[Federal Register Volume 63, Number 89 (Friday, May 8, 1998)]
[Proposed Rules]
[Pages 25718-25726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11951]



[[Page 25717]]

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Part IV





Federal Housing Finance Board





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12 CFR Parts 935, and 970



Community Investment Cash Advance Programs and Federal Home Loan Bank 
Standby Letters of Credit; Proposed Rules

  Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 / Proposed 
Rules  

[[Page 25718]]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 935, and 970

[No. 98-16]
RIN 3069-AA75


Community Investment Cash Advance Programs

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
a rule establishing a general framework under which the Federal Home 
Loan Banks (Bank) may establish community investment cash advance 
(CICA) programs in addition to their Affordable Housing Programs (AHP) 
and Community Investment Programs (CIP). The proposed rule does not 
require a Bank to establish CICA programs. It is intended to provide 
the Banks with an outline of what the Finance Board has determined will 
meet the statutory requirement that CICA programs support community 
investment.
    The proposed rule is intended to establish one set of general 
standards governing all CICA programs, including the Banks' CIPs. The 
proposed rule, however, does not apply to a Bank's AHP, which is 
governed specifically by part 960 of the Finance Board's regulations. 
In addition to establishing a general outline for CICA programs, the 
proposed rule establishes standards for two specific CICA programs a 
Bank may establish: the Rural Development Advances (RDA) and the Urban 
Development Advances (UDA) programs. The proposed standards for the RDA 
and the UDA programs are intended to create a safe harbor for programs 
that the Finance Board would consider to meet the statutory requirement 
that CICA programs support community investment. A Bank will not be 
required to obtain prior Finance Board approval of CICA programs the 
Bank may create. However, all such programs will be subject to review 
through the examination process to determine whether they support what 
the Finance Board considers to be community investment financing.

DATES: Comments on this proposed rule must be received in writing on or 
before August 6, 1998.

ADDRESSES: Comments should be mailed to: Elaine L. Baker, Secretary to 
the Board, Federal Housing Finance Board, 1777 F Street, N.W., 
Washington, D.C. 20006. Comments will be available for public 
inspection at this address.

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Deputy Director, 
Market Research, (202) 408-2537, Stanley Newman, Associate Director, 
Market Research, (202) 408-2812, or Diane E. Dorius, Associate 
Director, Program Development, (202) 408-2576, Office of Policy; 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

    The Banks currently have broad authority under section 10(a) of the 
Federal Home Loan Bank Act (Bank Act) and part 935 of the Finance 
Board's regulations to make advances in support of housing finance, 
including housing for very low-, low- and moderate-income families. See 
12 U.S.C. 1430(a); 12 CFR part 935. Furthermore, in the Financial 
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), 
Congress required the Banks to create two specific programs, the AHP 
and the CIP, to provide advances in support of unmet housing finance 
and economic development credit needs. See Pub. L. 101-73, section 721, 
103 Stat. 183 (Aug. 9, 1989).
    The AHP is a subsidy program through which the Banks support the 
finance of affordable owner-occupied and rental housing. See 12 U.S.C. 
1430(j). The Finance Board first issued implementing regulations for 
the AHP in 1990. See 12 CFR Part 960.
    The CIP is a program through which the Banks provide advances to 
members at cost to support the financing of housing benefiting families 
with incomes at or below 115 percent of the area median income and 
economic development activities benefiting families with incomes at or 
below 80 percent of the area median income. See 12 U.S.C. 1430(i)(2). 
The Finance Board previously has not promulgated regulations 
implementing the CIP.
    Section 10(j)(10) of the Bank Act authorizes the Banks to establish 
CICA programs in addition to the CIP and the AHP to support ``community 
investment.'' See id. section 1430(j)(10). The Finance Board has not 
previously promulgated regulations or other specific guidance on what 
kinds of Bank lending are permitted under this authority.
    Since the establishment of the Banks' statutory authority to make 
advances for community investment under FIRREA, the Banks have provided 
relatively less long-term credit for economic development projects than 
for housing, and all of the Banks' economic development lending has 
been done under their CIP authority, as opposed to their authority to 
establish other CICA programs. In the past eight years, the Banks have 
provided $18.1 billion in CIP advances to finance 368,359 housing 
units. Only 25 percent of those units have been multifamily or rental 
units that often provide housing for lower-income families and are 
usually more difficult to finance than single-family owner-occupied 
housing. In addition, only $751 million or 4 percent of CIP advances 
have financed economic development projects. Furthermore, CIP advances 
are not available to the Banks' nonmember borrowers. See id. section 
1430(i)(1).
    The Finance Board believes there is a need for long-term financing 
for economic development in urban and rural areas that is not being met 
by members using the CIP. The Banks can help to meet this need through 
the establishment of other CICA programs to provide long-term financing 
for economic development through both members and nonmember borrowers. 
Therefore, the Finance Board now is proposing to establish standards 
defining the kinds of housing and economic development activities that 
constitute ``community investment'' eligible to be financed by advances 
under section 10(j)(10) of the Bank Act. This proposed rule does not 
require a Bank to establish a CICA program; it is intended to provide 
the Banks with an outline of what the Finance Board has determined will 
meet the statutory requirement for ``community investment'' under 
section 10(j)(10). See id. However, all such programs will be subject 
to review through the examination process to determine whether they 
support what the Finance Board considers to be community investment 
financing, in compliance with the statutory requirement.
    The Finance Board specifically requests comment on whether it 
should establish CICA standards, in whole or in part, in a form other 
than a regulation. Would establishing such standards in the form of a 
policy statement or guidelines be a more effective means of achieving 
the goal of promoting the Banks' support for community investment 
financing, and if so, why? The Finance Board is interested particularly 
in the comments of the potential users of CICA program advances, i.e., 
members and nonmember borrowers, as well as the potential end users of 
CICA-financed credit products, such as developers of housing and 
commercial properties.

