[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Proposed Rules]
[Pages 53251-53253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26893]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 933 and 935
[No. 97-60]
RIN 3069-AA69
Eligibility for Membership and Advances
AGENCY: Federal Housing Finance Board.
ACTION: Proposed rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
to amend certain of its regulations relating to combination business or
farm properties on which a residence is located. The amendments would
eliminate the requirement that at least 50 percent of the value of such
properties be attributable to the residential portion of the property
(50 percent test). The amendments are intended to assist smaller
depository institutions, particularly those located in rural areas, to
qualify for Federal Home Loan Bank (Bank) membership and, once
admitted, to provide the collateral necessary to obtain advances.
DATES: The Finance Board will accept comments on this proposed rule in
writing on or before November 13, 1997.
ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,
Federal Housing Finance Board, 1777 F Street, N.W., Washington DC
20006. Comments will be available for public inspection at this
address.
FOR FURTHER INFORMATION CONTACT: Julie Paller, Senior Financial
Analyst, Office of Policy, (202) 408-2842, or Neil R. Crowley,
Associate General Counsel, Office of General Counsel, (202) 408-2990,
Federal Housing Finance Board, 1777 F Street, N.W., Washington DC
20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
Section 4(a) of the Federal Home Loan Bank Act (Bank Act), 12
U.S.C. 1424(a), establishes the eligibility criteria for depository
institutions to become members of the Federal Home Loan Bank System
(Bank System). Section 10(a) of the Bank Act, id. 1430(a), authorizes a
Bank to make secured advances to its members and specifies the types of
collateral that a Bank may accept when originating or renewing an
advance. With respect to both membership criteria and eligible
collateral, the regulations of the Finance Board permit the use of
loans that are secured by business or farm properties on which there is
a residence, but only if the value of the residential portion equals or
exceeds 50 percent of the value of the entire parcel. The Finance Board
is concerned that those regulations may be overly restrictive and
therefore is proposing to amend them, as described below.
A. Membership
Section 4(a)(2) of the Bank Act requires, in part, that an insured
depository institution have ``at least 10 percent of its total assets
in residential mortgage loans'' in order to be eligible for membership.
Id. 1424(a)(2). The Finance Board has defined ``residential mortgage
loan'' to include, among other things, a ``home mortgage loan.'' 12 CFR
933.1(bb). The Finance Board has defined ``home mortgage loan'' to
include, in part, a loan secured by a first lien on ``combination
business or farm property where at least 50 percent of the total
appraised value of the combined property is attributable to the
residential portion of the property.'' Id. Sec. 933.1(n)(1)(iii). The
term ``combination business or farm property'' means real property for
which the value is attributable to residential, and business or farm
uses. Id. Sec. 933.1(i).
B. Collateral for Advances
Section 10(a)(1) of the Bank Act requires a Bank making or renewing
an advance to its members to maintain a security interest in certain
specified types of collateral, among which are ``first mortgages on
improved residential property.'' 12 U.S.C. 1430(a)(1). The Finance
Board has defined ``improved residential real property'' to mean
``residential real property excluding real property to be improved, or
in the process of being improved, by the construction of dwelling
units.'' 12 CFR 935.1. The Finance Board has defined ``residential real
property'' to include, among other things, ``combination business or
farm property, provided that at least 50 percent of the total appraised
value of the combined property is attributable to the residential
portion of the property.'' Id. The term ``combination business or farm
property'' means ``real property for which the total appraised value is
attributable to the combination of residential, and business or farm
uses.'' Id.
II. Analysis of the Proposed Rule
The Finance Board believes that community depository institutions,
particularly those located in rural areas, often are essential to the
housing finance activities and the broader economic well-being of the
communities they serve. Such institutions may have less demand for
conventional single and multi-family mortgage credit and their service
areas may be characterized by low population density and a low level of
economic activity. In such circumstances, those institutions may not be
able to originate a substantial number of residential first mortgage
loans. Moreover, many loans originated by rural banks may be made on
the security of family farms, which
[[Page 53252]]
are in part residential but which often cannot meet the 50 percent
test.
