AHP-subsidized household in a project could pay less 
than 20 percent of its gross monthly income toward monthly housing 
costs (the 20 percent requirement).
    a. Project Feasibility and Need for Subsidy.
    Section 960.5(b)(2) of the final rule consolidates standards 
regarding project feasibility and need for subsidy that appeared in 
several different sections of the proposed rule. Many commenters 
objected to those provisions of the proposed rule requiring the Banks 
to adopt project cost guidelines and to evaluate the reasonableness of 
the interest rates and charges involved in financing from funding 
sources other than members. Commenters stated that such requirements 
are duplicative of efforts undertaken by members and other funding 
sources and are unnecessarily burdensome for the Banks.
    The proposed rule was intended to codify the current practices of 
many of the Banks in evaluating project feasibility and need for 
subsidy. Due to the time constraints of the application process, 
members often do not provide the level of project review necessary to 
determine project feasibility and the need for AHP subsidy. 
Consequently, the Finance Board believes it is in the best interest of 
the Program for the Banks to have and carry out an independent duty to 
scrutinize each proposed project to determine whether the requested 
subsidy is necessary for the financial feasibility of the project, as 
currently structured. Section 960.3(b)(1)(iii) of the final rule 
requires the Banks to include in their AHP implementation plans 
feasibility guidelines for determining whether proposed projects comply 
with these standards.
    The Finance Board is sensitive to the challenge of developing 
project feasibility guidelines during the transition to operation under 
the regulatory changes made by this final rule. The Finance Board 
intends to create a special process under which a Bank may, at its 
option, obtain prior review and approval by the Finance Board of its 
initial project feasibility guidelines in order to ensure that they are 
consistent with the requirements of the final rule.
    With regard to a project's estimated sources of funds, 
Sec. 960.5(b)(2)(i) of the final rule carries forward provisions of the 
proposed rule and makes clear that such sources must include estimates 
of the market value of in-kind donations and volunteer professional 
labor or services committed to the project, but not the value of sweat-
equity. This provision is intended to allow sponsors that build housing 
using donations of labor and material to account for such sources of 
funds in their development budgets. Sweat-equity is excluded from a 
project's funding sources in order to avoid requiring the purchaser of 
a home who provides labor in the construction of the home to pay for 
the value of his or her own labor.
    The proposed rule provided 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. At the time of disbursement, the Bank was required to obtain a 
current independent appraisal of property sold to a project where a 
member had a ``direct or indirect interest'' in the property or 
project. In response to requests from several commenters, the final 
rule clarifies the proposed language referring to a ``direct or 
indirect interest'' of a member in the property or project. Section 
960.5(b)(2)(ii)(B) of the final rule provides that the purchase price 
of property or services sold to a project by a member providing AHP 
subsidy to the project, or, in the case of property, upon which such 
member holds a mortgage or lien, may not exceed market value as of the 
date the purchase price for the property or services was agreed upon. 
In the case of real estate owned property sold to a project by the 
member, or property sold to the project upon which the member holds a 
mortgage or lien, the market value of such property is deemed to be the 
``as-is'' or ``as-rehabilitated'' value of the property, whichever is 
appropriate, as reflected in an independent appraisal of the property 
performed within six months prior to the date the purchase price for 
the property was agreed upon.
    Several commenters suggested that the value of property may be 
enhanced where the property is proposed to be used for affordable 
housing receiving subsidized financing. In addition, there may be other 
factors related to the proposed use of a property for affordable 
housing that affect the property's valuation. The Finance Board 
believes that it may be appropriate to take such factors into account 
in determining the market value of a property. As discussed above, the 
final rule provides for property to be valued either ``as-is'' or ``as 
rehabilitated,'' whichever is appropriate under the circumstances. 
However, the Finance Board believes that any valuation judgments 
related to a property's use for affordable housing should be reflected 
in an appraisal of the property. Consequently, to the extent that a 
property's proposed use for affordable housing affects the property's 
value, this factor should be reflected in the appraisal of the property 
in order to be considered in determining the property's market value 
for purposes of the AHP.
    b. Timing of Subsidy Use.
    The proposed rule provided that a project must be likely to be 
completed within a reasonable period of time. Section 960.5(b)(3) of 
the final rule provides that the AHP subsidy must be likely to be drawn 
down by a project or used by the project to procure other financing 
commitments within 12 months of the date of approval of the application 
for subsidy financing the project. This reflects the requirement of the 
existing regulation and current practice.
    c. Prepayment Fees.
    There may be situations where, due to declining interest rates, it 
would be advantageous to a project to prepay its loan from a member and 
refinance the project. However, prepayment of the member's loan may 
trigger prepayment of the Bank's subsidized advance by the member, a 
prepayment fee for the member, and, thus, a prepayment fee for the 
project. It has been suggested that the project be permitted to 
allocate the remaining AHP subsidy incorporated in the advance to pay 
for the member's prepayment fee. This, in turn, would permit the member 
to forego charging the project a prepayment fee, making refinancing 
less costly.
    The proposed rule prohibited the use of AHP subsidies for such 
prepayment fees on the ground 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. Clearly, however, where a 
project agrees to continue to comply with the terms of the application 
for the AHP subsidy after using the subsidy to pay for a prepayment 
fee, the purpose of the Program is met and the project is able to 
obtain a stronger financial position. Consequently, Sec. 960.5(b)(4)(i) 
of the final rule permits the use of AHP subsidies to pay for 
prepayment fees

[[Page 41819]]

imposed by a Bank on a member for a prepayment of a subsidized advance, 
if, subsequent to such prepayment, the project will continue to comply 
with the terms of the application for the subsidy, as approved by the 
Bank, and the requirements of the AHP regulation for the duration of 
the original retention period, and any unused subsidy is returned to 
the Bank and made available for other AHP projects.
    d. Counseling Costs.
    The notice of proposed rulemaking requested comments on whether AHP 
subsidies should be permitted to be used to pay for counseling costs 
generally, and whether AHP subsidies should be used to pay only for 
counseling for homebuyers, homeowners, or tenants of AHP-assisted 
units. Section 960.5(b)(5) of the final rule, which carries forward the 
proposed provision, permits AHP subsidies to be used to pay for costs 
incurred in connection with counseling of homebuyers as long as: (1) 
The counseling is provided to a household who actually purchases an 
AHP-assisted unit; and (2) the cost of the counseling has not been 
covered by another funding source, including the member. While many 
commenters supported the proposed provision, there was no consensus 
among commenters on this issue. The Finance Board believes that if AHP 
subsidies are to be used for counseling costs, 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.
    e. Refinancing.
    Section 960.5(b)(6) of the final rule carries forward the proposed 
requirement that if a project uses AHP subsidies to refinance an 
existing single-family or multifamily mortgage loan, the equity 
proceeds of the refinancing must be used only for the purchase, 
construction, or rehabilitation of AHP-eligible housing. Several 
commenters suggested that the final rule should permit the use of AHP 
subsidies to refinance existing projects in cases where no equity is 
taken out of the project and the refinancing results in a lower debt 
service cost for the project. 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).
    f. Project Sponsor Qualifications.
    Section 960.5(b)(8) of the final rule provides that a project's 
sponsor must be qualified and able to perform its responsibilities as 
committed to in the AHP application. Section 960.1 of the final rule 
carries forward the definition of ``sponsor'' in the proposed rule and, 
in response to comments, clarifies that in the case of rental projects, 
``sponsor'' includes an organization whose ownership of a project is in 
the form of a partnership interest.
    g. Use of AHP Subsidies for Loan Guarantees.
    Several commenters suggested that the final rule permit the use of 
AHP subsidies for loan guarantees or other financial mechanisms to make 
affordable housing feasible. Although the Finance Board did not request 
comments on this issue and has not authorized the use of AHP subsidies 
for loan guarantees in the final rule, the Finance Board does find 
these comments of interest and will review how such guarantees might 
work under the AHP.
    h. Pre-Development Expenses.
    The final rule omits the language in the proposed rule expressly 
prohibiting the use of AHP subsidies for pre-development expenses. The 
proposed rule prohibited 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. This language was intended to 
make clear that a Bank could not provide AHP subsidies for the sole 
purpose of determining the feasibility of housing.
    The final rule omits this language because the requirement in 
Sec. 960.5(b)(2) that projects be feasible in order to receive AHP 
subsidy effectively incorporates this prohibition. Proposed projects 
that meet the requirements of a Bank's feasibility guidelines may 
include pre-development expenses as project costs in their AHP 
applications.
    Several commenters supported the use of AHP subsidies for the sole 
purpose of determining the feasibility of housing. The Finance Board 
believes that this use of funds will not result in the actual purchase, 
construction, or rehabilitation of housing, as required by the statute. 
Further, since the inception of the Program, demand for AHP subsidies 
for feasible projects has significantly exceeded available funds. Thus, 
if AHP subsidies were to be approved for the sole purpose of 
determining the feasibility of housing, 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.
    i. District Eligibility Requirements.
    Section 960.5(b)(10) of the final rule carries forward the 
provisions in the proposed rule governing District eligibility 
requirements, which were referred to as ``District threshold 
requirements'' in the proposed rule. The notice of proposed rulemaking 
included an extensive discussion of the salient arguments in favor of 
and against the proposed District eligibility requirements. See 61 FR 
57799, 57807-57809 (Nov. 8, 1996). The comments received by the Finance 
Board on these provisions either supported or objected to the proposal 
on many of the grounds discussed in the notice of proposed rulemaking. 
There was no consensus on two of the three optional District 
eligibility requirements. Although there was more prevalent opposition 
to the third requirement--that the member have used a Bank credit 
product in the past 12 months--the Finance Board feels that members and 
sponsors will have some influence on an individual Bank's decision 
regarding this option. Consequently, the Finance Board is finalizing 
the District eligibility provisions, as proposed, which provide the 
Banks with discretion to determine whether to adopt these eligibility 
requirements.
    j. The 20 percent Requirement.
    The final rule omits the provision in the proposed rule known as 
``the 20 percent requirement,'' which provided that households who own 
or rent AHP-assisted units shall pay no less than 20 percent of their 
gross monthly income towards monthly housing costs. The proposed rule 
carried forward provisions of the existing regulation and added some 
exceptions to the 20 percent requirement. Commenters generally 
supported the additional exceptions in the proposed rule and suggested 
the adoption of several other exceptions. The 20 percent requirement 
was intended to implement the maximum subsidy limitation requirement 
contained in section 10(j)(9)(F) of the Act. See 12 U.S.C. 
1430(j)(9)(F).
    In light of the fact that most projects come within the exceptions 
to the 20 percent requirement, the Finance Board believes that the 20 
percent requirement no longer is an effective means of implementing the 
statutory maximum subsidy limitation. Further, the requirements in the 
final rule regarding project feasibility and need for subsidy are 
intended to implement this statutory requirement.

G. Procedure for Approval of Applications for Funding--Sec. 960.6

    As part of the reorganization of the structure of the proposed 
rule, the final

[[Page 41820]]