[[Page 25719]]

II. Analysis of Proposed Rule

A. Overview

    The proposed rule adds a new Part 970 to the Finance Board's 
regulations. Part 970 establishes a framework for the Banks to create 
CICA programs to provide advances to members, nonmember borrowers, or 
both, who in turn use the advances to provide long-term financing for 
housing and economic development projects that benefit families with 
incomes at or below a targeted income level, as established by a Bank 
to address unmet community investment credit needs. Projects with unmet 
credit needs are those for which financing is not generally available, 
or is available at lower levels or under less attractive terms.

B. Annual CICA Program Goals--Section 970.3

    Each Bank should undertake a deliberate decision making process to 
determine how much community investment credit it intends to make 
available each year, through its CIP and other CICA programs, and the 
kinds of projects to which that credit should be directed. As discussed 
above, the current focus of the Banks' community investment lending 
efforts has been through volume lending under the CIP in support of 
home mortgage loans, to the relative exclusion of economic development 
financing. The Banks' concentration on funding large volumes of CIP-
eligible home mortgage loans may have been encouraged by the CIP target 
system established in the past by the Finance Board, which was based on 
a Bank's average annual outstanding CIP advances. The Finance Board 
wishes to reverse this trend and to encourage the Banks to shift their 
focus from the overall volume of CIP advances to maximizing the impact 
of individual advances. Although the Bank Act does not expressly state 
that a Bank may establish limits on the amount of CIP advances it 
makes, the Finance Board believes that because the CIP is a no-profit 
program for the Banks, the supply of CIP advances is necessarily 
limited. Consequently, as discussed further below, the proposed rule 
makes clear each Bank's authority to determine the appropriate amount 
of CIP credit to make available on an annual basis. However, with the 
authority to limit the amount of available CIP credit comes the 
obligation to target how the opportunity cost associated with CIP 
advances is to be used most effectively in relation to the kinds of CIP 
projects the Bank funds.
    As discussed above, the Banks provide CIP advances to members at 
cost. See id. Therefore, where a Bank funds a member's mortgage lending 
with CIP advances, there is an opportunity cost to the Bank to the 
extent the Bank could have used regular advances to fund the 
transaction. CIP advances should be used to fund those loans and 
projects where the opportunity cost associated with the advance makes 
the most difference to the member or the project. The Banks have ample 
authority to make regular advances to support home mortgage lending 
currently being undertaken by members. To the extent that CIP capacity 
is made available by substituting regular advances funding, where 
appropriate, for home mortgage lending that is currently being funded 
under the CIP, a Bank can redirect the CIP to meeting unmet housing and 
economic development credit needs.
    In order to implement these concepts, Sec. 970.3 of the proposed 
rule provides that a Bank may establish an annual budget for the 
cumulative discount the Bank intends to make available under its CIP 
and other CICA programs (excluding AHP) the Bank may establish. The 
budget should be based upon the Bank's projected annual totals of CIP 
advances and other CICAs that the Bank intends to make, and the extent 
to which the Bank intends to provide a pricing discount, if any, for 
such other CICAs. A Bank also may include pricing discounts the Bank 
intends to offer for letters of credit in support of targeted economic 
development financing. In determining projected annual totals for CIP 
and other CICA program advances, a Bank should take into account its 
earnings. If a Bank establishes a budget for the cumulative discount 
available under its CICA programs, the Bank also should establish 
standards for allocating the discount among specific types of eligible 
housing finance and economic development activities. In the absence of 
such a budget, the Bank must fund requests from qualified members or 
nonmember borrowers for any advances that otherwise meet the 
requirements of the Bank's CIP or any other CICA Program the Bank may 
create.
    A Bank's determination as to how much CIP credit to make available 
annually must be based upon the extent to which the Bank intends to 
make community investment credit available under other CICA programs. 
In the case of CIP advances, each Bank must establish a strategy for 
providing CIP advances to support financing for housing and economic 
development projects that is otherwise not generally available, or is 
available at lower levels or under less attractive terms. For example, 
CIP advances could be directed to housing projects designed to improve 
the affordability of the housing through lower downpayments, longer 
term financing, and use of subsidies from other sources, or projects 
involving homebuyer counseling. A Bank's strategy may include the 
establishment of partnerships with government and private entities that 
provide funds to projects in conjunction with CIP advances and other 
CICAs in order to further reduce the cost of such financing. In 
developing its strategy, a Bank must consult with urban and rural 
economic development organizations in the Bank's District and the 
Bank's Advisory Council. The Finance Board requests comments on how 
information about a Bank's CIP and other CICA programs, including any 
projected annual totals for advances under such programs, could best be 
disseminated to Bank members and nonmember borrowers, as well as to 
other interested members of the public.

C. Definitions--Section 970.4

1. Definition of Benefit
    Under each CICA program, a Bank may make advances to support 
housing and economic development projects that benefit families with 
incomes at or below a certain targeted income level. The proposed rule 
uses the same definition of the term ``benefit'' for all CICA programs. 
Section 970.4 of the proposed rule defines ``benefit'' based on whether 
the project is for economic development or for housing, and on the form 
of the housing, such as owner-occupied or rental. Specifically, an 
economic development project is deemed to benefit families with incomes 
at or below a targeted income level if: (1) The project is located in a 
neighborhood in which more than 50 percent of the families have incomes 
at or below the targeted income level; (2) the project is located in a 
rural Champion Community, or a rural Empowerment Zone or rural 
Enterprise Community, as designated by the Secretary of Agriculture (in 
the case of projects located in rural areas); (3) the project is 
located in an urban Champion Community, or an urban Empowerment Zone or 
urban Enterprise Community, as designated by the Secretary of HUD (in 
the case of projects located in urban areas); (4) the project is 
located in a federally declared disaster area; (5) the project involves 
property eligible for a federal Brownfield Tax Credit; (6) the project 
is located in an area affected by a federal military base closing or 
realignment; (7) the project is located in an area identified as a 
designated