The existing regulations preclude a Bank from recognizing or
accepting a first mortgage loan on combination property unless the
value of the residential portion equals or exceeds 50 percent of the
total value of the property. That requirement may hinder the ability of
community depository institutions, particularly those in rural areas,
to become members of the Bank System or, for those that are able to
join, to take full advantage of the opportunity to obtain advances. The
Finance Board believes that the membership and advances regulations
should recognize the unique aspects of the lending practices of such
institutions, and has determined that it is appropriate to reconsider
whether to retain the 50 percent test in either the membership or
collateral regulation.
There is nothing in the Bank Act that mandates that the residential
portion of such combination properties constitute a specified
percentage of the property's total appraised value. With respect to
eligibility for membership, the only statutory mandate is that the loan
must be secured by real estate on which there is a residence. 12 U.S.C.
1422 (5), (6). With respect to the use of whole first mortgages as
collateral for advances, the only statutory mandate is that they attach
to real property that previously has been improved. Id. 1430(a)(1).
Subject to those requirements, the Finance Board has the authority to
determine what types of combination property may be considered to be
``residential'' for purposes of the ``residential mortgage loan''
aspect of the eligibility requirements and for the ``residential real
property'' aspect of the collateral requirements. Because the 50
percent test is more restrictive than the Bank Act requires, and may
well exclude from consideration a significant number of loans that are
secured, at least in part, by a home, the Finance Board is proposing to
eliminate the ``50 percent'' requirement in both regulations.
The proposed rule would amend the definition of ``home mortgage
loan'' in the membership regulations to allow a loan secured by a
combination property to be considered a ``home mortgage loan'' if a
permanent structure is located on the property and it actually is used
as a residence. See 12 CFR 933.1(n)(1)(iii). The proposed rule would
make the same changes to the definition of ``residential real
property'' in the collateral provisions of the advances regulation. See
id. Sec. 935.1. Eliminating the 50 percent requirement should allow a
greater number of loans secured by combined use assets to be considered
``residential mortgage loans'' or ``improved residential property,''
thus easing the membership eligibility and collateral requirements,
respectively. The definitions would exclude any farm or business
property that only occasionally is used for residential purposes, such
as temporary, migrant, or seasonal housing, because such properties
lack the characteristics of permanence and regular residential use
generally associated with typical combination properties, such as a
family farm or a family business.
The Finance Board believes that any additional risks that might
arise if such mortgage loans are used as collateral for advances should
be adequately managed in accordance with the current provisions of the
advances regulation. Among other things, the advances regulation
requires the Banks to establish written procedures for determining the
value of collateral, and to follow those procedures in ascertaining the
value of a particular asset offered as collateral. The regulation also
permits the Banks to require a member to support the valuation of any
collateral with an appraisal or other investigation of the collateral
as the Bank deems necessary. Id. Sec. 935.12. Rural lending often
requires collateral valuation practices that may differ significantly
from those typically employed in lending on the security of one-to-four
family homes. The Finance Board expects that if the proposed amendments
are adopted as a final rule each Bank will review its collateral
valuation procedures, and will amend them as necessary to reflect the
changes made by the amendments, before accepting as collateral any
newly authorized combination properties. The Finance Board also expects
that the Banks, as a matter of practice, will conduct careful review
and, if necessary, require an appraisal of such collateral, taking into
account the additional risks inherent in rural lending and each Bank's
own capability to evaluate those risks.
With respect to the advances regulation, the Finance Board requests
comments on whether elimination of the percentage requirement might
expose the Banks to any undue risk of loss should a Bank need to
liquidate the mortgage loans it holds as collateral. For example, the
value of a mortgage on a farm property, even one on which there is a
residence, may be more volatile than the value of a mortgage on a one-
to-four family home, reflecting the greater volatility of the value of
the underlying property. In addition, a mortgage on a combination
property may be less liquid than a mortgage on a one-to-four family
home. The Finance Board solicits comments on whether it should address
these issues through regulation, such as by retaining a percentage of
value requirement for collateral purposes, albeit at a level less than
the 50 percent test. The Finance Board also solicits comments on
whether there are apt to be any practical difficulties in implementing
the proposed definitions. For example, will a member's loan files for a
loan secured by farm property necessarily indicate whether the farm
property also includes a residential structure and, if so, whether it
actually is used as a residence?