rule consolidates and streamlines the proposed provisions governing 
funding periods, application requirements, and scoring and approvals of 
applications under a Bank's competitive application program. The final 
rule also integrates and streamlines provisions in the proposed rule 
governing funding under a Bank's homeownership set-aside programs.
1. Program Administration
    Section 960.6(b)(1) of the final rule carries forward the proposed 
provisions permitting a Bank to accept applications for funding under 
its competitive application program during a specified number of 
funding periods each year, as determined by the Bank. The notice of 
proposed rulemaking requested 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. Of those 
commenters who addressed this issue, the majority opposed the 
acceptance of applications on a rolling basis. The Finance Board 
believes that a competitive process has worked well and has decided to 
maintain the AHP as a competitive program. Further, those commenters 
who supported funding on a rolling basis offered no way to score 
applications fairly under such a process.
    The final rule omits the proposed provision requiring a Bank to 
notify members and other interested parties of: the amount of subsidy 
offered annually and in each funding period; District eligibility 
requirements; scoring guidelines; and application due dates. The final 
rule also omits the provisions of the proposed rule specifying the 
information required to be included in AHP applications. These changes 
are consistent with the Finance Board's intent to streamline the AHP 
regulation and to devolve to the Banks those aspects of the Program 
involving day-to-day administration. Accordingly, Sec. 960.6(b)(2) of 
the final rule provides that a Bank shall require applicants for AHP 
subsidies under the Bank's competitive application program to submit 
information sufficient for the Bank to determine that a proposed AHP 
project meets applicable eligibility requirements and to evaluate the 
application pursuant to the regulatory scoring criteria.
2. Acceptance of Applications from Nonmembers
    Sections 960.6(a) and (b)(1) of the final rule add provisions 
authorizing a Bank, in its discretion, to accept applications for 
funding under both its homeownership set-aside programs and its 
competitive application program from institutions with pending 
applications for membership in the Bank. This is intended to give the 
Banks greater flexibility in accommodating new members that desire to 
participate in the AHP before the membership application process has 
been completed. As discussed further below, an institution must be a 
member prior to actually receiving AHP subsidies.
3. Scoring of Applications
    a. In General.
    The notice of proposed rulemaking requested comments on all aspects 
of the proposed scoring provisions and on ways in which the scoring 
system could 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. A number of commenters generally supported the scoring 
provisions as proposed and suggested limited changes. Some commenters 
suggested that the Finance Board permit the Banks, in consultation with 
their Advisory Councils, to establish their own scoring systems. Other 
commenters recommended that the scoring system be simplified, and that 
the Banks be given greater flexibility in adopting scoring criteria and 
allocating points among the criteria. Commenters stated that such 
changes would improve the Program's operating efficiency and enable the 
Banks to tailor their scoring systems to the needs of their Districts.
    While the existing scoring process generally has worked well over 
the past seven years of the Program's operation and is familiar to 
Program users, the Finance Board agrees with commenters that a simpler 
and more flexible scoring system should improve operating efficiency 
and enhance the responsiveness of the Program to local District needs. 
Accordingly, Sec. 960.6(b)(4) of the final rule revises the scoring 
system in the proposed rule to incorporate greater simplicity and 
flexibility, as discussed below.
    b. Revised Scoring System.
    (i) Elimination of Two-Tiered Priority Scoring Process.
    The proposed rule established six priority categories, and required 
the Banks to allocate 60 of a total 100 points among those categories, 
with at least 8 points allocated to each category. In addition, the 
proposed rule established 4 scoring objectives categories, and required 
the Banks to allocate the remaining 40 points among these categories, 
with the targeting objective category receiving at least 8 points. 
Applications meeting at least two of the six priorities were considered 
priority applications and, as a group, were to be scored before 
applications meeting fewer than two of the priorities. Priority 
applications then were to be scored against each other based on the 
extent to which they met the priorities and the scoring objectives.
    The final rule eliminates this two-tiered system of scoring 
priority applications before non-priority applications. Instead, 
Sec. 960.6(b)(4) of the final rule establishes nine scoring criteria 
categories, and requires a Bank to score all applications for projects 
meeting the minimum eligibility requirements according to the nine 
criteria. Section 960.6(b)(4)(ii) requires a Bank to allocate 100 
points among the nine scoring criteria, which incorporate the scoring 
priorities and objectives of the proposed rule with revisions as 
discussed below. At least 5 points must be allocated to each scoring 
criterion except for targeting, which must be allocated at least 20 
points. Section 960.6(b)(4)(i) provides that a Bank shall not adopt 
additional scoring criteria or point allocations, except as 
specifically authorized under paragraph (b)(4).
    (ii) Designation of Variable-and Fixed-Point Criteria.
    The proposed rule designated each proposed priority category as 
either a fixed-point or a variable-point criterion. Fixed-point 
criteria are those which cannot be satisfied in varying degrees and are 
either satisfied, or not. Variable-point criteria are those where there 
are varying degrees to which an application can satisfy the criterion. 
Section 960.6(b)(4)(iii) of the final rule requires each Bank to make 
the designation of criteria as either fixed or variable. The targeting 
criterion and the subsidy-per-unit criterion must be designated as 
variable-point criteria. When determining the extent to which competing 
projects satisfy a variable-point criterion, a Bank must award points 
to projects in a uniform and consistent manner. The nine scoring 
criteria are discussed below.
    (iii) Donated Government-Owned or Other Properties Criterion.
    Section 960.6(b)(4)(iv)(A) of the final rule revises the scoring 
criterion in the proposed rule for projects using government-owned 
property to provide scoring credit for projects using a significant 
proportion of units or land donated or conveyed for a nominal price by 
the federal government or any agency or instrumentality thereof, or by 
any other party. The expansion of this criterion to include units or 
land owned by other parties responds to a number of commenters who 
pointed out that the stock of available federal government

[[Page 41821]]

properties continues to decrease. The criterion also has been revised 
to encourage the donation of property for AHP projects, which should 
reduce the costs of financing such housing
    (iv) Not-For-Profit Organization or Government Entity Sponsor 
Criterion.
    Section 960.6(b)(4)(iv)(B) of the final rule revises the scoring 
criterion in the proposed rule for projects sponsored by a not-for-
profit organization or government entity by expanding the list of 
government entities to include Native American Tribes, Alaskan Native 
Villages, and the government entity for Native Hawaiian Home Lands, 
which are comparable to state or local government entities.
    (v) Targeting Criterion.
    Section 960.6(b)(4)(ii) of the final rule revises the proposed rule 
by increasing the required minimum allocation of points for the 
targeting scoring criterion from 8 to 20. This change is intended to 
promote the funding of projects that commit to the targeting objective, 
which the Finance Board views is an important goal of the Program.
    Section 960.6(b)(4)(iv)(C)(1) of the final rule carries forward the 
proposed requirement that an application for a rental project shall be 
awarded the maximum number of points available under the targeting 
criterion 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 median income for the area. The final rule clarifies 
that applications for projects with less than 60 percent of the units 
reserved for occupancy by households with incomes at or below 50 
percent of the median income for the area shall be awarded points on a 
declining scale based on the percentage of units in a project that are 
reserved for households with incomes at or below 50 percent of the 
median income for the area, and on the percentage of the remaining 
units reserved for households with incomes at or below 80 percent of 
the median income for the area.
    The purpose of this targeting provision is to reduce the emphasis 
in the existing regulation on funding projects that are occupied solely 
by very low-income households. There was support among commenters for 
this goal, although commenters had different views as to whether 60 
percent is the appropriate ceiling for mixed-income targeting. Several 
commenters opposed reducing the current bias against mixed-income 
housing in the AHP scoring system. The Finance Board believes that 
mixed-income housing projects should be competitive under the Program. 
Mixed-income housing promotes economic integration, which supports the 
long-term financial feasibility of a project and the empowerment of 
lower income residents.
    The notice of proposed rulemaking requested comments on ways in 
which the targeting criterion could be structured so that it is more 
closely compatible with the monitoring requirements for AHP projects. 
Several commenters supported coordinating the targeting criterion with 
project monitoring requirements, and suggested that points under the 
targeting criterion should be awarded to projects based on targeting 
commitments made to funding sources other than the Banks. Section 
960.6(b)(4)(iv)(C)(1) of the final rule adopts this approach as an 
option for the Banks in structuring their Programs. The final rule 
provides that in order to facilitate reliance on monitoring by a 
federal, state, or local government entity providing funds or 
allocating federal Low-Income Housing Tax Credits to a proposed 
project, a Bank, in its discretion, may score each project according to 
the targeting commitments made by the project to such entity, and the 
Bank shall include such scoring practice in its AHP implementation 
plan.
    Section 960.6(b)(4)(iv)(C)(3) of the final rule provides that a 
Bank, in its discretion, may score owner-occupied projects and rental 
projects separately under the targeting criterion. This is a change 
from the proposed rule, which required separate scoring. The purpose of 
allowing separate scoring is to offset what may be an inherent bias in 
the targeting criterion in favor of rental projects, which, in general, 
have more units targeted to very-low income households than do owner-
occupied projects. The final rule permits the Banks to determine 
whether separate scoring is appropriate for the targeting criterion.
    (vi) Community Development Criterion and Empowerment Criterion.
    Section 960.6(b)(4)(iv)(E) of the final rule eliminates the 
proposed mandatory community development scoring criterion and replaces 
it with a mandatory scoring criterion for projects promoting 
empowerment. The proposed rule had a more limited version of the 
empowerment criterion as an optional District priority. Under 
Sec. 960.6(b)(4)(iv)(F)(2) of the final rule, the community development 
criterion is now an optional District priority. Several commenters 
suggested that the community development criterion is inherently biased 
against rural projects and, therefore, should not be a mandatory 
criterion in a Bank's scoring system. Commenters also favored a 
mandatory criterion for empowerment, consistent with the existing 
regulation. The Finance Board agrees that promoting empowerment is a 
valuable aspect of projects and should be maintained as a mandatory 
criterion.
    (vii) First and Second District Priorities.
    Section 960.6(b)(4)(iv)(F) of the final rule carries forward the 
provision of the proposed rule requiring a Bank to select a District 
priority, as recommended by the Bank's Advisory Council and set forth 
in the Bank's AHP implementation plan, from a set of criteria listed in 
the AHP regulation. A number of commenters suggested that the Banks 
should be allowed to select criteria in addition to those listed in the 
proposed rule. Section 960.6(b)(4)(iv)(G) of the final rule provides 
for this by permitting a Bank to adopt a second District priority for 
projects meeting a housing need in the Bank's District, as defined and 
recommended by the Bank's Advisory Council and set forth in the Bank's 
AHP implementation plan. Further, under the Act, the Finance Board has 
a statutory mandate to promulgate regulations that specify priorities 
for the use of AHP subsidies. See 12 U.S.C. 1430(j)(9)(B). 
Consequently, the Finance Board may not, consistent with the statute, 
allow the Banks to have total discretion to determine priorities under 
the Program. Nonetheless, the Finance Board believes that the final 
rule provides the Banks with a large measure of discretion in this area 
by providing a relatively wide range of choices for the Banks' two 
District priorities. In addition, the final rule revises the proposed 
rule by allowing a Bank to adopt multiple criteria under its first 
District priority, as long as the total points available for meeting 
the criteria do not exceed the total points allocated to the priority. 
The final rule makes clear that a Bank's second District priority need 
not be chosen from the list of permissible criteria for the Bank's 
first District priority.
    The final rule omits from the list of optional District priorities 
in Sec. 960.6(b)(4)(iv)(F) the priority for projects with retention 
periods in excess of the minimum retention period required under the 
project eligibility standards in Sec. 960.5(b)(7) of the final rule. 
Awarding points to projects for committing to retention periods longer 
than the minimum would require that such projects be monitored in 
excess of the minimum required retention period. In light of changes in 
the monitoring requirements, which are discussed further below, that 
are intended to permit the Banks to rely on monitoring

[[Page 41822]]

by other parties for most rental projects, the priority for projects 
with longer retention periods is no longer feasible.
    Section 960.6(b)(4)(iv)(F)(4) of the final rule carries forward the 
proposed optional District 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 notice of proposed rulemaking, the Finance Board 
requested comments on whether this should be a mandatory scoring 
criterion or a project eligibility standard, and on whether a member 
should be deemed to meet such a scoring criterion based on the member's 
record of affordable housing lending activities apart from its lending 
under the Program.
    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.
    A number of commenters objected to making member financial 
participation a project eligibility standard or a mandatory scoring 
criterion because some projects may not require or be able to sustain 
additional debt. Requiring projects to have loans from a member may 
create a bias against projects serving lower income households, which 
often cannot support debt service because rents are too low. Further, 
smaller members, which may not have the capacity to finance a project 
loan, waive fees or donate funds, may be effectively precluded from 
participating in the Program. The Finance Board believes these 
arguments have merit. However, the Banks should be permitted to 
determine whether promoting some measure of member financial 
participation through the scoring system is appropriate in the Bank's 
District. Consequently, the final rule retains member financial 
participation as an optional District priority.
    Commenters stated that favoring projects based on a member's record 
of affordable housing lending activities apart from its lending under 
the Program is inappropriate because the member's lending record is not 
directly relevant to the evaluation of a particular application for AHP 
subsidy, and a fair evaluation of a member's affordable housing record 
would be difficult to accomplish. The Finance Board agrees that this 
would present practical difficulties in Program administration and, 
therefore, has not included this criterion in the final rule.
    (viii) Community Involvement Criterion.
    Section 960.6(b)(4)(iv)(F)(10) of the final rule revises the 
proposed rule by removing community involvement as a mandatory scoring 
criterion and including it as an optional District priority in lieu of 
the proposed sweat-equity priority, which is incorporated in this 
priority. The final rule also deletes the proposed language allowing a 
Bank to give scoring credit under this criterion to projects receiving 
commitments of funds from local sources. This change was made because 
the criterion is intended to promote in-kind donations to projects.
    (ix) Subsidy-Per-Unit Criterion.
    Section 960.6(b)(4)(iv)(H) of the final rule carries forward the 
provisions in the proposed rule governing the subsidy-per-unit 
criterion, with the exception that a Bank, in its discretion, may 
determine whether owner-occupied projects and rental projects should be 
scored separately under this criterion. There may be an inherent bias 
in the subsidy-per-unit criterion in favor of rental projects, which, 
in general, have lower amounts of subsidy per unit than do owner-
occupied projects. Therefore, as under the targeting criterion, the 
final rule permits the Banks to determine whether separate scoring is 
appropriate for this criterion.
    The subsidy-per-unit criterion, in effect, favors projects with a 
shallower subsidy. A Bank may de-emphasize this effect and promote 
deeper subsidies per unit by allocating as few as five points to this 
criterion. The notice of proposed rulemaking requested comments on 
whether this gives the Banks adequate flexibility in applying the 
subsidy-per-unit criterion in their Districts. A number of commenters 
supported allowing the Banks to determine the number of points to 
allocate to the subsidy-per-unit criterion.

H. Modifications of Applications Prior to Project Completion--
Sec. 960.7

    Section 960.7 of the final rule incorporates several revisions to 
provisions in the proposed rule governing modifications of AHP 
applications under a Bank's competitive application program prior to 
project completion. First, the definition of ``project modification'' 
in the proposed rule is incorporated into the terms of Sec. 960.7, and 
clarified to refer to modifications occurring prior to final 
disbursement of funds to the project from all funding sources.
    Second, the final rule omits the provisions of the proposed rule 
specifying the information required to be included in requests for 
modifications. This change is consistent with the Finance Board's 
intent to streamline the AHP regulation and to devolve to the Banks 
those aspects of the Program involving day-to-day administration.
    Third, Sec. 960.7(a)(3) of the final rule revises the modification 
standards in the proposed rule by making all proposed modifications 
subject to a ``good cause'' requirement and permitting the Banks to 
determine whether a ``good cause'' showing has been made in individual 
cases. The proposed rule required the Banks to approve modifications 
not involving subsidy increases as long as a project continued to meet 
eligibility requirements and to score high enough to have been approved 
in the funding period in which it was originally scored and approved by 
the Bank. The purpose of this change is to give the Banks flexibility 
to determine on a case-by-case basis whether changes from a project's 
original AHP commitments are justified.
    Fourth, the final rule omits the provision in the proposed rule 
prohibiting a Bank's board of directors from delegating to Bank 
officers or other Bank employees the authority to approve requests for 
modifications not involving a subsidy increase. A number of commenters 
supported this change, which conforms the final rule to the Banks' 
current practices.
    Section 960.7(a)(2) of the final rule carries forward the 
requirement that, in order to receive a pre-completion modification, a 
project must continue to score high enough to have been approved in the 
funding period in which it was originally scored and approved by the 
Bank. The Finance Board wishes to make clear that where modifications 
are requested for applications that were scored and approved for 
funding prior to January 1, 1998, the application shall be rescored 
according to the scoring requirements in effect for the funding period 
in which the application was approved.