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community under the Community Adjustment and Investment Program, which 
is a joint program of the federal government and the North American 
Development Bank established in connection with the passage of the 
North American Free Trade Agreement (NAFTA) to promote economic 
opportunities in communities that have experienced job losses related 
to the implementation of the NAFTA; (8) the annual salaries for at 
least 75 percent of the permanent full-and part-time jobs, computed on 
a full-time equivalent basis, created or retained by the project, other 
than construction jobs, are at or below the targeted income level; (9) 
the project qualifies as a small business concern, as defined under the 
Small Business Act; or (10) more than 50 percent of the families who 
otherwise benefit from (other than through employment) or are provided 
services by the project have incomes at or below the targeted income 
level. The Finance Board specifically requests comment on whether 
measuring the salaries of jobs created by a project is an effective way 
to determine whether the project benefits families with incomes at or 
below a targeted level.
    A housing project is deemed to benefit families with incomes at or 
below a targeted income level if the project involves: (1) Owner-
occupied units, each of which is purchased or owned by a family with an 
income at or below the targeted income level; (2) multi-unit, owner-
occupied housing in which more than 50 percent of the units are owned 
or purchased by families with incomes at or below the targeted income 
level; (3) multifamily rental housing where more than 50 percent of the 
units in the project will be occupied by, or the rents will be 
affordable to, families with incomes at or below the targeted income 
level; or (4) manufactured housing parks where either substantially all 
of the resident families have incomes at or below the targeted income 
level, or the project is located in a neighborhood where more than 50 
percent of the families have incomes at or below the targeted income 
level.
2. Forms of Financing
    Section 10(i)(1) of the Bank Act requires the Banks to establish a 
CIP to provide funding for members, who in turn, provide loans to 
finance CIP-eligible activities. See id. section 1430(i)(1). Most of 
the Banks have implemented this statutory requirement by providing 
advances to members to fund the origination of loans financing CIP-
eligible activities. The proposed rule adopts a more expansive reading 
of the meaning of the statutory language authorizing CIP advances to be 
used by members to ``provide loans.'' See id. Specifically, the 
proposed rule authorizes CIP advances and other CICA advances to be 
used not only to fund CICA-eligible loan originations but also to 
purchase mortgage revenue bonds (MRB) and mortgage-backed securities 
(MBS) where all of the loans financed by such bonds and all of the 
loans backing such securities are CICA-eligible loans. See proposed 
Sec. 970.3 (definition of ``providing financing''). The proposed rule 
also authorizes CICA advances to be used by members to create or 
maintain a secondary market for loans, where all such loans are CICA-
eligible loans. The Finance Board believes that these are additional 
means of providing loans for the financing of CICA-eligible activities, 
in accordance with the intent of the statute, because they create 
liquidity in the market for CICA-eligible loans.
3. Income Limits
    The Bank Act does not specifically require the income limits for 
the CIP or other CICA programs to be based on median income data 
published by the Department of Housing and Urban Development (HUD). A 
``low-or moderate-income household'' is defined in the Bank Act as a 
household with an income of 80 percent or less of the area median 
income. See 12 U.S.C. 1430(j)(13)(B). A ``low-or moderate-income 
neighborhood'' is defined as a neighborhood in which 51 percent or more 
of the households are low-or moderate-income households. See id. 
section 1430(j)(13)(C).
    For purposes of the Banks' AHPs, the Finance Board permits each 
Bank to choose among several median income standards for owner-occupied 
and rental projects. See 12 CFR 960.1. In the case of owner-occupied 
projects, ``area median income'' may be defined as: (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; 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. See id. In the case of rental projects, ``area 
median income'' may be defined 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. See id. In order to provide uniformity between the 
AHP and other CICA programs, the proposed rule permits a Bank, for 
purposes of its CICA programs, to choose among the median income 
standards identified in the AHP regulation. The Finance Board 
specifically requests comments on defining income limits for CICA 
programs based upon median income data other than that published 
annually by HUD.

D. Provisions Governing the CIP--Section 970.5

    As discussed above, the Finance Board has not previously issued a 
regulation governing the CIP. The Banks currently operate their CIPs 
under the applicable statutory provisions in section 10(i) of the Bank 
Act. See 12 U.S.C. 1430(i). The Finance Board has provided some 
interpretations of section 10(i) in instances where there is ambiguity 
in the statutory provisions, and in the absence of Finance Board 
interpretations, the Banks have made their own interpretations for 
purposes of program implementation. This process of experimentation 
among the Banks in the context of the CIP, closely monitored by the 
Finance Board, was useful in the beginning of the program. It also has 
resulted in inconsistencies among the Banks in the implementation of 
the program, and left many questions unanswered. Consequently, the 
proposed rule is intended to establish one set of standards governing 
all CICA programs, taking into account the specific statutory 
requirements governing the CIP, previous interpretations, and other 
questions of which the staff is aware.
1. Housing Projects
    Section 10(i)(2)(A) and (B) of the Bank Act authorize the Banks to 
finance: (1) Home purchases by families whose income does not exceed 
115 percent of median income for the area, and (2) the purchase or 
rehabilitation of housing for occupancy by families whose income does 
not exceed 115 percent of median income for the area. See id. sections 
1430(i)(2)(A), (B). Section 970.5(b) of the proposed rule implements 
this provision by defining the following housing activities that 
qualify for CIP financing : (1) the purchase or construction of owner-
occupied housing

