[Federal Register Volume 63, Number 235 (Tuesday, December 8, 1998)]
[Proposed Rules]
[Pages 67625-67629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32527]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 63, No. 235 / Tuesday, December 8, 1998 / 
Proposed Rules  

[[Page 67625]]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 935

[No. 98-62]
RIN 3069-AA77


Collateral Eligible to Secure Federal Home Loan Bank 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 its regulation governing eligible collateral for Federal Home 
Loan Bank (FHLBank) advances to clarify that certain assets, including 
the insured or guaranteed portions of federally-insured or guaranteed 
loans, securities representing an equity interest in eligible 
collateral, and mortgage assets or government securities held by 
members' wholly-owned investment subsidiaries, qualify as eligible 
collateral to secure FHLBank advances. The proposed rule would also 
amend the Finance Board's regulation on collateral verification to 
eliminate certain ambiguities therein.

DATES: Comments are due on or before February 8, 1999.

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

FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Attorney-Advisor, 
Office of General Counsel, (202) 408-2932, Federal Housing Finance 
Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Section 10(a) of the Federal Home Loan Bank Act (Bank Act) 
enumerates four categories of collateral that are eligible to secure 
FHLBank advances: (1) Current whole first mortgage loans on improved 
residential property and securities representing a whole interest in 
such mortgages; (2) securities that are issued, guaranteed, or insured 
by the United States Government, or any agency thereof; (3) deposits of 
a FHLBank; and (4) other real-estate related collateral in a total 
amount not to exceed 30 percent of the borrowing member's capital. See 
12 U.S.C. 1430(a).
    The Finance Board promulgated part 935 of its regulations, 12 CFR 
part 935, governing FHLBank advances, in 1993. See 58 FR 29469 (May 20, 
1993). Among other things, the Advances Regulation implements and 
clarifies the statutory requirements of 12 U.S.C. 1430 relating to the 
security interests that a FHLBank must obtain and maintain when making 
advances to member institutions. See 12 CFR 935.9-935.12. Among the 
issues that the Regulation addresses are: the types and amounts of 
collateral that a FHLBank may or must accept when making advances; the 
priority of FHLBank claims to such collateral in relation to other 
creditors; and requirements regarding the valuation and verification of 
the existence of pledged collateral.
    In the five and one-half years since the promulgation of the 
Advances Regulation, the Finance Board has received numerous requests 
from both FHLBanks and their members to clarify or interpret these 
collateral provisions in the context of specific transactions, which 
the agency has done on a case-by-case basis. In other instances, 
FHLBanks have requested permission to enter into various collateral 
arrangements that, while permissible under the terms of the advances 
provisions of the Bank Act, are not clearly authorized under the 
Advances Regulation. The Finance Board is now proposing to amend 
certain of the collateral provisions of its Advances Regulation, and to 
add other provisions, in order to codify in the Regulation various 
collateral arrangements that have been the subject of regulatory 
interpretations and requests for such interpretations from the FHLBanks 
and their members.
    The Finance Board requests comments on all aspects of the proposed 
rule.

II. Analysis of the Proposed Rule

A. Definitions

    The proposed rule would amend Sec. 935.1 of the Advances 
Regulation, 12 CFR 935.1, which sets forth definitions of terms used in 
part 935, by adding thereto a definition of the term ``qualifying 
investment subsidiary.'' This term is used in proposed Sec. 935.9(b) to 
refer to certain member-owned subsidiaries. Because the definition of 
``qualifying investment subsidiary'' is intended primarily to make 
clear the parameters of the authority granted to the FHLBanks under 
proposed Sec. 935.9(b), the term is addressed in detail in the 
discussion of that section, set forth below.
    The proposed rule also would make technical amendments to the 
definition of the term ``mortgage-backed security'' set forth in 
Sec. 935.1, in order to eliminate redundant language contained in the 
existing definition and otherwise make it more readable.

B. Mortgage Collateral

    Substantively, the proposed rule would make several revisions to 
Sec. 935.9(a) of the Advances Regulation, which implements and 
clarifies the statutory requirements set forth in section 10(a) of the 
Bank Act, governing collateral eligible to secure FHLBank advances to 
members. See 12 U.S.C. 1430(a). Section 935.9(a)(1) of the existing 
Advances Regulation implements section 10(a)(1) of the Bank Act by 
authorizing the FHLBanks to accept as collateral for advances current 
whole first mortgage loans on improved residential property and high-
quality privately-issued mortgage-backed securities (MBS). The proposed 
rule would add a new paragraph (iii) to permit the FHLBanks to accept 
any security the ownership of which would represent an undivided equity 
interest in such whole mortgage loans or MBS. Although such equity 
securities arguably also fall within the definition of MBS set forth in 
Sec. 935.1, Sec. 935.9(a)(1)(iii) has been included in the proposed 
rule to make clear that shares of mutual funds and similar investments 
that are not ordinarily considered to be MBS may constitute eligible 
collateral when the underlying assets consist only of current whole 
first mortgage loans on residential property or eligible privately-
issued MBS.