I. Procedure for Funding--Sec. 960.8

    Section 960.8 of the final rule incorporates several substantive 
revisions to provisions in the proposed rule governing disbursement of 
AHP subsidies under a new section entitled ``Procedure for Funding.''
    First, in light of the new provisions in Sec. 960.6 permitting a 
Bank to accept AHP

[[Page 41823]]

applications from institutions with pending applications for 
membership, Sec. 960.8(a)(1) of the final rule makes explicit that a 
Bank may disburse AHP subsidies only to institutions that are members 
of the Bank at the time they request a draw-down of subsidy. Section 
960.8(a)(2) also provides that if an institution with an approved 
application for AHP subsidy fails to obtain or loses its membership in 
the Bank, the Bank may disburse subsidies to a member of such Bank to 
which the institution has transferred its obligations under the 
approved application, or the Bank may disburse subsidies through 
another Bank to a member of that Bank that has assumed the 
institution's obligations under the approved application.
    Second, the provisions in the proposed rule governing disbursement 
of homeownership set-aside funds are consolidated into Sec. 960.8(b), 
and a new provision is added in Sec. 960.8(b)(1) requiring a Bank to 
cancel an application for homeownership set-aside funds and make the 
funds available for other applicants or for other AHP-eligible projects 
if the funds are not drawn down and used by eligible households within 
the period of time specified by the Bank in its AHP implementation 
plan. This is consistent with current Bank practices and parallels the 
requirement for the Banks' competitive application programs. A new 
provision also is added in Sec. 960.8(b)(2)(iii), which states that, 
prior to disbursement of homeownership set-aside funds for counseling 
purposes, a Bank must require the member to certify that: (i) The funds 
will be used for counseling of homebuyers who actually purchase an AHP-
assisted unit; (ii) The cost of the counseling has not been covered by 
another funding source, including the member; and iii) the funds will 
be used to pay for only the amount of such reasonable and customary 
costs that exceeds the highest amount the member has spent annually on 
homebuyer counseling costs within the preceding three years.
    Third, the final rule omits the requirement in the proposed rule 
that a Bank obtain, and maintain in its project file, documents 
sufficient to demonstrate compliance with AHP requirements prior to 
making disbursements of AHP subsidy, including an independent, current 
appraisal 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. This change is consistent with the Finance 
Board's intent to streamline the AHP regulation. The Banks are in the 
best position to determine what kinds of documents must be maintained 
for purposes of the Bank's own recordkeeping and in order to support 
Bank decisions in the context of examinations by the Finance Board. The 
issue related to the use of AHP subsidies in projects involving real 
estate owned property provided by a member is specifically addressed in 
Sec. 960.5(b)(2)(ii) of the final rule, which is discussed above.
    Fourth, Sec. 960.8(c)(3) of the final rule revises the provisions 
in the proposed rule governing changes in a project's approved AHP 
subsidy amount where a Bank provides a direct subsidy to write down the 
principal amount prior to closing or the interest rate on a loan 
provided by a member to a project. The final rule permits Banks not to 
increase the subsidy amount where market interest rates rise between 
the time the subsidy initially is approved by the Bank and the time the 
lender commits to the interest rate to finance the project. Several 
Banks objected to the proposed provision, which made such a subsidy 
increase mandatory, on the ground that subsidy increases should be 
subject to a process of negotiation between Banks, members, and 
projects in order to ensure that such increases are justified. By 
making such subsidy increases optional, the final rule is consistent 
with the current practices of some of the Banks.
    Fifth, the final rule omits the language in the proposed rule 
requiring the Banks to ensure that AHP subsidies are passed on to the 
ultimate borrower, and that the preponderance of AHP subsidies is 
ultimately received by very low-and low-or moderate-income households. 
These requirements, including the provisions for matched repayment 
schedules for Bank subsidized advances and member loans, are 
implemented through Sec. 960.13 of the final rule governing agreements 
between Banks and members.
    Sixth, the final rule omits the requirement in the proposed rule 
that each Bank must ensure that the terms of any member's participation 
in a transaction benefiting from an AHP subsidy are fair to the 
Program. Commenters objected to this requirement on the grounds that it 
is too vague and will discourage member participation in the Program. 
Commenters also suggested this requirement is duplicative of other 
Program requirements intended to ensure that AHP subsidies are properly 
used.
    Seventh, Sec. 960.5(b)(2)(iii) of the final rule incorporates the 
provision in the proposed rule requiring each Bank to ensure that the 
rate of interest, points, fees and any other charges for all loans 
financing an AHP project do not exceed a market rate of interest, 
points, fees, and other charges for loans of similar maturity, terms, 
and risk. The final rule also requires a Bank to determine that AHP 
subsidy is necessary for the financial feasibility of a project, as 
currently structured.
    Eighth, the provisions in the proposed rule governing the lending 
of direct subsidies, matched repayment schedules, and prepayment fees 
charged by the Banks are implemented in a revised form through 
Sec. 960.13 of the final rule governing agreements between Banks and 
members.
    In the case of the matched repayment schedule requirement, 
Sec. 960.13(c)(1) of the final rule provides that the term of a 
subsidized advance shall be no longer than the term of the member's 
loan to the project funded by the advance, and at least once in every 
12-month period, the member shall be scheduled to make a principal 
repayment to the Bank equal to the amount scheduled to be repaid to the 
member on its loan to the project in that period. This is a change from 
the proposed rule, which required the principal repayments received by 
the member to be paid over to the Bank. According to commenters, the 
language in the proposed rule was too restrictive, because it referred 
to the actual principal repayments received by members and omitted 
mention of a member's independent obligation to repay an advance, 
without regard to the amount of principal repayments received by the 
member. Consequently, the language of the final rule is revised to 
clarify that the scheduled, rather than the actual, principal 
repayments must be equal, in a 12-month period.

J. Modifications of Applications After Project Completion--Sec. 960.9

    Section 960.9 of the final rule adds a new provision permitting 
members to obtain modifications to approved AHP applications under a 
Bank's competitive application program after a project has been 
completed, as long as the modification does not require an increase in 
the amount of AHP subsidy provided to the project. In order for a 
project to obtain additional AHP subsidy after completion, such subsidy 
must be approved pursuant to a Bank's competitive application program. 
Under the proposed rule, modifications were available only prior to 
project completion.
    Section 960.9 of the final rule provides that after final 
disbursement of funds to a project from all funding sources, a Bank, in 
its discretion, may

[[Page 41824]]

approve in writing a modification to the terms of an approved 
application for subsidy funding the project, other than an increase in 
the amount of subsidy, if there is or will be a change in the project 
that materially affects the facts under which the application was 
originally scored and approved under the Bank's competitive application 
program, provided that: (1) The project is in financial distress or is 
at substantial risk of falling into such distress; (2) the project 
sponsor or owner has made best efforts to avoid noncompliance with the 
terms of the application for subsidy and AHP requirements; (3) the 
project, incorporating any material changes, would meet Program 
eligibility requirements; and (4) the application, as reflective of 
such changes, continues to score high enough to have been approved in 
the funding period in which it was originally scored and approved by 
the Bank. The Finance Board wishes to make clear that where 
modifications are requested for applications that were scored and 
approved for funding prior to January 1, 1998, the application shall be 
rescored according to the scoring requirements in effect for the 
funding period in which the application was approved.
    Section 960.9 is added in response to comments from the Banks 
requesting that the final rule include an alternative to addressing 
compliance issues through the AHP remedial process. See also 
Sec. 960.12. Members, project sponsors, and project owners should use 
the modification process, where possible, as a means of addressing 
existing or potential AHP compliance issues on their own initiative 
rather than waiting for such issues to be brought to light and 
addressed through the remedial process.

K. Monitoring Requirements--Sec. 960.10 and Sec. 960.11

1. In General
    Section 10(j)(9)(C) of the Act requires the Finance Board to issue 
regulations ensuring ``that advances made under [the] 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 AHP regulation requires each Bank to monitor member 
and project compliance with AHP requirements, but does not establish 
specific 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 seven 
years that the Program has been in operation, the Banks have attempted 
to comply with 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. In the 
notice of proposed rulemaking, the Finance Board proposed 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 
reporting and certification requirement for members under the existing 
regulation. The Finance Board's proposal was 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 funding such projects; and (3) the Banks should be permitted to 
rely, to the extent feasible, on monitoring by other funding sources.
    A number of commenters stated that the various monitoring 
requirements in the proposed rule should be omitted or that the Banks 
should be permitted to develop their own monitoring procedures. As 
discussed above, the lack of clear and consistent standards may 
actually contribute to a more burdensome monitoring scheme, and the 
Finance Board intends to prevent this by setting standards in the 
regulation. In addition, the Finance Board believes that the final rule 
provides the Banks with additional flexibility by permitting them to 
rely on long-term monitoring by other entities for a majority of AHP-
assisted rental projects.
2. Restructuring of the Monitoring Provisions
    The final rule separates the section of the proposed rule governing 
monitoring into two sections governing initial monitoring requirements 
and long-term monitoring requirements, respectively. In addition, 
provisions on monitoring standards have been separated from provisions 
requiring that parties' obligations to comply with monitoring standards 
be implemented by specific agreements. The provisions related to 
monitoring agreements are incorporated in Sec. 960.13(b)(4) of the 
final rule.
3. Initial Monitoring Requirements
    As discussed above, the proposed provisions governing project 
monitoring were based, in part, on the principle that 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. Commenters generally supported this approach. Section 960.10 
of the final rule carries forward the proposed provisions governing 
monitoring in the initial stages of project development, with the 
following substantive changes.
    First, Sec. 960.10(a)(2)(ii)(C) of the final rule clarifies that 
documentation maintained by rental project owners must include 
documentation of project habitability to support the owner's 
habitability certification to the Bank and the member. In response to 
requests for clarification from commenters, Sec. 960.1 of the final 
rule makes clear that ``habitable'' means suitable for occupancy, 
taking into account local health, safety, and building codes. This 
definition is consistent with that used for purposes of monitoring 
projects receiving federal Low-Income Housing Tax Credits.
    Second, Secs. 960.10(c)(1)(ii) and (c)(2)(ii) of the final rule 
provide that for owner-occupied and rental projects, respectively, a 
Bank must review project documentation at project completion to 
determine that a project's actual costs were reasonable and customary 
in accordance with the Bank's project feasibility guidelines, and that 
the subsidies provided to the project were necessary for the financial 
feasibility of the project, as currently structured. This is consistent 
with the current practice of many of the Banks, which conduct closing 
audits for projects. Several commenters objected to this provision on 
the ground that it may discourage the use of AHP subsidies as ``first-
in'' money for a project. The concern is that subsequent funders may be 
hesitant to commit funds to a project if AHP subsidies received by the 
project are subject to repayment in cases where a review of the project 
at completion reveals excess costs, and thus oversubsidization.
    The Finance Board believes that requiring projects receiving AHP 
subsidies to demonstrate that their costs are customary and reasonable 
is essential to ensuring that such subsidies are used in accordance 
with a project's application for funding and the requirements of the 
AHP regulation. The

[[Page 41825]]