[[Page 25721]]

units; (2) the purchase or rehabilitation of rental housing; (3) the 
purchase or rehabilitation of manufactured housing parks; and (4) the 
purchase or rehabilitation of housing for the homeless.
    While manufactured housing parks have aspects of both owner-
occupied and rental housing projects, they do not fit clearly within 
the categories for single-family or rental housing projects described 
under the CIP provisions of the Bank Act. Furthermore, ensuring that 
the population of occupants in a manufactured housing park meets the 
relevant income eligibility requirements for the CIP is more difficult 
than in the context of financing other kinds of housing. For instance, 
most occupants of manufactured housing located in such parks own their 
homes but rent the space on which their homes are located. Verification 
of income is not a usual practice in the course of renting space to the 
owner of a manufactured home. Therefore, it is difficult to verify that 
the resident families in a manufactured housing park are income-
eligible.
    Nonetheless, the Finance Board believes that the financing of 
manufactured housing parks should be permitted under the CIP and other 
CICA programs. Consequently, under Sec. 970.4 of the proposed rule, a 
manufactured housing park is deemed to benefit families with targeted 
incomes if either: (1) substantially all of the resident families have 
incomes at or below the targeted income level, or (2) the project is 
located in a neighborhood where more than 50 percent of the families 
have incomes at or below the targeted income level. The latter 
criterion is intended as a proxy for the requirement that each resident 
family is income-eligible.
2. Economic Development Projects
    Section 10(i)(2)(C) of the Bank Act authorizes CIP funding to be 
used to finance commercial and economic development activities that 
benefit low-and moderate-income families or activities that are located 
in low-and moderate-income neighborhoods. See id. Sec. 1430(i)(2)(C). 
The proposed rule implements this provision by defining the kinds of 
economic development activities that qualify for CIP financing.
    Section 970.4 of the proposed rule defines ``economic development 
projects'' as: (1) commercial, manufacturing, social service, and 
public facility projects and activities; and (2) the construction or 
rehabilitation of public or private infrastructure, such as roads, 
utilities, and sewers. In order to be CIP-eligible, a loan must finance 
an economic development project that benefits families with incomes at 
or below 80 percent of the area median income. As discussed above, an 
economic development project is deemed to benefit such families if it 
meets the definition of ``benefit'' under Sec. 970.4 of the proposed 
rule.
3. Use of CIP Advances for Refinancing
    Section 970.5(d) clarifies that a member may use CIP advances to 
provide refinancing for owner-occupied and rental housing projects 
provided that the proceeds of any equity taken out of such projects are 
used to rehabilitate the projects or to preserve affordability for 
current residents. Where refinancing is done to preserve affordability 
for current residents, there is no requirement that continued 
affordability be monitored subsequent to the refinancing. The proposed 
rule also provides that CIP advances may be used to refinance economic 
development projects. For economic development projects, there is no 
limitation on the use of the proceeds of any equity taken out of the 
project.
4. Pricing of CIP Advances
    Section 10(i)(1) of the Bank Act provides that CIP advances shall 
be priced at the cost of Bank consolidated obligations of comparable 
maturities, taking into account reasonable administrative costs. See 
id. section 1430(i)(1). The statute does not define reasonable 
administrative costs. Section 935.7 of the Finance Board's regulation 
on Bank Advances codifies the statutory pricing requirement for CIP 
advances without material change. See 12 CFR 935.7
    A survey of the Banks' CIP policies in 1996 indicated that the 
Banks have adopted a variety of CIP pricing policies under Sec. 935.7 
of the Advances regulation. See id. Four Banks priced CIP advances at 
their cost of funds, and two Banks priced CIP advances at five basis 
points over their cost of funds. Two banks priced CIP advances 12 to 35 
basis points below the price of regular Bank advances, depending upon 
the maturity of the advance. It is estimated that, on average, CIP 
advances are priced approximately 25 basis points below the price of 
regular Bank advances.
    The proposed rule amends the language of existing Sec. 935.7 of the 
Advances regulation by clarifying that in pricing CIP advances, a Bank 
may take into account only those administrative costs necessary for the 
operation of its CIP, not administrative costs attributable to other 
Bank operations. Furthermore, the price of CIP advances shall be lower 
than the price of advances of similar amounts, maturities and terms 
made pursuant to section 10(a) of the Bank Act. See 12 U.S.C. 1430(a). 
The proposed rule moves the CIP pricing provision from existing 
Sec. 935.7 of the Advances regulation to new Sec. 970.5 of the CICA 
regulation.
    According to the 1996 survey of the Banks' CIP policies, four Banks 
varied CIP pricing based on the kinds of projects being financed and 
the income levels of the households benefiting from the project, for 
instance, projects that benefit families with incomes at or below 80 
percent of the area median income. One Bank provided lower pricing for 
members that have been assigned a rating of outstanding under the 
Community Reinvestment Act. See id. sections 2901 et seq. The Finance 
Board requests comment on whether the regulation should contain a list 
of factors such as these that could be the basis for deeper CIP 
discounts by the Banks.
5. Pricing Pass-through
    The statutory provisions governing the CIP do not require members 
that obtain CIP advances to pass on the benefit of the pricing 
differential between CIP advances and regular Bank advances to the 
owners or occupants of CIP-financed housing or businesses. The 1996 
survey of the Banks' CIP pricing policies indicated that two Banks 
specifically required such a pass-through and four Banks encouraged a 
pass-through. Section 970.5(g) of the proposed rule provides that a 
Bank may, in its discretion, require members receiving CIP advances to 
pass through the benefit of the pricing differential of the CIP advance 
to the member's borrower.