[[Page 67626]]

C. Government Securities

    Section 935.9(a)(2) of the Advances Regulation implements section 
10(a)(2) of the Bank Act by authorizing the FHLBanks to accept as 
collateral for advances to members securities issued, insured, or 
guaranteed by the United States Government, or any agency thereof. 
Under the proposed rule, the text of existing Sec. 935.9(a)(2) would be 
modified slightly to make clear that MBS that are issued or guaranteed 
by any agency of the United States Government--and not merely those 
issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae--may be 
accepted as collateral. This text also would be redesignated as the 
introductory paragraph and paragraph (A) of proposed 
Sec. 935.9(a)(2)(i).
    Paragraph (B) of proposed Sec. 935.9(a)(2)(i) would contain a new 
provision clarifying that the FHLBanks may accept as collateral 
mortgages or other loans, regardless of the delinquency status of the 
mortgages or other loans, to the extent that repayment of the principal 
and/or interest on such mortgages or loans is backed by the full faith 
and credit of the United States. For example, under this provision, 
FHLBanks would be permitted to accept the insured portions of Federal 
Housing Administration (FHA) and Veteran's Administration (VA)-insured 
mortgage loans, or the guaranteed portions of small business loans 
guaranteed by the Small Business Administration (SBA).
    While section 10(a)(2) of the Bank Act mentions MBS as an example 
of securities that FHLBanks are authorized to accept thereunder, the 
Act does not limit the FHLBanks to acceptance of any particular types 
of securities, aside from requiring that they be issued, guaranteed, or 
insured by the United States Government or any of its agencies. Section 
10(a)(1) of the Bank Act (and Sec. 935.9(a)(1) of the Advances 
Regulation), in authorizing FHLBanks to accept whole mortgage loans as 
collateral, requires that such mortgages be ``not more than 90 days 
delinquent.'' However, this requirement addresses a safety and 
soundness concern that is effectively mooted to the extent that the 
principal and/or interest payments on a particular loan are backed by 
the full faith and credit of the United States. As such, the Finance 
Board has determined that the authorization contained in proposed 
Sec. 935.9(a)(2)(i)(B) is consistent with the requirements of section 
10(a) of the Bank Act.
    Paragraph (C) of proposed Sec. 935.9(a)(2)(i) would provide that 
FHLBanks may also accept as collateral securities that are backed by, 
or represent equity interests in, pools of loans or mortgages that are 
insured or guaranteed by the United States Government or its agencies, 
even if the investment instrument itself is not so insured or 
guaranteed. In this case, the benefit of the government insurance or 
guarantee would pass through to the security holders and serve as the 
functional equivalent of a guaranty of, or insurance on, the security 
itself.
    Proposed Sec. 935.9(a)(2)(ii) parallels paragraph (iii) of proposed 
Sec. 935.9(a)(1) in that it would permit FHLBanks to accept as 
collateral shares of mutual funds and other similar investments that 
represent an undivided equity interest in pools of government 
securities.