use of AHP subsidies as ``first-in'' money can be analogized to an 
equity investment. While an equity investor assumes some risk by 
providing ``first-in'' money, no equity holder would allow use of its 
investment in a project for excessive costs. Similarly, under the final 
rule, AHP subsidies that serve as ``first-in'' money will remain in a 
project as long as the costs incurred by the project are reasonable and 
customary. Therefore, while the final rule in no way is intended to 
prevent AHP subsidies from being used as ``first-in'' money, the final 
rule provides for safeguards against misuse of such subsidies, 
consistent with the requirements of other funding sources.
    Third, Sec. 960.10(d) of the final rule makes clear that for 
purposes of determining compliance with the targeting commitments in an 
AHP application, such commitments shall be considered to adjust 
annually according to the current median income data.
4. Long-Term Monitoring Requirements
    Section 960.11 of the final rule governing long-term monitoring 
requirements after project completion applies solely to rental 
projects, because owner-occupied projects are not subject to ongoing 
household income requirements, and transfers of ownership are monitored 
through deed restrictions. Of the 3,704 existing AHP-assisted projects, 
1,752 are owner-occupied projects. Therefore, almost half of all 
existing AHP-assisted projects are subject to deed restrictions in lieu 
of long-term monitoring. In addition, Secs. 960.11 (a)(1) and (a)(2) of 
the final rule make the changes discussed below to the proposed 
provisions governing the long-term monitoring requirements for rental 
projects to allow greater reliance on monitoring by third parties.
     a. Reliance on Monitoring by a Federal, State or Local Government 
Entity.
    The proposed rule provided that for projects receiving $500,000 or 
less of AHP subsidies, a Bank could rely on monitoring by a housing 
credit agency providing federal Low-Income Housing Tax Credits 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.
    The notice of proposed rulemaking requested comments on whether the 
proposed provisions permitting the Banks to rely on monitoring by other 
parties could be expanded to include government entities other than 
housing credit agencies. Comments also were requested on ways in which 
the targeting scoring objective in the proposed rule could be modified, 
or whether it should be eliminated, so that the income targeting and 
rent requirements for AHP projects would be compatible with those 
required and monitored by other government housing entities.
    Commenters identified several other entities that undertake 
monitoring for program standards that are similar, and in some cases 
identical, to those under the AHP. However, it was not apparent from 
the comments that there are any government entities that monitor for 
compliance with requirements identical to those under the AHP on a 
consistent basis.
    A number of commenters suggested that the Banks should be permitted 
to rely on monitoring by other entities that provide funding to a 
project even if the targeting, rent, and retention commitments 
monitored by the other entity do not match those made by the project 
under the AHP. However, the integrity of the Program's competitive 
application process depends upon projects being held to the commitments 
that they make in order to receive AHP subsidies. Further, project 
sponsors or owners may have a reduced incentive to comply with these 
commitments over the long term where they have the knowledge that they 
will not be monitored according to those commitments.
    The final rule attempts to resolve the conflict discussed above by 
permitting the Banks to evaluate projects under the AHP scoring process 
according to the targeting commitments made by a project to a 
government entity providing funds to the project. As discussed 
previously, Sec. 960.6(b)(4)(iv)(C)(1) of the final rule provides that 
in order to facilitate reliance on monitoring by a federal, state, or 
local government entity providing funds or allocating federal Low-
Income Housing Tax Credits to a project, a Bank, in its discretion, may 
score each project according to the targeting commitments made by the 
project to such entity.
    In accordance with this change, Sec. 960.11(a)(1) of the final rule 
expands the extent to which a Bank may rely on post-completion 
monitoring by government entities providing funds to a project. The 
final rule provides that for those projects that receive funds from, or 
are allocated federal Low-Income Housing Tax Credits by, a federal, 
state, or local government entity, a Bank may rely on the monitoring by 
such entity after project completion if: (1) The income targeting 
requirements, the rent requirements, and the retention period monitored 
by such entity for purposes of its own program are the same as, or more 
restrictive than, those committed to in the AHP application; (2) the 
entity 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 entity or where the project is not habitable; and (3) 
the entity has demonstrated and continues to demonstrate to the Bank 
its ability to carry out monitoring under its own program, and the Bank 
does not have information that such monitoring is not occurring or is 
inadequate.
    This is a change from the proposed rule which, as discussed above, 
limited reliance on third-party monitoring to monitoring conducted by 
housing credit agencies. In addition, the proposed rule limited such 
reliance to projects receiving $500,000 or less in AHP subsidies. The 
final rule also omits the requirements in the proposed rule that 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.
    b. Reliance on Monitoring of AHP Application Commitments By a 
Contractor.
    Section 960.11(a)(2) of the final rule also adds a new monitoring 
option for the Banks that is intended to expand the ability of the 
Banks to rely on post-completion monitoring by government entities 
providing funds to a project, where the government entity has different 
income targeting, rent, and retention requirements from those committed 
to by the project under the AHP.
    Section 960.11(a)(2) provides that, for those projects that receive 
funds from, or are allocated federal Low-Income Housing Tax Credits by, 
a federal, state, or local government entity that monitors for income 
targeting requirements, rent requirements, or retention periods

[[Page 41826]]

under its own program that are less restrictive than those committed to 
in the project's AHP application, a Bank, in its discretion, may rely 
on the monitoring by such entity if: (1) The entity agrees to monitor 
the income targeting requirements, the rent requirements, and the 
retention period committed to in the AHP application; (2) the entity 
agrees to inform the Bank of instances where tenant rents or incomes 
are found to be in noncompliance with the requirements committed to in 
the AHP application or where the project is not habitable; and (3) the 
entity has demonstrated and continues to demonstrate to the Bank its 
ability to carry out such monitoring, and the Bank does not have 
information that such monitoring is not occurring or is inadequate.
    c. Long-Term Monitoring Requirements Where Reliance on Government 
Entities Or Contractors Is Not Permitted.
    Under the final rule, where a Bank is not permitted to rely on 
post-completion monitoring by a federal, state, or local government 
entity, the Bank, members, and project owners must monitor projects in 
accordance with the requirements of Sec. 960.11(a)(3) of the final 
rule. Section 960.11(a)(3) carries forward provisions in the proposed 
rule, and makes the following changes in order to reduce monitoring 
costs for Banks, members, and project owners. First, the final rule 
omits the requirement that a project owner annually must provide a list 
of tenant rents and incomes to the Bank.
    Second, the final rule omits the provision in the proposed rule 
requiring the owner of a rental project to certify to the member and 
the Bank that the 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. The final rule also eliminates 
the requirement that the Bank investigate complaints about the project. 
These changes have been made in response to several comments objecting 
to the above provisions on the ground that they place the Banks in the 
middle of landlord-tenant disputes, which is not an appropriate role 
for the Banks.
    Third, under Sec. 960.11(a)(3)(ii) of the final rule, for rental 
projects receiving $500,000 or less in AHP subsidy from a member, the 
member must perform exterior visual inspections of projects and certify 
to the Bank at least once every three, rather than two, years that the 
project appears to be suitable for occupancy.
    Fourth, under Sec. 960.11(a)(3)(iii)(B)(3) of the final rule, for 
rental projects receiving over $500,000 in AHP subsidy, a Bank must 
perform an on-site review of project documentation for a sample of the 
project's units at least once every two years, rather than annually, to 
verify compliance with the rent and income targeting commitments made 
in the AHP application and project habitability.
    Section 960.11(a)(3)(iv) of the final rule makes clear that a Bank, 
in its discretion, may hire consultants or outside contractors to 
perform the Bank's ongoing long-term monitoring activities as the 
Bank's agents, for example, if the Bank determines that this is more 
cost-effective than having its own employees administer the Bank's 
monitoring responsibilities.
    d. Annual Adjustment of Targeting Commitments.
    As under the provisions governing initial monitoring requirements, 
Sec. 960.11(b) of the final rule makes clear that for purposes of 
determining compliance with the targeting commitments in an AHP 
application, such commitments shall be considered to adjust annually 
according to the current median income data.

L. Remedial Actions for Noncompliance--Sec. 960.12

1. In General
    Section 960.12 of the final rule revises the structure of the 
proposed rule governing remedies for noncompliance with AHP 
requirements by separating provisions on compliance standards from 
provisions requiring that compliance standards be implemented by 
specific agreements. The proposed provisions on compliance standards 
governing Banks, members and project sponsors and owners are retained 
and clarified in Sec. 960.12, while provisions related to compliance 
agreements are incorporated in Sec. 960.13 of the final rule.
2. Project Foreclosure
    A number of commenters requested clarification on the liability of 
members and project owners where a project goes into foreclosure prior 
to the end of the retention period. Section 960.12 of the final rule 
makes a party's liability for repayment of AHP subsidies contingent 
upon that party's action or omission resulting in noncompliance with 
AHP requirements. Therefore, if, due to circumstances that are not the 
result of an action or omission of the member and project sponsor or 
owner, a project goes into foreclosure prior to the end of the 
project's retention period, the sponsor or owner is not liable for 
repayment of subsidies, and the member is required to recover and repay 
to the Bank only that amount that the member can recover through 
reasonable collection efforts, by exercising its legal rights against 
the project.
3. Degree of Culpability
    Commenters also suggested that a project sponsor's or owner's 
liability to repay AHP subsidies should apply to cases of fraud or 
gross mismanagement but not simple negligence. The Finance Board 
believes that determinations as to degrees of culpability are best made 
on a case-by-case basis. This is reflected in Sec. 960.12(c)(2) of the 
final rule, which permits Banks and members to settle claims for 
noncompliance taking into account factors such as the degree of 
culpability of the parties involved.
4. Provision for Members, Sponsors, and Owners to be Parties to 
Enforcement Proceedings
    Section 960.12(d) of the final rule adds a new provision permitting 
a Bank, in its AHP implementation plan, to provide for a member, 
project sponsor, or project owner to enter into a written agreement 
with a Bank under which such member, sponsor, or owner consents to be a 
party to any enforcement proceeding initiated by the Finance Board 
regarding the repayment of AHP subsidies received by such member, 
sponsor, or owner, or the suspension or debarment of such parties, 
provided that the member, sponsor, or owner has agreed to be bound by 
the Finance Board's final determination in the enforcement proceeding. 
Under such an agreement, a member, sponsor, or owner who consents to be 
subject to a final determination of the Finance Board will have the 
same rights and remedies as a Bank in seeking review of such a 
determination.
5. Suspension and Debarment
    Section 960.12(f)(2) of the final rule revises the provision in the 
proposed rule governing suspension and debarment of members and project 
sponsors and owners from participation in the Program by clarifying 
that suspension or debarment by the Finance Board is implemented 
through an order upon a Bank.
6. Procedure for Finance Board Action
    Section 960.12(h) of the final rule clarifies that, except in cases 
where a Bank is seeking prior Finance Board review of a settlement 
agreement with a member, any actions taken by the Finance Board 
pursuant to section

[[Page 41827]]

960.12 shall be subject to the Finance Board's Procedures for Review of 
Disputed Supervisory Determinations. Copies of these procedures are 
available from the Finance Board upon request.

M. Agreements--Sec. 960.13

1. In General
    As discussed previously, Sec. 960.13 of the final rule generally 
describes the kinds of agreements Banks must have in place with members 
in order to implement the various standards set forth in the final 
rule, including standards governing monitoring, retention, and 
repayment of subsidies. This section also describes special provisions 
that must be in place where members receive subsidized advances and 
direct subsidies, respectively. The final rule is not intended to 
prescribe the form of agreements between Banks and members or whether 
such agreements consist of one agreement or several separate 
agreements. Nor is a Bank precluded from making entities in addition to 
members, such as project sponsors or owners, parties to such 
agreements.
2. Retention Agreements
    Sections 960.13(c) (4) and (5) and (d) (1) and (2) of the final 
rule incorporate and carry forward the provisions of the proposed rule 
governing retention of owner-occupied and rental projects. Section 
960.1 of the final rule carries forward the provisions of the proposed 
rule defining the retention period as five years from closing for an 
AHP-assisted owner-occupied unit, and 15 years from the date of project 
completion for an AHP-assisted rental project. A number of commenters 
supported these retention periods. Some commenters supported other 
retention periods ranging from 3 to 25 years in the case of owner-
occupied units, and 5 to 30 years in the case of rental projects. In 
light of the significant support for the proposed retention periods, 
the final rule retains the proposed retention periods.
    The notice of proposed rulemaking requested comments on whether 
repayment of AHP subsidy should be required in all cases of refinancing 
by the homeowner prior to the end of the retention period of an AHP-
assisted unit, rather than just in cases where the homeowner 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 five-year retention period, which may be perceived as a 
windfall to the owner. However, homeowners, generally, can take 
advantage of lower interest rates by refinancing their unit, and 
households that purchase AHP-assisted units should not be denied this 
opportunity. As long as the owner of an AHP-assisted unit ensures that 
after the refinancing, the unit continues to be subject to the initial 
AHP retention requirement, the goal of the Program is met.
    Several commenters supported permitting refinancing without 
penalty, while others suggested various permutations of repayment 
requirements in this situation. The Finance Board continues to believe 
that households that have AHP-assisted units should be allowed to 
benefit from appreciation in the value of their homes, through 
refinancing or otherwise, to the same extent as other homeowners, as 
long as AHP retention requirements are satisfied. Therefore, 
Sec. 960.13(d)(1)(iii) of the final rule carries forward the proposed 
provision on this issue, but makes this provision parallel with 
Sec. 960.13(d)(1)(ii), which provides for pro rata repayment of the AHP 
subsidy upon sale of an AHP-assisted unit, unless the unit continues to 
be subject to the initial AHP retention requirement.
    The notice of proposed rulemaking also requested comments on 
whether an owner of an AHP-assisted rental project should be required 
to repay the entire amount of 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 may serve to discourage the 
conversion of AHP-assisted rental projects into projects that charge 
market rents, prior to the end of the retention period. Several 
commenters supported requiring full repayment of subsidy where an AHP-
assisted rental project is converted to market-rate housing. Despite 
good arguments on both sides of the issue, the Finance Board, as a 
matter of policy, has decided to retain this requirement in the final 
rule as a disincentive for project conversion prior to the end of the 
retention period. Therefore, Secs. 960.13 (c)(5)(iii) and (d)(2)(iii) 
of the final rule carry forward the proposed provisions on this issue.
3. Termination of Income-Eligibility and Affordability Restrictions 
Upon Foreclosure
    Sections 960.13 (c)(5)(iv) and (d)(2)(iv) of the final rule add a 
requirement that Banks include in their agreements with members a 
provision that the income-eligibility and affordability restrictions 
applicable to an AHP-assisted rental project may terminate upon 
foreclosure or upon transfer in lieu of foreclosure. This change was 
made in response to requests from commenters for clarification on this 
issue.
4. Lending of 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. 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 may be repaid by the recipients. See 
12 U.S.C. 1430(j)(9)(E).
    The proposed rule reflected an attempt to accommodate the needs of 
sponsors and the statutory requirement governing the pass-through of 
AHP subsidies. It provided that a member or a sponsor may lend a direct 
subsidy in connection with an AHP-assisted 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 had to be repaid to the Bank.
    Commenters stated that the proposed provisions did not adequately 
reflect the way that rental project financing is structured in all 
cases. For instance, members or sponsors may charge interest on direct 
subsidies lent to projects and may not require deferral of repayments. 
Section 960.13(d)(3) of the final rule is intended to broaden the 
language of the provisions of the proposed rule in order to make the 
final rule compatible with these financing structures. It provides that 
if a member or a project sponsor lends a direct subsidy to a project, 
any repayments of principal and payments of interest received by the 
member or the project sponsor must be paid forthwith to the Bank. The 
final rule also no longer limits lending of direct subsidies solely to 
situations involving projects receiving federal Low-Income Housing Tax 
Credits. This requirement is to be implemented through inclusion in 
agreements between Banks, members, and project sponsors.
5. Transfer of AHP Obligations Where a Member Loses Its Membership In 
the Bank
    Section 960.13(b)(5) of the final rule provides that the member 
must make

[[Page 41828]]

best efforts to transfer its obligations under the approved application 
for AHP subsidy to another member in the event of its loss of 
membership in the Bank prior to the Bank's final disbursement of AHP 
subsidies.
    Under Sec. 960.13(c)(6), if, after final disbursement of AHP 
subsidies to the member, the member undergoes an acquisition or a 
consolidation resulting in a successor organization that is not a 
member of the Bank, the nonmember successor organization assumes the 
member's obligations under its approved application for AHP subsidy 
upon prepayment or orderly liquidation by the nonmember of the 
subsidized advance. Under Sec. 960.13(d)(4), if, after final 
disbursement of AHP subsidies to the member, the member undergoes an 
acquisition or a consolidation resulting in a successor organization 
that is not a member of the Bank, the nonmember successor organization 
assumes the member's obligations under its approved application for AHP 
subsidy.