E. Provisions Governing Other CICA Programs Established By A Bank--
Section 970.6 and Section 970.7

1. RDA and UDA Programs--Section 970.6
    As discussed above, the RDA and UDA programs are CICA programs a 
Bank may establish to provide financing for economic development 
projects in rural or urban areas, respectively. Section 970.6(a) of the 
proposed rule authorizes each Bank to establish an RDA program to 
provide advances to its members, nonmember borrowers, or both to 
finance economic development projects in rural areas that benefit 
families with incomes at or below 115 percent of the area median 
income. Section 970.6(b) of the proposed rule authorizes a Bank to 
establish a UDA program to provide advances to its

[[Page 25722]]

members, nonmember borrowers, or both to finance economic development 
projects in urban areas that benefit families with incomes at or below 
100 percent of the area median income. As discussed above, the proposed 
standards for the RDA and the UDA are intended to create safe harbor 
programs that the Finance Board considers to meet the statutory 
requirement that CICA programs support ``community investment.'' See 
id. section 1430(j)(10).
    The RDA is intended to benefit a population that is not targeted 
under the CIP, which has an income eligibility standard of 80 percent 
of area median income for economic development projects. See id. 
section 1430(i)(2)(C). The UDA program, which is intended to benefit 
families with incomes at or below 100 percent of the area median 
income, also is intended to reach a population not targeted by the CIP. 
Due to generally higher median incomes in urban areas, this standard, 
although numerically lower than the income eligibility standard for the 
RDA program, reaches families with higher incomes.
    In cases where a UDA or an RDA project has a housing component, 
only the economic development portion of the project must be designed 
to benefit families with targeted income levels.
    The proposed rule permits the Banks to price RDAs and UDAs either 
as regular advances or at rates below the price of regular advances of 
similar amounts, maturities and terms. Permitting the Banks to price 
UDAs and RDAs as regular advances may provide them with a financial 
incentive to make such advances. The Banks have the option to provide 
reduced pricing for RDAs and UDAs in order to provide members and 
nonmember borrowers with a financial incentive to undertake the kinds 
of financing described in the RDA and UDA programs.
2. Other CICA Programs--Section 970.7
    Section 970.7 of the proposed rule establishes minimum requirements 
for CICA programs a Bank may wish to establish that do not conform to 
the requirements of the RDA and UDA programs. A Bank may establish such 
other CICA programs to provide advances to finance community investment 
for economic development and housing. Projects that involve a 
combination of economic development and housing must meet the 
appropriate targeting standards for the economic development and 
housing components of such projects, respectively.
    a. Economic Development Projects. Under proposed Sec. 970.7(b), a 
Bank may establish a CICA program to provide financing for economic 
development projects benefiting families with incomes at or below a 
level established by the Bank to address unmet economic development 
credit needs.
    b. Housing projects. Under proposed Sec. 970.7(c), a Bank may 
establish a CICA program to provide financing for housing projects 
involving the acquisition, construction, rehabilitation, or refinancing 
of owner-occupied and rental housing, as well as manufactured housing 
parks and housing for the homeless. In the case of refinancing, the 
refinancing must be necessary to preserve affordability for the current 
residents of a rental housing project or the current owners of owner-
occupied housing.
    As in the case of economic development projects, the Bank must 
establish an income eligibility level at or below a level targeted to 
address unmet housing credit needs. Proposed Sec. 97076(c)(2) makes 
clear that the financing of predevelopment costs for eligible housing 
also is permitted.
    c. Pricing of other CICA program advances. As under the provisions 
governing the RDA and UDA programs, Sec. 970.7(f) of the proposed rule 
permits the Banks to price other CICA advances either as regular 
advances or below regular advances.
    d. Prior Finance Board approval not required. As discussed above, a 
Bank is not required to obtain prior Finance Board approval of a CICA 
program it establishes under Sec. 970.7. However, such programs will be 
subject to review through the examination process to determine whether 
they support what the Finance Board considers to be community 
investment financing, in compliance with the Bank Act.

F. Limits on Access to CICA Advances--Section 970.8

    Section 7(j) of the Bank Act provides that the board of directors 
of each Bank shall administer the affairs of the Bank fairly and 
impartially and without discrimination in favor of or against any 
member borrower. See 12 U.S.C. 1427(j). Section 970.8 of the proposed 
rule is intended to make clear that any limitations established by a 
Bank upon members' or nonmember borrowers' access to CIP or other CICA 
advances must comply with the statutory nondiscrimination requirement 
in section 7(j) of the Bank Act.

G. Conforming Amendments to the Finance Board's Advances Regulation

    The proposed rule makes conforming amendments to the Advances 
regulation in order to make clear that a Bank may make long-term 
advances for the purpose of financing lending and investment activities 
that meet the requirements of a CICA Program, including economic 
development activities. Specifically, the proposed rule amends the 
existing definition of ``residential housing finance assets'' in 
Sec. 935.1 of the Advances regulation to include loans or investments 
financed by CICA Program advances. The proposed rule also revises 
several existing provisions of the Advances regulation on the use of 
long-term advances under the CIP in order to make clear that these 
provisions apply to all CICA Programs, not just the CIP. See id. 
Secs. 935.13, 935.14. In addition, the proposed rule replaces the 
existing definition of ``Community Investment Program'' with a new 
definition of ``Community Investment Cash Advance Program,'' which, as 
discussed above, includes the CIP.

III. Regulatory Flexibility Act

    The proposed 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 this proposed rule, if promulgated as a 
final rule, will not have a significant economic impact on a 
substantial number of small entities.

List of Subjects

12 CFR Part 935

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.

12 CFR Part 970

    Credit, Federal home loan banks, Housing.
    Accordingly, chapter IX, title 12, Code of Federal Regulations, is 
hereby proposed to be amended, as set forth below:

Subchapter B--Federal Home Loan Bank System

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. Section 935.1 is amended by adding in alphabetical order the 
following definition of ``Community Investment Cash Advance Program'', 
by removing the definition of ``Community Investment Program'', and in 
the definition of ``Residential housing

[[Page 25723]]

finance assets'' by republishing the introductory text and in paragraph 
(4), to read as follows:


Sec. 935.1  Definitions.