D. Eligible Collateral Held by a Qualifying Investment Subsidiary

    The proposed rule would redesignate paragraphs (b) through (e) of 
existing Sec. 935.9 as paragraphs (c) through (f) and would add a new 
paragraph (b) to Sec. 935.9. Proposed Sec. 935.9(b) would permit 
FHLBanks, under certain circumstances, to accept as collateral for 
advances assets that would otherwise constitute eligible collateral 
under Sec. Sec. 935.9(a)(1) or (2), but that are held by the member's 
qualifying investment subsidiary, as opposed to the member itself. The 
proposed rule would add a definition of the term ``qualifying 
investment subsidiary'' (QIS) to Sec. 935.1 of the Advances Regulation.
    A QIS would include any business entity: 100 percent of the voting 
stock of which is owned and controlled, directly or indirectly, by a 
FHLBank member; that is operated for the sole purpose of holding 
investment or real estate assets on behalf of that member; and that 
holds only cash equivalents and assets that are eligible to secure 
advances under Secs. 935.9(a)(1) and (2) of the Advances Regulation 
(i.e., whole residential mortgages, high-quality privately-issued MBS, 
and government securities). The term is intended to include any entity 
established by a member, to reduce its tax burden or for other 
financial management purposes, as a passive repository for assets that 
the member would otherwise hold on its own balance sheet. Examples of 
entities that might qualify as a QIS include a Real Estate Investment 
Trust (REIT) established by a member in conformity with the 
requirements of the Internal Revenue Code (IRC), see 26 U.S.C. 856-68, 
or a security corporation established under Massachusetts law, see 
Mass. Gen. Laws Ann. ch. 63 section 38B, or other state law.
    Under the proposed definition, a QIS may include entities that are 
wholly-owned indirectly by a member. For example, an entity that is 
wholly-owned by a holding company that itself is wholly-owned by the 
member institution may qualify as a QIS. By requiring 100 percent of 
only the voting stock of a QIS to be controlled by a member, the 
proposed rule would permit entities having non-voting preferred shares 
that are owned by individuals or entities other than the member to 
qualify as a QIS. For example, to qualify as a REIT under the IRC, an 
entity must be beneficially owned by at least 100 stockholders. See 26 
U.S.C. 856(a)(5). If this IRC requirement is implemented through 
distribution by the REIT of a limited number non-voting preferred 
shares to persons or entities other than the member, that distribution 
would not invalidate the entity's status as a QIS under the proposed 
rule, so long as the member owns and controls all of the voting stock 
of the entity.
    While the Bank Act requires that a member assume a primary and 
unconditional obligation to repay all advances, see 12 U.S.C. 1430(d), 
and that advances be fully secured by eligible collateral, see id. 
1430(a), the Act does not expressly require that such collateral be 
pledged by the member itself. Section 10(f) of the Bank Act, which 
addresses priorities of FHLBank security interests, specifically 
mentions, and presumes the possible existence of, security interests 
granted by an ``affiliate'' of a member. See id. 1430(f). A wholly-
owned subsidiary that would qualify as a QIS under the proposed rule 
clearly would be an ``affiliate'' of its member/parent, even under the 
most conservative definition of that term.
    Without passing upon the question of whether eligible collateral 
held by a third party may be used in all cases to secure a FHLBank 
advance to a member, the Finance Board has concluded that such 
collateral held by a QIS of a member may be used to secure an advance 
to that member where the FHLBank's legal rights and privileges with 
respect to such collateral are functionally equivalent in all material 
aspects to those that the FHLBank would possess if the member were to 
pledge the same collateral on its own behalf. This conclusion is 
reflected in Sec. 935.9(b)(1) of the proposed rule, which would permit 
FHLBanks to accept pledges of collateral from a member's QIS to secure 
advances to that member if these criteria are met. The Finance Board 
anticipates that this will be a determination that will need to be made 
on a case-by-case basis after careful legal review and analysis by each 
FHLBank that decides to accept such collateral, taking into 
consideration the structure

[[Page 67627]]