III. Regulatory Flexibility Act

    The final 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 the final rule will not have a significant 
economic impact on a substantial number of small entities.

IV. Paperwork Reduction Act

    As part of the notice of proposed rulemaking, the Finance Board 
published a request for comments concerning proposed changes to the 
collection of information in the existing AHP regulation, see 61 FR 
57799, 57819-57820 (Nov. 8, 1996), which previously was approved by the 
Office of Management and Budget (OMB) and assigned OMB control number 
3096-0006. The revised collection of information was submitted to OMB 
for review in accordance with section 3507(d) of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3507(d). The Finance Board also 
submitted to OMB for its approval an analysis of the proposed changes 
to the collection of information resulting from the proposed rule. The 
Finance Board received one comment on the proposed changes. The 
commenter suggested that the reporting and recordkeeping burden of the 
information collection may be understated on the grounds that it is not 
based on current hour and cost estimates and does not take into account 
the monitoring requirements in the proposed rule. The Finance Board 
based the hour and cost burden estimates for the information collection 
on current information available at the time the estimates were made. 
Further, the Finance Board's analysis of the information collection on 
file at OMB specifically sets forth hour and cost burden estimates for 
those aspects of the information collection related to monitoring. The 
Finance Board continues to believe that the burden estimates are 
accurate.
    OMB has assigned a control number 3096-0006 and approved the 
revised information collection without conditions with an expiration 
date of December 31, 1999. 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).
    Although the final rule does not substantively or materially modify 
the approved information collection, it provides additional options in 
complying with long-term monitoring requirements, which may, in some 
cases, reduce the reporting and recordkeeping burden on respondents.
    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.
    Comments concerning the information collection may be submitted to 
the Finance Board in writing at the address listed above and to the 
Office of Information and Regulatory Affairs of OMB, Attention: Desk 
Officer for Federal Housing Finance Board, Washington, DC 20503.

List of Subjects in 12 CFR Part 960

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

PART 960--AFFORDABLE HOUSING PROGRAM

Sec.
960.1  Definitions.
960.2  Required annual AHP contributions.
960.3  Operation of Program and adoption of AHP implementation plan.
960.4  Advisory Councils.
960.5  Minimum eligibility standards for AHP projects.
960.6  Procedure for approval of applications for funding.
960.7  Modifications of applications prior to project completion.
960.8  Procedure for funding.
960.9  Modifications of applications after project completion.
960.10  Initial monitoring requirements.
960.11  Long-term monitoring requirements.
960.12  Remedial actions for noncompliance.
960.13  Agreements.
960.14  Temporary suspension of AHP contributions.
960.15  Affordable Housing Reserve Fund.
960.16  Application to existing AHP projects.

    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 member's obligation; and
    (3) Fully secured by collateral in accordance with the Act and part 
935 of this chapter.
    Affordable means that the rent charged to a household for a unit 
that is committed to be affordable in an AHP application does not 
exceed 30 percent of the income of a household of the maximum income 
and size expected, under the commitment made in the 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.
    Bank means a Federal Home Loan Bank established under the authority 
of the Act.
    Board of Directors means the Board of Directors of the Finance 
Board.
    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.

[[Page 41829]]

    Direct subsidy means an AHP subsidy in the form of a direct cash 
payment, but does not include homeownership set-aside funds.
    Family member means any individual related to a person by blood, 
marriage or adoption.
    Finance Board means the agency established as the Federal Housing 
Finance Board.
    Habitable means suitable for occupancy, taking into account local 
health, safety, and building codes.
    Homeless household means a household made up of one or more 
individuals, other than individuals imprisoned or otherwise detained 
pursuant to state or federal law, who:
    (1) Lack a fixed, regular, and adequate nighttime residence; or
    (2) Have 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.
    Homeownership set-aside funds means funds provided to a member by a 
Bank pursuant to a Bank's homeownership set-aside program.
    HUD means the Department of Housing and Urban Development.
    Low-or moderate-income household. (1) Owner-occupied projects. For 
purposes of an owner-occupied project, low-or moderate-income household 
means a household which, at the time it is qualified by the sponsor for 
participation in the project, has an income of 80 percent or less of 
the median income for the area.
    (2) Rental projects. (i) In general. For purposes of a rental 
project, low-or moderate-income household means a household which, upon 
initial occupancy of a rental unit, has an income at or below 80 
percent of the median income for the area.
    (ii) Housing with current occupants. In the case of projects 
involving the purchase or rehabilitation of rental housing with current 
occupants, low-or moderate-income household means an occupying 
household which, at the time the purchase or rehabilitation is 
completed, has an income at or below 80 percent of the median income 
for the area.
    (3) Family-size adjustment. The income limit for low-or moderate-
income households may be adjusted for family size in accordance with 
the methodology of the applicable median income standard.
    Low-or moderate-income neighborhood means any neighborhood in which 
51 percent or more of the households have incomes at or below 80 
percent of the median income for the area.
    Median income for the area. (1) Owner-occupied projects. A Bank 
shall identify in its AHP implementation plan one or more of the 
following median income standards from which all owner-occupied 
projects may choose for purposes of the AHP:
    (i) The median income for the area, as published annually by HUD;
    (ii) The applicable median family income, as determined under 26 
U.S.C. 143(f) (Mortgage Revenue Bonds) and published by a State agency 
or instrumentality;
    (iii) The median income for the area, as published by the United 
States Department of Agriculture; or
    (iv) The median income for any definable geographic area, as 
published by a federal, state, or local government entity for purposes 
of that entity's housing programs, and approved by the Board of 
Directors, at the request of a Bank, for use under the AHP.
    (2) Rental projects. A Bank shall identify in its AHP 
implementation plan one or more of the following median income 
standards from which all rental projects may choose for purposes of the 
AHP:
    (i) The median income for the area, as published annually by HUD; 
or
    (ii) The median income for any definable geographic area, as 
published by a federal, state, or local government entity for purposes 
of that entity's housing programs, and approved by the Board of 
Directors, at the request of a Bank, for use under the AHP.
    (3) Procedure for approval. Prior to requesting approval by the 
Board of Directors of a median income standard, a Bank shall amend its 
AHP implementation plan to permit the use of such standard, conditioned 
on Board of Directors approval. Requests for approval of median income 
standards shall receive prompt consideration by the Board of Directors.
    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.
    Net earnings of a Bank means the net earnings of a Bank for a 
calendar year after deducting the Bank's pro rata share 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, including 
condominiums and cooperative housing, by or for very low-or low-or 
moderate-income households.
    Owner-occupied unit means a unit in an owner-occupied project.
    Rental project means a project involving the purchase, 
construction, or rehabilitation of rental housing, including 
transitional housing for homeless households and mutual housing, where 
at least 20 percent of the units in the project are occupied by and 
affordable for very low-income households.
    Retention period means:
    (1) 5 years from closing for an AHP-assisted owner-occupied unit; 
and
    (2) 15 years from the date of project completion for a rental 
project.
    Sponsor means a not-for-profit or for-profit organization or public 
entity that:
    (1) Has an ownership interest (including any partnership interest) 
in a rental project; or
    (2) Is 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 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. 960.8(c)(3));
    (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 earlier 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

[[Page 41830]]

its asset/liability management system, or otherwise; or
    (3) Homeownership set-aside funds.
    Very low-income household. (1) Owner-occupied projects. For 
purposes of an owner-occupied project, very low-income household means 
a household which, at the time it is qualified by the sponsor for 
participation in the project, has an income at or below 50 percent of 
the median income for the area.
    (2) Rental projects. (i) In general. For purposes of a rental 
project, very low-income household means a household which, upon 
initial occupancy of a rental unit, has an income at or below 50 
percent of the median income for the area.
    (ii) Housing with current occupants. In the case of projects 
involving the purchase or rehabilitation of rental housing with current 
occupants, very low-income household means an occupying household 
which, at the time the purchase or rehabilitation is completed, has an 
income at or below 50 percent of the median income for the area.
    (3) Family-size adjustment. The income limit for very low-income 
households may be adjusted for family size in accordance with the 
methodology of the applicable median income standard.


Sec. 960.2  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. 960.3  Operation of Program and adoption of AHP implementation 
plan.

    (a) Allocation of AHP contributions. (1) Homeownership set-aside 
programs. Each Bank, after consultation with its Advisory Council, may 
set aside annually, in the aggregate, up to the greater of $1.5 million 
or 15 percent of its annual required AHP contribution to provide funds 
to members participating in the Bank's homeownership set-aside 
programs, pursuant to the requirements of this part. In cases where the 
amount of homeownership set-aside funds applied for by members in a 
given year exceeds the amount available for that year, a Bank may 
allocate up to the greater of $1.5 million or 15 percent of its annual 
required AHP contribution for the subsequent year to the current year's 
homeownership set-aside programs. A Bank may establish one or more 
homeownership set-aside programs pursuant to written policies adopted 
by the Bank's board of directors. A Bank's board of directors shall not 
delegate to Bank officers or other Bank employees the responsibility 
for adopting such policies.
    (2) Competitive application program. That portion of a Bank's 
required annual AHP contribution that is not set aside to fund 
homeownership set-aside programs shall be provided to members through a 
competitive application program, pursuant to the requirements of this 
part.
    (b) AHP implementation plan. (1) Adoption of plan. Each Bank's 
board of directors shall adopt a written AHP implementation plan which 
shall set forth:
    (i) The applicable median income standard or standards, adopted by 
the Bank consistent with the definition of median income for the area 
in Sec. 960.1;
    (ii) The requirements for any homeownership set-aside programs 
adopted by the Bank pursuant to paragraph (a)(1) of this section;
    (iii) The Bank's project feasibility guidelines, adopted consistent 
with Sec. 960.5(b)(2);
    (iv) The Bank's schedule for AHP funding periods;
    (v) Any additional District eligibility requirement, adopted by the 
Bank pursuant to Sec. 960.5(b)(10);
    (vi) The Bank's scoring guidelines, adopted by the Bank consistent 
with Sec. 960.6(b)(4);
    (vii) The Bank's time limits on use of AHP subsidies and procedures 
for verifying compliance upon disbursement of AHP subsidies pursuant to 
Sec. 960.8; and
    (viii) The Bank's procedures for carrying out its monitoring 
obligations under Secs. 960.10(c) and 960.11.
    (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 an opportunity to review the plan 
and any subsequent amendments, and the Advisory Council shall provide 
its recommendations to the Bank's board of directors.
    (4) Submission of plan to the Finance Board. A Bank shall submit 
its initial AHP implementation plan, and any amendments, to the Finance 
Board and the Bank's Advisory Council at least 60 days prior to 
distributing requests for applications for AHP subsidies for the 
funding period in which the plan, or amendments, will be effective.
    (5) Public Access. A Bank's initial AHP implementation plan, and 
any subsequent amendments, shall be made available to members of the 
public, upon request.
    (c) Conflicts of interest--(1) Bank directors and employees. Each 
Bank's board of directors shall adopt a written policy providing that 
if a Bank director or employee, or such person's family member, has a 
financial interest in, or is a director, officer, or employee of an 
organization involved in, a project that is the subject of a pending or 
approved AHP application, the Bank director or employee shall not 
participate in or attempt to influence decisions by the Bank regarding 
the evaluation, approval, funding, monitoring or any remedial process 
for such project.
    (2) Advisory Council members. Each Bank's board of directors shall 
adopt a written policy providing that if an Advisory Council member, or 
such person's family member, has a financial interest in, or is a 
director, officer, or employee of an organization involved in, a 
project that is the subject of a pending or approved AHP application, 
the Advisory Council member shall not participate in or attempt to 
influence decisions by the Bank regarding the approval for such 
project.
    (3) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility to adopt 
conflicts of interest policies.
    (d) Reporting. Each Bank shall provide such reports and 
documentation concerning its Program as the Finance Board may request 
from time to time.


Sec. 960.4  Advisory Councils.

    (a) In general. Each Bank's board of directors shall appoint an 
Advisory Council of from 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 time for 
responses. The Bank's board of directors shall appoint Advisory Council 
members giving consideration to the size of the Bank's

[[Page 41831]]

District and the diversity of low- and moderate-income housing needs 
and activities within the District.
    (c) Diversity of membership. In appointing the Advisory Council, a 
Bank's board of directors 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's board of 
directors shall appoint Advisory Council members to serve for no more 
than three 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 and community 
investment mission, including, but not limited to, advice on the low- 
and moderate-income housing and community investment programs and needs 
in the Bank's District, and on the use of AHP subsidies, Bank advances, 
and other Bank credit products for these purposes.
    (2) Summary of AHP applications. The Bank shall comply with 
requests from the Advisory Council for summary information regarding 
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 and meetings requested by the Finance Board.


Sec. 960.5  Minimum eligibility standards for AHP projects.