* * * * *
    Community Investment Cash Advance Program or CICA Program has the 
same meaning as in part 970 of this chapter.
* * * * *
    Residential housing finance assets means any of the following:
* * * * *
    (4) Loans or investments financed by advances made pursuant to a 
CICA program;
* * * * *


Sec. 935.7  [Removed and reserved]

    3. Section 935.7 is removed and reserved.
    4. Section 935.13 is amended by revising paragraph (a)(5) to read 
as follows:


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

    (a) * * *
    (5) The requirements of paragraph (a)(2) of this section shall not 
apply to applications from non-savings association members for CICA 
Program advances.
* * * * *
    5. Section 935.14 is amended by revising paragraph (b)(2) to read 
as follows:


Sec. 935.14  Limitations on long-term advances.

* * * * *
    (b) * * *
    (2) Applications for CICA Program advances are exempt from the 
requirements of paragraph (b)(1) of this section.
    6. Subchapter F, consisting of part 970, is added to chapter IX to 
read as follows:

Subchapter F--Community Investment

PART 970--Community Investment Cash Advance Programs

Sec.
970.1  Scope.
970.2  Purpose.
970.3  Annual CICA Program goals.
970.4  Definitions.
960.5  Community Investment Program.
970.6  Rural and Urban Development Advances Programs.
970.7  Other Community Investment Cash Advance programs.
970.8  Limits on access to CICA Program advances.
970.9  Reporting.

    Authority: 12 U.S.C. 1422b(a)(1) and 1430.

Sec. 970.1  Scope.

    Sections 10(i) and (j) of the Act require the Banks to establish an 
Affordable Housing Program (AHP) and a Community Investment Program 
(CIP). (See 12 U.S.C. 1430(j), (i)). Section 10(j)(10) of the Act 
authorizes the Banks to establish community investment cash advance 
(CICA) programs in addition to the AHP and the CIP. (See 12 U.S.C. 
1430(j)(10)). This part establishes requirements for a Bank's CIP and 
for other CICA programs established by a Bank. The requirements of this 
part do not apply to a Bank's AHP, which is governed specifically by 
part 960 of this chapter.


Sec. 970.2  Purpose.

    The purpose of this part is to identify targeted community 
investment activities the Banks may support through the establishment 
of CICA programs under section 10(j)(10) of the Act. (12 U.S.C. 
1430(j)(10). Advances made under a CICA program are to be used in 
support of financing for housing and economic development activities 
that benefit income-targeted families. This part establishes the 
general framework under which a Bank may create CICA programs in 
support of community investment financing. This part establishes 
regulations for advances made under a Bank's statutorily mandated CIP. 
This part also sets forth standards governing other CICA programs a 
Bank may establish, including two specific CICA programs a Bank may 
establish: Rural Development Advances (RDA) and Urban Development 
Advances (UDA) programs.


Sec. 970.3  Annual CICA Program goals.

    A Bank may establish an annual budget for the cumulative discount 
the Bank intends to make available under its CIP and other CICA 
programs (excluding AHP) the Bank may establish. The budget should be 
based upon the Bank's projected annual totals of CIP advances and other 
CICAs that the Bank intends to make, and the extent to which the Bank 
intends to provide a pricing discount, if any, for such other CICAs. A 
Bank also may include pricing discounts the Bank intends to offer for 
letters of credit in support of targeted economic development 
financing. In determining projected annual totals for CIP and other 
CICA program advances, a Bank should take into account its earnings. If 
a Bank establishes a budget for the cumulative discount available under 
its CICA programs, the Bank also should establish standards for 
allocating the discount among specific types of eligible housing 
finance and economic development activities. In the absence of such a 
budget, the Bank must fund must fund requests from qualified members or 
nonmember borrowers for any advances that otherwise meet the 
requirements of the Bank's CIP or any other CICA Program the Bank may 
create. Each Bank shall establish a strategy for providing CIP advances 
to support financing for housing and economic development projects that 
is otherwise not generally available, or is available at lower levels 
or under less attractive terms. A Bank's strategy may include the 
establishment of partnerships with government and private entities that 
provide funds to projects in conjunction with CIP and other CICA 
advances in order to further reduce the cost of such financing. In 
developing its strategy, a Bank must consult with urban and rural 
economic development organizations in the Bank's District and with the 
Bank's Advisory Council.


Sec. 970.4  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 borrower's 
obligation; and
    (3) Fully secured by collateral in accordance with the Act and part 
935 of this chapter.
    AHP means the Affordable Housing Program, the CICA Program mandated 
by section 10(j) of the Act (12 U.S.C. 1430(j)) and part 960 of this 
chapter.
    Bank means a Federal Home Loan Bank established under the authority 
of the Act.
    Benefit. (1) Economic development projects. An economic development 
project is deemed to benefit families with incomes at or below a 
targeted income level if:
    (i) The project is located in a neighborhood in which more than 50 
percent of the families have incomes at or below the targeted income 
level;
    (ii) The project is located in a rural Champion Community, or a 
rural Empowerment Zone or rural Enterprise Community, as designated by 
the Secretary of Agriculture (in the case of projects located in rural 
areas);
    (iii) The project is located in an urban Champion Community, or an 
urban Empowerment Zone or urban Enterprise Community, as designated by 
the

[[Page 25724]]