of the transaction and the law of the state that governs the 
transaction.
    In order to provide guidance as to the factors that a FHLBank must 
consider in determining whether this general requirement has been met, 
the Finance Board has set forth in proposed Sec. 935.9(b)(2) four 
``safe harbor'' requirements which, if each is met by the FHLBank, 
would ensure that the FHLBank is in compliance with proposed 
Sec. 935.9(b)(1). A FHLBank would not need to meet these safe harbor 
requirements to be in compliance with proposed Sec. 935.9(b) if it 
otherwise demonstrated that its legal rights and privileges with 
respect to the QIS-held collateral are functionally equivalent in all 
material aspects to those that the FHLBank would possess if the member 
were to pledge the same collateral on its own behalf.
    To meet the proposed safe harbor requirements, the FHLBank first 
must obtain from the QIS and maintain, as collateral for repayment of 
the advance, a legally enforceable security interest in assets held by 
the QIS that are eligible collateral under Secs. 935.9(a)(1) or (2). To 
determine whether such a pledge is legally enforceable, a FHLBank, 
among other things, will need to satisfy itself that the QIS has the 
legal authority to make the pledge and that sufficient consideration 
has passed between the parties to make the pledge enforceable as a 
matter of contract law.
    Because the Bank Act requires that each advance be fully secured, 
see id. 1430(a), a guaranty by the QIS of the member's obligation, 
backed by the eligible assets held by the QIS, would not meet the 
requirements of the Bank Act or the proposed rule, as the collateral 
would then be securing the QIS's secondary obligation and not the 
advance itself. However, as provided by proposed Sec. 935.9(b)(2)(i), 
where the QIS enters into a surety arrangement under which it assumes a 
primary joint and several co-obligation to repay the advance made to 
the member, and fully secures this primary surety obligation with 
eligible collateral, such collateral would be considered as securing 
the advance itself as required by the statute.
    Second, the FHLBank must obtain from the QIS a legally enforceable 
waiver of defenses, that the QIS might have as a third party pledgor 
that would not apply to a party pledging collateral in support of its 
own obligation. For example, under section 3-605 of the Uniform 
Commercial Code, a surety may be discharged from its obligation in 
certain cases where the obligor and obligee have modified their 
agreement without the knowledge or consent of the surety. See U.C.C. 3-
605 (1995). However, the surety may waive this right of discharge in 
advance ``by general language indicating that parties waive defenses 
based on suretyship.'' See id. 3-605(i).
    The types of defenses that third parties may be permitted to raise 
would vary depending upon the structure of the transaction in question 
and the law of the state that governs the transaction. The possibility 
that the QIS may be able to raise such a defense, even if remote in a 
practical sense, would render its pledge of collateral materially 
inferior to a pledge made directly by the member. Again, FHLBank staff 
would need to review thoroughly each transaction, as well as the 
applicable provisions of state law, to determine the types of defenses 
that could be raised by the QIS and whether these defenses could be 
effectively waived. If such defenses could not be waived, the 
transaction would fail to meet the safe harbor requirements. However, 
the FHLBank still might be able to comply with the general requirements 
of Sec. 935.9(b)(1) by structuring the transaction to ensure that a 
scenario that might give rise to any such defenses could not occur.
    Third, the FHLBank would need to take such precautions as are 
necessary to ensure that the pledge of collateral by the QIS would be 
neither voidable under the fraudulent conveyance provisions of 
applicable state and federal bankruptcy laws, see 11 U.S.C. 548, nor 
subject to the claims of other creditors. The Finance Board anticipates 
that both components of this requirement can be effectively addressed 
through contractual provisions. For example, provisions prohibiting the 
QIS from pledging collateral to any other party, or from incurring any 
type of debt, might be sufficient to ensure that the collateral could 
not be subject to the claims of any other creditors. Likewise, 
provisions that (1) limit the amount of any pledge of collateral to a 
fixed percentage (less than 100 percent) of the fair market value of 
the collateral and require substitution of collateral should this fair 
market value drop below a certain threshold, or (2) permit the FHLBank 
to force the liquidation of the QIS when certain criteria are met, 
might be sufficient to ensure that the collateral transaction could not 
be voidable under any fraudulent conveyance provisions. Again, the 
FHLBank would need to ensure that sufficient consideration has passed 
between the parties to support the pledge of collateral by the QIS.
    Fourth and last, in order to qualify under the safe harbor 
provisions of proposed Sec. 935.9(b)(2), a FHLBank would need to obtain 
from its member and maintain a perfectible security interest in stock 
or other securities representing the member's controlling equity 
interest in its QIS. In cases where the QIS is itself owned by a 
holding company that is wholly-owned by the member, the voting stock of 
both the QIS and the holding company would need to be pledged in order 
to meet this safe harbor requirement.
    Security interests obtained and maintained by a FHLBank pursuant to 
proposed Sec. 935.9(b) would be entitled to the benefit of the priority 
lien granted to FHLBanks under section 10(f) of the Bank Act, which 
applies to ``any security interest granted to a [FHL]Bank by any member 
of a [FHL]Bank or any affiliate of any such member.'' See 12 U.S.C. 
1430(f).

E. Collateral Verification

    Finally, the proposed rule would amend Sec. 935.11(b) of the 
Finance Board's Advances Regulation, which requires that each FHLBank 
regularly verify the existence of collateral securing its advances. 
Existing Sec. 935.11(b) requires that each FHLBank establish written 
collateral verification procedures containing standards that are 
``similar to those established by the Auditing Standards Board of the 
American Institute of Public Accountants'' (AICPA). The Finance Board 
has found that the ambiguity of this reference renders it effectively 
unenforceable. The proposed rule, therefore, eliminates the reference 
to AICPA standards and requires merely that the FHLBanks establish 
``written procedures and standards'' for collateral verification. Under 
this provision, the Finance Board will be able to evaluate each 
FHLBank's procedures and standards taking into account only the 
relevant safety and soundness considerations that apply to that FHLBank 
without reference to the AICPA, or any other external, standards.