    (a) Homeownership set-aside programs. A Bank's homeownership set-
aside programs must meet the following requirements:
    (1) Homeownership set-aside funds must be provided to members 
pursuant to allocation criteria established by the Bank;
    (2) Members must provide homeownership set-aside funds only to 
households that:
    (i) Are low-or moderate-income households, as defined in 
Sec. 960.1;
    (ii) Complete a homebuyer or homeowner counseling program provided 
by, or based on one provided by, an organization recognized as 
experienced in homebuyer or homeowner counseling, respectively; and
    (iii) Meet such other eligibility criteria that may be established 
by the Bank, such as a matching funds requirement or criteria that give 
priority for the purchase or rehabilitation of housing in particular 
areas or as part of a disaster relief effort;
    (3) Members must provide homeownership set-aside funds to 
households as a grant, in an amount up to a maximum of $10,000 per 
household, as established by the Bank, which limit shall apply to all 
households;
    (4) Households must use homeownership set-aside funds to pay for 
downpayment, closing cost, counseling, or rehabilitation assistance in 
connection with the household's purchase or rehabilitation of an owner-
occupied housing unit, including a condominium or cooperative housing 
unit, to be used as the household's primary residence;
    (5) A housing unit purchased or rehabilitated using homeownership 
set-aside funds must be subject to a retention agreement described in 
Sec. 960.13(d)(1);
    (6) If a member is providing mortgage financing to a participating 
household, the member must provide financial or other incentives in 
connection with such mortgage financing, and the rate of interest, 
points, fees, and any other charges by the member must not exceed a 
reasonable market rate of interest, points, fees, and other charges for 
a loan of similar maturity, terms, and risk;
    (7) Homeownership set-aside funds may be used to pay for counseling 
costs only where:
    (i) Such costs are incurred in connection with counseling of 
homebuyers who actually purchase an AHP-assisted unit;
    (ii) The cost of the counseling has not been covered by another 
funding source, including the member; and
    (iii) The homeownership set-aside funds are used to pay only for 
the amount of such reasonable and customary costs that exceeds the 
highest amount the member has spent annually on homebuyer counseling 
costs within the preceding three years; and
    (8) Homeownership set-aside funds must be drawn down and used by 
eligible households within the period of time specified by the Bank in 
its AHP implementation plan.
    (b) Competitive application program. Projects receiving AHP 
subsidies pursuant to a Bank's competitive application program must 
meet the eligibility requirements of this paragraph (b).
    (1) Owner-occupied or rental housing. A project must be either an 
owner-occupied project or a rental project, as defined, respectively, 
in Sec. 960.1.
    (2) Project feasibility and need for subsidy--(i) Sources and uses 
of funds. The project's estimated uses of funds must equal its 
estimated sources of funds, as reflected in the project's development 
budget. A project's sources of funds must include:
    (A) Estimates of funds the project sponsor intends to obtain from 
other sources but which have not yet been committed to the project; and
    (B) Estimates of the market value of in-kind donations and 
volunteer professional labor or services committed to the project, but 
not the value of sweat-equity.
    (ii) Project costs--(A) In general. Project costs, as reflected in 
the project's development budget, must be reasonable and customary, in 
accordance with the Bank's project feasibility guidelines, in light of:
    (1) Industry standards for the location of the project; and
    (2) The long-term financial needs of the project.
    (B) Cost of property and services provided by a member. The 
purchase price of property or services, as reflected in the project's 
development budget, sold to the project by a member providing AHP 
subsidy to the project, or, in the case of property, upon which such 
member holds a mortgage or lien, may not exceed the market value of 
such property or services as of the date the purchase price for the 
property or services was agreed upon. In the case of real estate owned 
property sold to a project by a member providing AHP subsidy to a 
project, or property sold to the project upon which the member holds a 
mortgage or lien, the market value of such property is deemed to be the 
``as-is'' or ``as-rehabilitated'' value of the property, whichever is 
appropriate, as reflected in an independent appraisal of the property 
performed within six months prior to the date the purchase price for 
the property was agreed upon.
    (iii) Operational feasibility and need for subsidy. The project 
must be

[[Page 41832]]

operationally feasible, in accordance with the Bank's project 
feasibility guidelines, based on relevant factors including, but not 
limited to, applicable financial ratios, geographic location of the 
project, needs of tenants, and other non-financial project 
characteristics. The requested AHP subsidy must be necessary for the 
financial feasibility of the project, as currently structured, and the 
rate of interest, points, fees, and any other charges for all loans 
financing the project must not exceed a market rate of interest, 
points, fees, and other charges for loans of similar maturity, terms, 
and risk.
    (3) Timing of subsidy use. The AHP subsidy must be likely to be 
drawn down by the project or used by the project to procure other 
financing commitments within 12 months of the date of approval of the 
application for subsidy funding the project.
    (4) Prepayment, cancellation, and processing fees. The project must 
not use AHP subsidies to pay for:
    (i) Prepayment fees imposed by a Bank on a member for a subsidized 
advance that is prepaid, unless, subsequent to such prepayment, the 
project will continue to comply with the terms of the application for 
the subsidy, as approved by the Bank, and the requirements of this part 
for the duration of the original retention period, and any unused 
subsidy is returned to the Bank and made available for other AHP 
projects;
    (ii) Cancellation fees and penalties imposed by a Bank on a member 
for a subsidized advance commitment that is canceled; or
    (iii) Processing fees charged by members for providing direct 
subsidies to a project.
    (5) Counseling costs. AHP subsidies may be used to pay for 
counseling costs only where:
    (i) Such costs are incurred in connection with counseling of 
homebuyers who actually purchase an AHP-assisted unit; and
    (ii) The cost of the counseling has not been covered by another 
funding source, including the member.
    (6) Refinancing. If the project uses AHP subsidies to refinance an 
existing single-family or multifamily mortgage loan, the equity 
proceeds of the refinancing must be used only for the purchase, 
construction, or rehabilitation of housing units meeting the 
eligibility requirements of this paragraph (b).
    (7) Retention--(i) Owner-occupied projects. The project's AHP-
assisted units are or are committed to be subject to a retention 
agreement described in Sec. 960.13 (c)(4) or (d)(1).
    (ii) Rental projects. AHP-assisted rental projects are or are 
committed to be subject to a retention agreement described in 
Sec. 960.13 (c)(5) or (d)(2).
    (8) Project sponsor qualifications. A project's sponsor must be 
qualified and able to perform its responsibilities as committed to in 
the application for subsidy funding the project.
    (9) Fair housing. The project, as proposed, must comply with any 
applicable fair housing law requirements and demonstrate how the 
project will be affirmatively marketed.
    (10) District eligibility requirements. (i) A project receiving AHP 
subsidies may be required by a Bank to meet one or more of the 
following additional eligibility requirements adopted by a Bank's board 
of directors, after consultation with its Advisory Council:
    (A) A requirement that the amount of subsidy requested for the 
project does not exceed limits established by the Bank as to the 
maximum amount of AHP subsidy available per member each year; or per 
member, per project, or per project unit in a single funding period;
    (B) A requirement that the project is located in the Bank's 
District; or
    (C) A requirement that the member submitting the application has 
made use of a credit product offered by the Bank, other than AHP or CIP 
credit products, within the previous 12 months.
    (ii) District eligibility requirements must apply equally to all 
members.


Sec. 960.6  Procedure for approval of applications for funding.

    (a) Homeownership set-aside programs. A Bank shall accept 
applications for homeownership set-aside funds from members and may, in 
its discretion, accept applications from institutions with pending 
applications for membership in the Bank. The Bank shall approve 
applications in accordance with the Bank's criteria governing the 
allocation of funds.
    (b) Competitive application program--(1) Funding periods; amounts 
available. A Bank shall accept applications for funding under its 
competitive application program from members and may, in its 
discretion, accept applications from institutions with pending 
applications for membership in the Bank. A Bank may accept applications 
for funding during a specified number of funding periods each year, as 
determined by the Bank. The amount of subsidies offered in each funding 
period shall be comparable.
    (2) Submission of applications. A Bank shall require applicants for 
AHP subsidies to submit information sufficient for the Bank to:
    (i) Determine that the proposed AHP project meets the eligibility 
requirements of Sec. 960.5(b); and
    (ii) Evaluate the application pursuant to the scoring criteria in 
paragraph (b)(4) of this section.
    (3) Review of applications for project eligibility. A Bank shall 
review applications to determine that the proposed AHP project meets 
the eligibility requirements of Sec. 960.5(b).
    (4) Scoring of applications--(i) In general. A Bank shall score 
only those applications meeting the eligibility requirements of 
Sec. 960.5(b). A Bank shall not adopt additional scoring criteria or 
point allocations, except as specifically authorized under this 
paragraph (b)(4). A Bank shall adopt written guidelines implementing 
the scoring requirements of this paragraph (b)(4).
    (ii) Point allocations. A Bank shall allocate 100 points among the 
nine scoring criteria identified in paragraph (b)(4)(iv) of this 
section. The scoring criterion identified in paragraph (b)(4)(iv)(C) of 
this section shall be allocated at least 20 points. The remaining 
scoring criteria shall be allocated at least five points each.
    (iii) Satisfaction of scoring criteria. A Bank shall designate each 
scoring criterion as either a fixed-point or a variable-point 
criterion. Variable-point criteria are those where there are varying 
degrees to which an application can satisfy the criteria. The number of 
points that may be awarded to an application for meeting a variable-
point criterion will vary, depending on the extent to which the 
application satisfies the criterion, compared to the other applications 
being scored. A Bank shall designate the scoring criteria identified in 
paragraphs (b)(4)(iv) (C) and (H) of this section as variable-point 
criteria. The application(s) best achieving each variable-point 
criterion shall receive the maximum point score available for that 
criterion, with the remaining applications scored on a declining scale. 
Fixed-point criteria are those which cannot be satisfied in varying 
degrees and are either satisfied, or not. An application meeting a 
fixed-point criterion shall be awarded the total number of points 
allocated to that criterion.
    (iv) Scoring criteria. An application for a proposed project may 
receive points based on satisfaction of the nine scoring criteria set 
forth in this paragraph (b)(4)(iv).
    (A) Use of donated government-owned or other properties. The 
creation of housing using a significant proportion of units or land 
donated or conveyed for a nominal price by the federal government or 
any agency or

[[Page 41833]]

instrumentality thereof, or by any other party.
    (B) Sponsorship by a not-for-profit organization or government 
entity. Project sponsorship by a not-for-profit organization, a state 
or political subdivision of a state, a state housing agency, a local 
housing authority, a Native American Tribe, an Alaskan Native Village, 
or the government entity for Native Hawaiian Home Lands.
    (C) Targeting. The extent to which a project creates housing for 
very low- and low- or moderate-income households.
    (1) Rental projects. An application for a rental project shall be 
awarded the maximum number of points available under this scoring 
criterion 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 median income for the area. Applications for projects 
with less than 60 percent of the units reserved for occupancy by 
households with incomes at or below 50 percent of the median income for 
the area shall be awarded points on a declining scale based on the 
percentage of units in a project that are reserved for households with 
incomes at or below 50 percent of the median income for the area, and 
on the percentage of the remaining units reserved for households with 
incomes at or below 80 percent of the median income for the area. In 
order to facilitate reliance on monitoring by a federal, state, or 
local government entity providing funds or allocating federal Low-
Income Housing Tax Credits to a proposed project, a Bank, in its 
discretion, may score each project according to the targeting 
commitments made by the project to such entity, and the Bank shall 
include such scoring practice in its AHP implementation plan.
    (2) Owner-occupied projects. Applications for owner-occupied 
projects shall be awarded points based on the percentage of units in 
the project to be provided to households with incomes at or below 80 
percent of the median income for the area. Points shall be awarded on a 
declining scale, with projects having the highest percentage of units 
targeted to households with the lowest percentage of median income for 
the area awarded the highest number of points.
    (3) Separate scoring. For purposes of this scoring criterion, 
applications for owner-occupied projects and rental projects may be 
scored separately.
    (D) Housing for homeless households. The creation of transitional 
housing, excluding overnight shelters, for homeless households 
permitting a minimum of six months occupancy, or the creation of rental 
housing reserving at least 20 percent of the units for homeless 
households.
    (E) Promotion of empowerment. The provision of housing in 
combination with a program offering: employment; education; training; 
homebuyer, homeownership or tenant counseling; daycare services; 
resident involvement in decisionmaking affecting the creation or 
operation of the project; or other services that assist residents to 
move toward better economic opportunities, such as welfare to work 
initiatives.
    (F) First District priority. The satisfaction of one of the 
following criteria, or one of a number of the following criteria, as 
recommended by the Bank's Advisory Council and adopted by the Bank's 
board of directors and set forth in the Bank's AHP implementation plan, 
as long as the total points available for meeting the criterion or 
criteria adopted under this category do not exceed the total points 
allocated to this category:
    (1) Special needs. The creation of housing in which at least 20 
percent of the units are reserved for occupancy by households with 
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;
    (2) Community development. The creation of housing meeting housing 
needs documented as part of a community revitalization or economic 
development strategy approved by a unit of a state or local government;
    (3) First-time homebuyers. The financing of housing for first-time 
homebuyers;
    (4) Member financial participation. Member financial participation 
(excluding the pass-through of AHP subsidy) in the project, such as 
providing market rate or concessionary financing, fee waivers, or 
donations;
    (5) Disaster areas. The financing of housing located in federally 
declared disaster areas;
    (6) Rural. The financing of housing located in rural areas;
    (7) Urban. The financing of urban in-fill or urban rehabilitation 
housing;
    (8) Economic diversity. The creation of housing that is 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 median income for the area;
    (9) Fair housing remedy. The financing of 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;
    (10) Community involvement. Demonstrated support for the project by 
local government, community organizations, or individuals other than as 
project sponsors through the commitment by such entities or individuals 
of donated goods and services, or volunteer labor;
    (11) Lender consortia. The involvement of financing by a consortium 
of at least two financial institutions; or
    (12) In-District projects. The creation of housing located in the 
Bank's District.
    (G) Second District priority--defined housing need in the District. 
The satisfaction of 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 and set forth in the Bank's AHP 
implementation plan. The Bank may, but is not required to, use one of 
the criteria listed in paragraph (b)(4)(iv)(F) of this section, 
provided it is different from the criterion or criteria adopted by the 
Bank under paragraph (b)(4)(iv)(F) of this section.
    (H) AHP subsidy per unit. The extent to which a project proposes to 
use the least amount of AHP subsidy per AHP-targeted unit. In the case 
of an application for a project financed by a subsidized advance, the 
total amount of AHP subsidy used by the project shall be estimated 
based on the Bank's cost of funds as of the date on which all 
applications are due for the funding period in which the application is 
submitted. For purposes of this scoring criterion, applications for 
owner-occupied projects and rental projects may be scored separately.
    (I) Community stability. The promotion of community stability, such 
as by rehabilitating vacant or abandoned properties, being an integral 
part of a neighborhood stabilization plan approved by a unit of state 
or local government, and not displacing low- or moderate-income 
households, or if such displacement will occur, assuring that such 
households will be assisted to minimize the impact of such 
displacement.
    (5) Approval of applications--(i) Approval by Bank's board. The 
board of directors of each Bank shall approve applications in 
descending order

[[Page 41834]]

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 at least 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.
    (ii) No delegation. A Bank's board of directors shall not delegate 
to Bank officers or other Bank employees the responsibility to approve 
or disapprove AHP applications.