The proposed rule also would amend Sec. 933.1(bb) by adding a new
paragraph (8) that would include as ``residential mortgage loans'' for
membership purposes any loans that, if made by a member, would satisfy
the statutory and regulatory requirements for loans made under the
Community Investment Program (CIP) or under the community investment
cash advance provisions of the Bank Act. The community investment cash
advance program is a cash advance program that may be established by
the Banks under section 10(j)(10) of the Bank Act, and includes the
CIP, a program of ``community-oriented mortgage lending'' required by
section 10(i) of the Bank Act. 12 U.S.C. 1430 (i), (j)(10).
``Community-oriented mortgage lending'' is defined as lending for
homeownership, multifamily housing and commercial and economic
development that benefits certain targeted populations or
neighborhoods. Id. 1430(i). Under this provision, if the purpose of a
loan were to meet the statutory standards, including any future
regulatory standards, for these loan programs, the loan could be
considered for purposes of the membership criteria. The amendment would
not require that the transaction also result in a loan that is eligible
for collateral under the advances regulation. The effect of this
provision would be to allow such assets to be considered as residential
mortgage loans for purposes of eligibility for membership, and would
conform the membership regulation more closely to the advances
regulation, which already includes loans financed by CIP advances
within the definition of ``residential housing finance assets.'' See 12
CFR 935.1.
III. Regulatory Flexibility Act
The proposed rule would not impose any additional reporting,
recordkeeping, or compliance requirements on prospective or current
Bank members.
[[Page 53253]]
Although the Finance Board anticipates that the proposed rule will be
of benefit primarily to small depository institutions, it will not have
a disproportionate impact on small entities. Therefore, in accordance
with the Regulatory Flexibility Act, the Finance Board hereby certifies
that this proposed rule, if promulgated as a final rule, will not have
a significant economic impact on a substantial number of small
entities. 5 U.S.C. 605(b).
IV. Paperwork Reduction Act
The proposed rule does not contain any collections of information,
as defined by the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501
et seq. Consequently, the Finance Board has not submitted any
information to the Office of Management and Budget for review.
List of Subjects
12 CFR Part 933
Federal home loan banks, Reporting and recordkeeping requirements.
12 CFR Part 935
Credit, Federal home loan banks, Reporting and recordkeeping
requirements.
Accordingly, the Federal Housing Finance Board hereby proposes to
amend title 12, chapter IX, parts 933 and 935 of the Code of Federal
Regulations as follows:
PART 933--MEMBERS OF THE BANKS
1. The authority citation for part 933 continues to read as
follows:
Authority: 12 U.S.C. 1422a, 1422b, 1424, 1426, 1430, 1442.
2. Amend Sec. 933.1 by revising paragraph (n)(1)(iii), removing
``or'' at the end of paragraph (bb)(6)(iii), removing the period at the
end of paragraph (bb)(7) and adding ``; or'' in its place, and adding
paragraph (bb)(8) to read as follows:
Sec. 933.1 Definitions.
* * * * *
(n) Home mortgage loan * * *
(1) * * *
(iii) Combination business or farm property, on which is located a
permanent structure actually used as a residence, other than for
temporary or seasonal housing; or
* * * * *
(bb) Residential mortgage loan * * *
(8) Loans that finance properties or activities that, if made by a
member, would satisfy the statutory requirements for the Community
Investment Program established under section 10(i) of the Bank Act, or
the regulatory requirements established for any community investment
cash advance program authorized by section 10(j)(10) of the Bank Act.
* * * * *
PART 935--ADVANCES
1. The authority citation for part 935 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430,
1430b, and 1431.
2. Amend Sec. 935.1 by revising paragraph (1)(v) in the definition
of ``Residential real property'' to read as follows:
Sec. 935.1 Definitions.
* * * * *
Residential real property * * *
(1) * * *
(v) Combination business or farm property, on which is located a
permanent structure actually used as a residence, other than for
temporary or seasonal housing.
* * * * *
Dated: September 10, 1997.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 97-26893 Filed 10-10-97; 8:45 am]
BILLING CODE 6725-01-U