[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