Sec. 960.7  Modifications of applications prior to project completion.

    (a) Modification procedure. Prior to final disbursement of funds to 
a project from all funding sources, a Bank, in its discretion, may 
approve in writing a modification to the terms of an approved 
application for subsidy funding the project if there is or will be a 
change in the project that materially affects the facts under which the 
application was originally scored and approved under the Bank's 
competitive application program, provided that:
    (1) The project, incorporating any such changes, would meet the 
eligibility requirements of Sec. 960.5(b);
    (2) The application, as reflective of such changes, continues to 
score high enough to have been approved in the funding period in which 
it was originally scored and approved by the Bank; and
    (3) There is good cause for the modification.
    (b) Modifications involving a subsidy increase. Modifications 
involving an increase in AHP subsidy shall be approved or disapproved 
by a Bank's board of directors. The authority to approve or disapprove 
such requests shall not be delegated to Bank officers or other Bank 
employees.


Sec. 960.8.  Procedure for funding.

    (a) Disbursement of subsidies to members. (1) A Bank may disburse 
AHP subsidies only to institutions that are members of the Bank at the 
time they request a draw-down of subsidy.
    (2) If an institution with an approved application for AHP subsidy 
fails to obtain or loses its membership in a Bank, the Bank may 
disburse subsidies to a member of such Bank to which the institution 
has transferred its obligations under the approved application, or the 
Bank may disburse subsidies through another Bank to a member of that 
Bank that has assumed the institution's obligations under the approved 
application.
    (b) Homeownership set-aside programs--(1) Time limit on use of 
subsidies. If homeownership set-aside funds are not drawn down and used 
by eligible households within the period of time specified by the Bank 
in its AHP implementation plan, the Bank shall cancel the application 
for funds and make the funds available for other applicants for 
homeownership set-aside funds or for other AHP-eligible projects.
    (2) Member certification upon disbursement. Prior to disbursement 
of homeownership set-aside funds by a Bank to a member, the Bank shall 
require the member to certify that:
    (i) The funds received from the Bank will be provided to a 
household meeting the eligibility requirements of Sec. 960.5(a)(2);
    (ii) If the member is providing mortgage financing to the 
household, the member will provide financial or other incentives in 
connection with such mortgage financing, and the rate of interest, 
points, fees, and any other charges by the member will not exceed a 
reasonable market rate of interest, points, fees, and other charges for 
a loan of similar maturity, terms, and risk; and
    (iii) Funds received from the Bank for homebuyer counseling costs 
will be provided according to the requirements of Sec. 960.5(a)(7).
    (c) Competitive application program--(1) Time limit on use of 
subsidies. If AHP subsidies approved for a project under a Bank's 
competitive application program are not drawn down and used by the 
project within the period of time specified by the Bank in its AHP 
implementation plan, the Bank shall cancel its approval of the 
application for the subsidies and make the subsidies available for 
other AHP-eligible projects.
    (2) Compliance upon disbursement of subsidies. A Bank shall verify 
prior to its initial disbursement of subsidies for an approved project, 
and prior to each disbursement thereafter, that the project meets the 
eligibility requirements of Sec. 960.5(b) and all obligations committed 
to in the approved application.
    (3) Changes in approved AHP subsidy amount where a direct subsidy 
is used to write down prior to closing the principal amount or interest 
rate on a loan.--(i) Change in subsidy amount. If a member is approved 
to receive a direct subsidy to write down prior to closing 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 for the 
loan decreases from the amount of subsidy initially approved by the 
Bank due to a decrease in market interest rates between the time of 
approval and the time the lender commits to the interest rate to 
finance the project, the Bank shall reduce the subsidy amount 
accordingly. If market interest rates rise between the time of approval 
and the time the lender commits to the interest rate to finance the 
project, the Bank may, in its discretion, increase the subsidy amount 
accordingly.
    (ii) Reconciliation of AHP fund. 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. If a Bank increases the amount of 
AHP subsidy approved for a project, the amount of such increase shall 
be drawn first from any currently uncommitted or repaid AHP subsidies 
and then from the Bank's required AHP contribution for the next year.


Sec. 960.9  Modifications of applications after project completion.

    Modification procedure. After final disbursement of funds to a 
project from all funding sources, a Bank, in its discretion, may 
approve in writing a modification to the terms of an approved 
application for subsidy funding the project, other than an increase in 
the amount of subsidy approved for the project, if there is or will be 
a change in the project that materially affects the facts under which 
the application was originally scored and approved under the Bank's 
competitive application program, provided that:
    (a) The project is in financial distress, or is at substantial risk 
of falling into such distress;
    (b) The project sponsor or owner has made best efforts to avoid 
noncompliance with the terms of the application for subsidy and the 
requirements of this part;
    (c) The project, incorporating any material changes, would meet the 
eligibility requirements of Sec. 960.5(b); and
    (d) The application, as reflective of such changes, continues to 
score high enough to have been approved in the funding period in which 
it was originally scored and approved by the Bank.


Sec. 960.10  Initial monitoring requirements.

    (a) Requirements for project sponsors and owners--(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

[[Page 41835]]

progress is being made towards completion of the project.
    (ii) Where AHP subsidies are used to finance the purchase of owner-
occupied units, the project sponsor must certify annually to the member 
and the Bank, until all approved AHP subsidies are provided to eligible 
households in the project, that those households receiving AHP 
subsidies during the year were eligible households, 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.
    (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 of the project.
    (ii) Within the first year after project completion, the project 
owner must:
    (A) 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;
    (B) Provide a list of actual tenant rents and incomes to the member 
and 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; and
    (2) The project is habitable; and
    (C) Maintain documentation regarding tenant rents and incomes and 
project habitability available for review by the member or the Bank, to 
support such certifications.
    (b) Requirements for members--(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 of the 
project and must report to the Bank semiannually on the status of the 
project.
    (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 or 
other legally enforceable retention agreements or mechanisms meeting 
the requirements of Sec. 960.13(c)(4) or (d)(1);
    (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 of the project 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 income targeting commitments; and
    (C) The rents charged for income-targeted units do not exceed the 
maximum levels committed to in the AHP application.
    (c) Requirements for Banks--(1) Owner-occupied projects. Each Bank 
must take the steps necessary to determine, based on a review of the 
documentation for a sample of projects and units within one year of 
receiving the certifications described in paragraph (b)(1)(ii) of this 
section that:
    (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 were qualified by the sponsor to participate in the 
project;
    (ii) The AHP subsidies were used for eligible purposes, the 
project's actual costs were reasonable and customary in accordance with 
the Bank's project feasibility guidelines, and the subsidies were 
necessary for the financial feasibility of the project, as currently 
structured; and
    (iii) The AHP-assisted units are subject to deed restrictions or 
other legally enforceable retention agreements or mechanisms meeting 
the requirements of Sec. 960.13(c)(4) or (d)(1).
    (2) Rental projects. Each Bank must take the steps necessary to 
determine that:
    (i) Within the first year after completion of a rental project, the 
services and activities committed to in the AHP application have been 
provided in connection with the project; and
    (ii) The AHP subsidies were used for eligible purposes, the 
project's actual costs were reasonable and customary in accordance with 
the Bank's project feasibility guidelines, and the subsidies were 
necessary for the financial feasibility of the project, as currently 
structured.
    (d) Annual adjustment of targeting commitments. For purposes of 
determining compliance with the targeting commitments in an AHP 
application, such commitments shall be considered to adjust annually 
according to the current applicable median income data. A rental unit 
may continue to count toward meeting the targeting commitment of an 
approved AHP application as long as the rent charged remains 
affordable, as defined in Sec. 960.1, for the household occupying the 
unit.


Sec. 960.11  Long-term monitoring requirements.

    (a) Rental projects. For purposes of monitoring a rental project, 
Banks, members, and project owners shall carry out their long-term 
monitoring obligations pursuant to one of the three methods set forth 
in this paragraph (a).
    (1) Reliance on monitoring by a federal, state or local government 
entity. For those projects that receive funds from, or are allocated 
federal Low-Income Housing Tax Credits by, a federal, state, or local 
government entity, a Bank may rely on the monitoring by such entity if:
    (i) The income targeting requirements, the rent requirements, and 
the retention period monitored by such entity for purposes of its own 
program are the same as, or more restrictive than, those committed to 
in the AHP application;
    (ii) The entity 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 entity or where the project is not habitable; 
and
    (iii) The entity has demonstrated and continues to demonstrate to 
the Bank its ability to carry out monitoring under its own program, and 
the Bank does not have information that such monitoring is not 
occurring or is inadequate.
    (2) Reliance on monitoring of AHP application commitments by a 
contractor. For those projects that receive funds from, or are 
allocated federal Low-Income Housing Tax Credits by, a federal, state, 
or local government entity that monitors for income targeting 
requirements, rent requirements, or retention periods under its own 
program that are less restrictive than those committed to in the 
project's AHP application, a Bank, in its discretion, may rely on the 
monitoring by such entity if:
    (i) The entity agrees to monitor the income targeting requirements, 
the rent requirements, and the retention period committed to in the AHP 
application;
    (ii) The entity agrees to inform the Bank of instances where tenant 
rents or incomes are found to be in noncompliance with the requirements 
committed to in the AHP application or where the project is not 
habitable; and
    (iii) The entity has demonstrated and continues to demonstrate to 
the Bank its ability to carry out such monitoring, and the Bank does 
not have information that

[[Page 41836]]

such monitoring is not occurring or is inadequate.
    (3) Long-term monitoring by the Banks, members, and project owners. 
In cases where a Bank does not rely on monitoring by a federal, state, 
or local government entity pursuant to paragraphs (a)(1) or (a)(2) of 
this section, the Bank, members, and project owners shall monitor 
rental projects according to the requirements in this paragraph (a)(3).
    (i) Requirements for project owners. In the second year after 
completion of a rental project and annually thereafter until the end of 
the project's retention period, the project owner must:
    (A) Certify to the Bank that:
    (1) The tenant rents and incomes are in compliance with the rent 
and income targeting commitments made in the AHP application; and
    (2) The project is habitable; and
    (B) Maintain documentation regarding tenant rents and incomes and 
project habitability available for review by the Bank, to support such 
certifications.
    (ii) Requirements for members. For rental projects receiving 
$500,000 or less in AHP subsidy from a member, during the period from 
the second year after project completion to the end of the project's 
retention period, the member must certify to the Bank at least once 
every three years, based on an exterior visual inspection, that the 
project appears to be suitable for occupancy.
    (iii) Requirements for Banks--(A) Certifications received by the 
Bank. Each Bank shall review certifications provided by project owners 
and members regarding tenant rents and incomes and project 
habitability.
    (B) Review of project documentation. Each Bank shall review 
documentation maintained by the project owner regarding tenant rents 
and incomes and project habitability to verify compliance with the rent 
and income targeting commitments in the AHP application and project 
habitability, according to the following schedule:
    (1) $50,001 to $250,000. For projects receiving $50,001 to $250,000 
of AHP subsidies, the Bank must review project documentation for a 
sample of the project's units at least once every six years;
    (2) $250,001 to $500,000. For projects receiving $250,001 to 
$500,000 of AHP subsidies, the Bank must review project documentation 
for a sample of the project's units at least once every four years; and
    (3) Over $500,000. For projects receiving over $500,000 of AHP 
subsidies, the Bank must perform an on-site review of project 
documentation for a sample of the project's units at least once every 
two years.
    (C) Sampling plan. A Bank may use a reasonable sampling plan to 
select the projects monitored each year and to review the project 
documentation supporting the certifications made by members and project 
owners.
    (iv) Monitoring by a contractor. A Bank, in its discretion, may 
contract with a third party to carry out the Bank's monitoring 
obligations set forth in paragraph (a)(3)(iii) of this section.
    (b) Annual adjustment of targeting commitments. For purposes of 
determining compliance with the targeting commitments in an AHP 
application, such commitments shall be considered to adjust annually 
according to the current applicable median income data. A rental unit 
may continue to count toward meeting the targeting commitment of an 
approved AHP application as long as the rent charged remains 
affordable, as defined in Sec. 960.1, for the household occupying the 
unit.


Sec. 960.12  Remedial actions for noncompliance.