Secretary of HUD (in the case of projects located in urban areas);
    (iv) The project is located in a federally declared disaster area;
    (v) The project involves property eligible for a federal Brownfield 
Tax Credit;
    (vi) The project is located in an area affected by a federal 
military base closing or realignment;
    (vii) The project is located in an area identified as a designated 
community under the Community Adjustment and Investment Program;
    (viii) The annual salaries for at least 75 percent of the permanent 
full-and part-time jobs, computed on a full-time equivalent basis, 
created or retained by the project, other than construction jobs, are 
at or below the targeted income level;
    (ix) The project qualifies as a small business; or
    (x) More than 50 percent of the families who otherwise benefit from 
(other than through employment) or are provided services by the project 
have incomes at or below the targeted income level.
    (2) Housing projects. A housing project is deemed to benefit 
families with incomes at or below a targeted income level if the 
project involves:
    (i) Owner-occupied units, each of which is purchased or owned by a 
family with an income at or below the targeted income level;
    (ii) Multi-unit, owner-occupied housing in which more than 50 
percent of the units are owned or purchased by families with incomes at 
or below the targeted income level;
    (iii) Rental housing where more than 50 percent of the units in the 
project are occupied by, or the rents are affordable to, families with 
incomes at or below the targeted income level; or
    (iv) Manufactured housing parks where:
    (A) Substantially all of the resident families have incomes at or 
below the targeted income level; or
    (B) The project is located in a neighborhood where more than 50 
percent of the families have incomes at or below the targeted income 
level.
    Board of Directors means the Board of Directors of the Finance 
Board.
    Champion Community means a community which developed a strategic 
plan and applied for designation by either the Secretary of HUD or the 
Secretary of Agriculture as an Empowerment Zone or Enterprise 
Community, but was designated a Champion Community.
    CICA or Community Investment Cash Advance means an advance made 
pursuant to a CICA program.
    CICA Program or Community Investment Cash Advance program means:
    (1) A Bank's AHP;
    (2) A Bank's CIP;
    (3) A Bank's RDA program;
    (4) A Bank's UDA program; and
    (5) Any other cash advance program established by a Bank that meets 
the requirements of Sec. 970.6.
    CIP means a Bank's Community Investment Program, the CICA Program 
mandated by section 10(i) of the Act (12 U.S.C. 1430(i)).
    Community investment means housing finance and economic development 
projects that benefit families with incomes at or below a targeted 
income level.
    Economic development projects means:
    (1) Commercial, manufacturing, social service, and public facility 
projects and activities; and
    (2) The construction or rehabilitation of public or private 
infrastructure, such as roads, utilities, and sewers.
    Family means one or more persons living in the same dwelling unit.
    Finance Board means the agency established as the Federal Housing 
Finance Board.
    HUD means the Department of Housing and Urban Development.
    Median income for the area. (1) Owner-occupied housing projects and 
economic development projects. For purposes of owner-occupied housing 
projects and economic development projects, median income for the area 
means one or more of the following, as determined by the Bank:
    (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 Bank's CICA 
programs.
    (2) Rental housing projects. For purposes of rental projects, 
median income for the area means:
    (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 Bank's CICA 
programs.
    (3) Procedure for 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.
    Neighborhood means:
    (1) A census tract or block numbering area;
    (2) A unit of local government with a population of 25,000 or less;
    (3) A rural county;
    (4) A trust or restricted Indian land, Native Hawaiian Home Land, 
or Alaskan Native Village; or
    (5) A geographic location designated in comprehensive plans, 
ordinance, or other local documents as a neighborhood, village, or 
similar geographic designation that is within the boundary of but does 
not encompass the entire area of a unit of general local government.
    Nonmember borrower means an entity certified as a nonmember 
mortgagee pursuant to Sec. 935.22(b) of this chapter.
    Provide financing means:
    (1) Originating loans;
    (2) Purchasing mortgage revenue bonds or mortgage-backed 
securities, where all of the loans financed by such bonds and all of 
the loans backing such securities meet the eligibility requirements of 
the program under which the member or nonmember borrower receives an 
advance; and
    (3) Creating or maintaining a secondary market for loans, where all 
such loans are mortgage loans meeting the eligibility requirements of 
the program under which the member or nonmember borrower receives an 
advance.
    RDA or Rural Development Advance means an advance made pursuant to 
an RDA program.
    RDA program or Rural Development Advance program means a program 
established by a Bank meeting the requirements of Sec. 970.6(a).
    Rural area means:
    (1) A unit of general local government or an unincorporated place 
outside a Metropolitan Statistical Area (MSA), as defined by the U.S. 
Bureau of the Census, that has a population of less than 30,000; or
    (2) A trust or restricted Indian land, Native Hawaiian Home Land, 
or Alaskan Native Village.
    Small business means a ``small business concern,'' as that term is

[[Page 25725]]

defined by section 3(a) of the Small Business Act (15 U.S.C. 632(a)) 
and implemented by the Small Business Administration under 13 CFR part 
121, or any successor provisions.
    UDA or Urban Development Advance means an advance made pursuant to 
a UDA program.
    UDA program or Urban Development Advance program means a program 
established by a Bank meeting the requirements of Sec. 970.6(b).
    Urban area means a unit of general local government or an 
unincorporated place that is:
    (1) Within an MSA; or
    (2) Outside an MSA and has a population of more than 30,000.


Sec. 970.5  Community Investment Program.

    (a) In general. Each Bank shall establish a CIP to make advances to 
its members to provide financing, as defined in Sec. 970.4, for 
eligible community investment projects. (Nonmember borrowers are not 
eligible to receive CIP advances.)
    (b) Housing projects. A Bank may provide CIP advances to finance 
the following kinds of housing projects, provided that such projects 
benefit families with incomes at or below 115 percent of the median 
income for the area of a family of four:
    (1) The purchase or construction of owner-occupied housing units;
    (2) The purchase or rehabilitation of rental housing;
    (3) The purchase or rehabilitation of manufactured housing parks; 
and
    (4) The purchase or rehabilitation of housing for the homeless.
    (c) Economic development projects. A Bank may provide CIP advances 
to finance economic development projects that benefit families with 
incomes at or below 80 percent of the median income for the area of a 
family of four.
    (d) Refinancing. A Bank may provide CIP advances to refinance:
    (1) Economic development projects described in paragraph (c) of 
this section; and
    (2) Owner-occupied and multifamily housing and manufactured housing 
parks described in paragraphs (b)(1) through (b)(4) of this section, 
provided that the equity proceeds of the refinancing are used to 
rehabilitate the projects or to preserve affordability for current 
residents.
    (e) Mixed-use projects. If a project involves a combination of 
eligible housing finance and economic development activities, the 
economic development and housing components of the project must benefit 
families at the appropriate income levels.
    (f) Pricing of CIP advances--(1) In general. Each Bank shall price 
its CIP advances as provided in Sec. 935.6 of this chapter, provided 
that the cost of such advances shall not exceed, and may be lower than, 
the Bank's cost of issuing consolidated obligations of comparable 
maturity, taking into account reasonable administrative costs. In 
pricing CIP advances, a Bank may take into account only those 
administrative costs necessary for the operation of its CIP.
    (2) Pricing differential. The price of CIP advances shall be lower 
than the price of advances of similar amounts, maturities and terms 
made pursuant to section 10(a) of the Act.
    (g) Pricing pass-through. A Bank may require members receiving CIP 
advances to pass through the benefit of the pricing differential of the 
CIP advance to the member's borrower.


Sec. 970.6  Rural and Urban Development Advances Programs.

    (a) RDA program. Each Bank may establish an RDA program to provide 
advances to its members, nonmember borrowers, or both to provide 
financing, as defined in Sec. 970.4, for economic development projects 
in rural areas that benefit families with incomes at or below 115 
percent of the median income for the area of a family of four.
    (b) UDA program. Each Bank may establish a UDA program to provide 
advances to its members, nonmember borrowers, or both to provide 
financing, as defined in Sec. 970.4, for economic development projects 
in urban areas that benefit families with incomes at or below 100 
percent of the median income for the area of a family of four.
    (c) Mixed-use projects. If an economic development project financed 
by a UDA or an RDA involves the financing of housing, only the economic 
development portion of the project must be designed to benefit families 
with targeted income levels.
    (d) Pricing of UDAs and RDAs--(1) Advances to members. A Bank shall 
price UDAs and RDAs to members as provided in Sec. 935.6 of this 
chapter, and may price such advances at rates below the price of 
advances of similar amounts, maturities and terms made pursuant to 
section 10(a) of the Act. (12 U.S.C. 1430(a)).
    (2) Advances to nonmember borrowers. A Bank shall price UDAs and 
RDAs to nonmember borrowers as provided in Sec. 935.24 of this chapter 
and may price such advances at rates below the price of advances of 
similar amounts, maturities and terms made pursuant to section 10b of 
the Act. (12 U.S.C. 1430b).


Sec. 970.7  Other Community Investment Cash Advance programs.

    (a) In general. Each Bank may establish CICA programs in addition 
to those described in Secs. 970.5 and 970.6, to provide advances to its 
members, nonmember borrowers, or both to finance community investment.
    (b) Economic development projects. A Bank may make a CICA to a 
member or nonmember borrower to provide financing, as defined in 
Sec. 970.4, for economic development projects that benefit families 
with incomes at or below a targeted income level, as established by the 
Bank to address unmet economic development credit needs. Projects with 
unmet economic development credit needs are those economic development 
projects for which financing is not generally available, or is 
available at lower levels or under less attractive terms.
    (c) Housing projects. A Bank may make a CICA to a member or 
nonmember borrower to provide financing, as defined in Sec. 970.4, for 
the following kinds of housing projects, provided such projects benefit 
families with incomes at or below a targeted income level, as 
established by the Bank to address unmet housing credit needs. Projects 
with unmet housing credit needs are those housing projects for which 
financing is not generally available, or is available at lower levels 
or under less attractive terms:
    (1) The acquisition, construction, rehabilitation, or refinancing 
of:
    (i) Owner-occupied housing units;
    (ii) Multi-unit, owner-occupied housing;
    (iii) Rental housing;
    (iv) Manufactured housing parks; and
    (v) Housing for the homeless; or
    (2) The financing of predevelopment costs for housing described in 
paragraph (c)(1) of this section.
    (d) Limit on refinancing. Where a member or nonmember borrower uses 
a CICA for the purpose of refinancing housing, the refinancing must be 
necessary to preserve affordability for the current residents of a 
multifamily rental housing project or the current owners of owner-
occupied housing.
    (e) Mixed-use projects. If a project involves a combination of 
eligible housing finance and economic development activities, the 
economic development and housing components of the project must benefit 
families at the appropriate targeted income levels.
    (f) Pricing of other CICA program advances.--(1) Advances to 
members. A Bank shall price advances to members made under a CICA 
program established pursuant to this section as provided in Sec. 935.6 
of this chapter, and may price

[[Page 25726]]

such advances at rates below the price of advances of similar amounts, 
maturities, and terms made pursuant to section 10(a) of the Act. (12 
U.S.C. 1430(a)).
    (2) Advances to nonmember borrowers. A Bank shall price advances to 
nonmember borrowers made under a CICA program established pursuant to 
this section as provided in Sec. 935.24 of this chapter, and may price 
such advances at rates below the price of advances of similar amounts, 
maturities, and terms made pursuant to section 10b of the Act. (12 
U.S.C. 1430b).


Sec. 970.8  Limits on access to CICA program advances.

    Any limit established by a Bank upon members' or nonmember 
borrowers' access to CICA advances shall not discriminate in favor of 
or against any member.


Sec. 970.9  Reporting.

    (a) CICA policies. Each Bank shall submit to the Finance Board 
annually a copy of the policies governing the Bank's CICA programs.
    (b) Quarterly reports. Each Bank shall report quarterly to the 
Finance Board on the Bank's use of CICAs.

    Dated: April 22, 1998.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-11951 Filed 5-7-98; 8:45 am]
BILLING CODE 6725-01-P