    (a) Repayment of subsidies by members--(1) Noncompliance by member. 
A member shall repay to the Bank the amount of any subsidies (plus 
interest, if appropriate) that, as a result of the member's actions or 
omissions, is not used in compliance with the terms of the application 
for the subsidy, as approved by the Bank, and the requirements of this 
part, unless:
    (i) The member cures the noncompliance within a reasonable period 
of time; or
    (ii) The circumstances of noncompliance are eliminated through a 
modification of the terms of the application for the subsidy pursuant 
to Secs. 960.7 or 960.9.
    (2) Noncompliance by project sponsors or owners--(i) Duty to 
recover subsidies. A member shall recover from the sponsor of an owner-
occupied project or the owner of a rental project and repay to the Bank 
the amount of any subsidies (plus interest, if appropriate) that, as a 
result of the sponsor's or owner's actions or omissions, is not used in 
compliance with the terms of the application for the subsidy, as 
approved by the Bank, and the requirements of this part, unless:
    (A) The sponsor or owner cures the noncompliance within a 
reasonable period of time; or
    (B) The circumstances of noncompliance are eliminated through a 
modification of the terms of the application for the subsidy pursuant 
to Secs. 960.7 or 960.9.
    (ii) Limitation on duty to recover subsidies. The member shall not 
be liable to the Bank for the return of amounts that cannot be 
recovered from the project sponsor or owner through reasonable 
collection efforts by the member.
    (b) Repayment of subsidies by project sponsors or owners. A sponsor 
of an owner-occupied project and the owner of a rental project shall 
repay to the member the amount of any subsidies (plus interest, if 
appropriate) that, as a result of the sponsor's or owner's actions or 
omissions, is not used in compliance with the terms of the application 
for the subsidy, as approved by the Bank, and the requirements of this 
part, unless:
    (1) The sponsor or owner cures the noncompliance within a 
reasonable period of time; or
    (2) The circumstances of noncompliance are eliminated through a 
modification of the terms of the application for the subsidy pursuant 
to Secs. 960.7 or 960.9.
    (c) Requirements for Banks--(1) Duty to recover subsidies. A Bank 
shall recover from a member:
    (i) The amount of any subsidies (plus interest, if appropriate) 
that, as a result of the member's actions or omissions, is not used in 
compliance with the terms of the application for the subsidy, as 
approved by the Bank, and the requirements of this part; and
    (ii) The amount of any subsidies recovered by a member from the 
sponsor of an owner-occupied project or the owner of a rental project 
pursuant to the requirements of paragraph (a)(2) of this section.
    (2) Settlements. A Bank may enter into an agreement or other 
arrangement with a member for the purpose of settling claims against 
the member for repayment of subsidies. If a Bank enters into a 
settlement that results in the return of a sum that is less than the 
full amount of any AHP subsidy that is not used in compliance with the 
terms of the application for the subsidy, as approved by the Bank, and 
the requirements of this part, the Bank may be required by the Finance 
Board to reimburse its AHP fund in the amount of any shortfall under 
paragraph (c)(3) of this section, unless:
    (i) The Bank has sufficient documentation showing that the sum 
agreed to be repaid under the settlement 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

[[Page 41837]]

    (ii) The Bank obtains a determination from the Board of Directors 
that the sum agreed to be repaid under the settlement 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).
    (3) Reimbursement of AHP fund. The Finance Board may order a Bank 
to reimburse its AHP fund in an appropriate amount upon determining 
that:
    (i) As a result of the Bank's actions or omissions, AHP subsidy is 
not used in compliance with the terms of the application for the 
subsidy, as approved by the Bank, and the requirements of this part; or
    (ii) The Bank has failed to recover AHP subsidy from a member 
pursuant to the requirements of paragraph (c)(1) of this section, and 
has not shown such failure is reasonably justified, considering factors 
such as the extent of the Bank's recovery efforts.
    (d) Parties to enforcement proceedings. A Bank, in its AHP 
implementation plan, may provide for a member, project sponsor, or 
project owner to enter into a written agreement with a Bank under which 
such member, sponsor, or owner consents to be a party to any 
enforcement proceeding initiated by the Finance Board regarding the 
repayment of AHP subsidies received by such member, sponsor, or owner, 
or the suspension or debarment of such parties, provided that the 
member, sponsor, or owner has agreed to be bound by the Finance Board's 
final determination in the enforcement proceeding.
    (e) Use of repaid subsidies. Amounts repaid to a Bank pursuant to 
this section shall be made available for other AHP-eligible projects.
    (f) Suspension and debarment--(1) At a Bank's initiative. A Bank 
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 terms of an application for AHP subsidy or the 
requirements of this part.
    (2) At the Finance Board's initiative. The Finance Board may order 
a Bank to 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 terms of an application for AHP subsidy or the 
requirements of this part.
    (g) 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, under such 
terms and conditions as the Finance Board may prescribe.
    (h) Finance Board actions under this section. Except as provided in 
paragraph (c)(2)(ii) of this section, actions taken by the Finance 
Board pursuant to this section shall be subject to the Finance Board's 
Procedures for Review of Disputed Supervisory Determinations.


Sec. 960.13  Agreements.

    (a) Agreements between Banks and members. A Bank shall have in 
place with each member receiving a subsidized advance or direct subsidy 
an agreement or agreements containing the provisions set forth in this 
section.
    (b) General provisions--(1) Subsidy pass-through. The member shall 
pass on the full amount of the AHP subsidy to the project, or household 
in the case of homeownership set-aside funds, for which the subsidy was 
approved.
    (2) Use of subsidy--(i) Use of subsidy by the member. The member 
shall use the AHP subsidy in accordance with the terms of the member's 
application for the subsidy, as approved by the Bank, and the 
requirements of this part.
    (ii) Use of subsidy by the project sponsor or owner. The member 
shall have in place an agreement with the sponsor of an owner-occupied 
project and each owner of a rental project in which the sponsor or 
owner agrees to use the AHP subsidy in accordance with the terms of the 
member's application for the subsidy, as approved by the Bank, and the 
requirements of this part.
    (3) Repayment of subsidies in case of noncompliance--(i) 
Noncompliance by the member. The member shall repay subsidies to the 
Bank in accordance with the requirements of Sec. 960.12(a)(1).
    (ii) Noncompliance by a project sponsor or owner--(A) Agreement. 
The member shall have in place an agreement with the sponsor of an 
owner-occupied project and each owner of a rental project in which the 
sponsor or owner agrees to repay AHP subsidies in accordance with the 
requirements of Sec. 960.12(b).
    (B) Recovery of subsidies. The member shall recover from the 
project sponsor or owner and repay to the Bank any subsidy in 
accordance with the requirements of Sec. 960.12(a)(2).
    (4) Project monitoring--(i) Monitoring by the member. The member 
shall comply with the monitoring requirements of Secs. 960.10(b) and 
960.11(a)(3)(ii).
    (ii) Monitoring by the project sponsor. The member shall have in 
place an agreement with the sponsor of an owner-occupied project in 
which the sponsor agrees to comply with the monitoring requirements of 
Sec. 960.10(a)(1).
    (iii) Monitoring by the project owner. The member shall have in 
place an agreement with the owner of a rental project in which the 
owner agrees to comply with the monitoring requirements of 
Secs. 960.10(a)(2) and 960.11(a)(3)(i).
    (5) Transfer of AHP obligations to another member. The member will 
make best efforts to transfer its obligations under the approved 
application for AHP subsidy to another member in the event of its loss 
of membership in the Bank prior to the Bank's final disbursement of AHP 
subsidies.
    (c) Special provisions where members obtain subsidized advances--
(1) Repayment schedule. The term of the subsidized advance shall be no 
longer than the term of the member's loan to the project funded by the 
advance, and at least once in every 12-month period, the member shall 
be scheduled to make a principal repayment to the Bank equal to the 
amount scheduled to be repaid to the member on its loan to the project 
in that period.
    (2) Prepayment fees. Upon a prepayment of the subsidized advance, 
the Bank shall charge a prepayment fee only to the extent the Bank 
suffers an economic loss from the prepayment.
    (3) Treatment of loan prepayment by project. If all or a portion of 
the loan or loans financed by a subsidized advance are prepaid by the 
project to the member, the member may, at its option, either:
    (i) Repay to the Bank that portion of the advance used to make the 
loan or loans to the project, and be subject to a fee imposed by the 
Bank sufficient to compensate the Bank for any economic 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 advance; or
    (ii) Continue to maintain the advance outstanding, subject to the 
Bank resetting the interest rate on that portion of the advance used to 
make the loan or loans to the project to a rate equal to the cost of 
funds originally used by the Bank to calculate the interest rate 
subsidy incorporated in the advance.

[[Page 41838]]

    (4) Retention agreements for owner-occupied units. The member shall 
ensure that an owner-occupied unit financed by a loan from the proceeds 
of a subsidized advance is subject to a deed restriction or other 
legally enforceable retention agreement or 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; and
    (ii) 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 or other legally enforceable retention 
agreement or mechanism described in this paragraph (c)(4).
    (5) Retention agreements for rental projects. The member shall 
ensure that a rental project financed by a loan from the proceeds of a 
subsidized advance is subject to a deed restriction or other legally 
enforceable retention agreement or mechanism requiring that:
    (i) 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;
    (ii) 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;
    (iii) In the case of a sale or refinancing of the project 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 sale or refinancing, 
shall be repaid to the Bank, unless the project continues to be subject 
to a deed restriction or other legally enforceable retention agreement 
or mechanism incorporating the income-eligibility and affordability 
restrictions committed to in the AHP application for the duration of 
the retention period; and
    (iv) The income-eligibility and affordability restrictions 
applicable to the project may terminate upon foreclosure or upon 
transfer in lieu of foreclosure.
    (6) Transfer of AHP obligations to a nonmember. If, after final 
disbursement of AHP subsidies to the member, the member undergoes an 
acquisition or a consolidation resulting in a successor organization 
that is not a member of the Bank, the nonmember successor organization 
assumes the member's obligations under its approved application for AHP 
subsidy upon prepayment or orderly liquidation by the nonmember of the 
subsidized advance.
    (d) Special provisions where members obtain direct subsidies--(1) 
Retention agreements for owner-occupied units. The member shall ensure 
that an owner-occupied unit financed by the proceeds of a direct 
subsidy is subject to a deed restriction or other legally enforceable 
retention agreement or 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, an amount equal to a pro rata share of the direct 
subsidy, reduced for every year the occupying household has owned the 
unit, 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 or other legally enforceable retention agreement or 
mechanism described in this paragraph (d)(1).
    (2) Retention agreements for rental projects. The member shall 
ensure that a rental project financed by the proceeds of a direct 
subsidy is subject to a deed restriction or other legally enforceable 
retention agreement or mechanism requiring that:
    (i) 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;
    (ii) 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;
    (iii) In the case of a sale or refinancing of the project prior to 
the end of the retention period, an amount equal to the full amount of 
the direct subsidy shall be repaid to the Bank, unless the project 
continues to be subject to a deed restriction or other legally 
enforceable retention agreement or mechanism incorporating the income-
eligibility and affordability restrictions committed to in the AHP 
application for the duration of the retention period; and
    (iv) The income-eligibility and affordability restrictions 
applicable to the project may terminate upon foreclosure or upon 
transfer in lieu of foreclosure.
    (3) Lending of direct subsidies. If a member or a project sponsor 
lends a direct subsidy to a project, any repayments of principal and 
payments of interest received by the member or the project sponsor must 
be paid forthwith to the Bank.
    (4) Transfer of AHP obligations to a nonmember. If, after final 
disbursement of AHP subsidies to the member, the member undergoes an 
acquisition or a consolidation resulting in a successor organization 
that is not a member of the Bank, the nonmember successor organization 
assumes the member's obligations under its approved application for AHP 
subsidy.


Sec. 960.14  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. 960.2 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) Board of Directors review of application for temporary 
suspension--(1) Determination of financial instability. In determining 
the financial instability of a Bank, the Board of Directors 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

[[Page 41839]]

    (iii) Whether there has been a substantial reduction in the Bank's 
advances outstanding.
    (2) Limitations on grounds for suspension. The Board of Directors 
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) Board of Directors decision. The Board of Directors' decision 
shall be in writing and shall be accompanied by specific findings and 
reasons for its action. If the Board of Directors approves a Bank's 
application for a temporary suspension, the Board of Directors' 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 Board of Directors, the affected Bank shall provide to the Board 
of Directors such financial reports as the Board of Directors 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 Board of Directors determines that the 
Bank has returned to a position of financial stability, the Board of 
Directors 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. 960.15  Affordable Housing Reserve Fund.

    (a) Reserve Fund--(1) 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. 960.2, 90 percent of the unused or uncommitted amount 
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.
    (2) Use or commitment of funds. Approval of applications for AHP 
subsidies sufficient to exhaust the amount a Bank is required to 
contribute pursuant to Sec. 960.2 shall constitute use or commitment of 
funds. Amounts remaining unused or uncommitted at year-end are deemed 
to be used or committed if, in combination with AHP subsidies that have 
been returned to the Bank or de-committed from canceled projects, they 
are insufficient to fund:
    (i) The next highest scoring AHP application in the Bank's final 
funding period of the year for its competitive application program; or
    (ii) Pending applications for funds under the Bank's homeownership 
set-aside programs.
    Such insufficient amounts shall be carried over for use or 
commitment during the following year.
    (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. 960.16  Application to existing AHP projects.

    The requirements of section 10(j) of the Act and the provisions of 
this part, as amended, are incorporated into all agreements between 
Banks, members, sponsors, or owners receiving AHP subsidies. To the 
extent the requirements of this part are amended from time to time, 
such agreements are deemed to incorporate the amendments to conform to 
any new requirements of this part. No amendment to this part shall 
affect the legality of actions taken prior to the effective date of 
such amendment.

    By the Board of Directors of the Federal Housing Finance Board.
    Dated: June 25, 1997.
Bruce A. Morrison,
Chairman.
[FR Doc. 97-20046 Filed 8-1-97; 8:45 am]
BILLING CODE 6725-01-U