III. Regulatory Flexibility Act

    The proposed rule applies only to the FHLBanks, which do not come 
within the meaning of ``small business,'' 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, 5 U.S.C. 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 in 12 CFR Part 935

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


[[Page 67628]]


    Accordingly, the Finance Board proposes to amend 12 CFR part 935 as 
follows:

PART 935--ADVANCES

    1. The authority citation for part 935 is revised to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430, 
1430b and 1431.

Subpart A--Advances to Members

    2. Amend Sec. 935.1 by revising the definition of ``Mortgage-backed 
security'' and adding the definition of ``Qualifying investment 
subsidiary'' to read as follows:


Sec. 935.1  Definitions.

* * * * *
    Mortgage-backed security means:
    (1) An equity security representing an ownership interest in:
    (i) Fully disbursed, whole first mortgage loans on improved 
residential real property; or
    (ii) Mortgage pass-through or participation securities which are 
themselves backed entirely by fully disbursed, whole first mortgage 
loans on improved residential real property; or
    (2) An obligation, bond, or other debt security backed entirely by 
the assets described in paragraph (1) (i) or (ii) of this definition.
* * * * *
    Qualifying Investment Subsidiary means a business entity, 
including, without limitation, a Real Estate Investment Trust (REIT) or 
a state security corporation:
    (1) 100 percent of the voting stock of which is owned and 
controlled, directly or indirectly, by a member;
    (2) That is operated for the sole purpose of holding investment or 
real estate assets on behalf of that member; and
    (3) That holds only cash equivalents and assets that are eligible 
to secure advances to members under Sec. 935.9(a)(1) or (a)(2) of this 
part.
* * * * *
    3. Amend Sec. 935.9 as follows:
    a. Add to the headings of paragraphs (b), (c) and (e) the word 
``advances'' preceding the word ``collateral'';
    b. Redesignate paragraphs (b) through (e) as paragraphs (c) through 
(f); and
    c. Revise paragraph (a) and add paragraph (b) as follows:


Sec. 935.9  Collateral.

    (a) Eligible security for advances. At the time of origination or 
renewal of an advance, each Bank shall obtain, and thereafter maintain, 
a security interest in collateral that meets the requirements of one or 
more of the following categories:
    (1) Mortgage loans and privately issued securities. (i) Fully 
disbursed, whole first mortgage loans on improved residential real 
property not more than 90 days delinquent;
    (ii) Privately issued mortgage-backed securities, excluding the 
following:
    (A) Securities which represent a share of only the interest 
payments or only the principal payments from the underlying mortgage 
loans;
    (B) Securities which represent a subordinate interest in the cash 
flows from the underlying mortgage loans;
    (C) Securities which represent an interest in any residual payments 
from the underlying pool of mortgage loans; or
    (D) Such other high-risk securities as the Board in its discretion 
may determine; or
    (iii) Any security the ownership of which represents an undivided 
equity interest in underlying assets, all of which qualify as eligible 
collateral under paragraphs (a)(1)(i) or (ii) of this section.
    (2) Agency securities. (i) Securities issued, insured, or 
guaranteed by the United States Government, or any agency thereof, 
including without limitation:
    (A) Mortgage-backed securities, as defined in Sec. 935.1 of this 
part, issued or guaranteed by the Federal Home Loan Mortgage 
Corporation, the Federal National Mortgage Association, the Government 
National Mortgage Association, or any other agency of the United States 
Government; and
    (B) Mortgages or other loans, regardless of delinquency status, to 
the extent that such mortgage or loan is insured or guaranteed by the 
United States or any agency thereof, or otherwise is backed by the full 
faith and credit of the United States; or
    (C) Securities backed by, or representing an equity interest in, 
mortgages or other loans referred to in paragraph (a)(2)(i)(B) of this 
section; or
    (ii) Any security the ownership of which represents an undivided 
equity interest in underlying assets, all of which qualify as eligible 
collateral under paragraph (a)(2)(i) of this section.
    (3) Deposits. Deposits in a Bank.
    (4) Other collateral. (i) Except as provided in paragraph 
(a)(4)(iii) of this section, other real estate-related collateral 
acceptable to the Bank if:
    (A) Such collateral has a readily ascertainable value; and
    (B) The Bank can perfect a security interest in such collateral.
    (ii) Eligible other real estate-related collateral may include, but 
is not limited to:
    (A) Privately issued mortgage-backed securities not otherwise 
eligible under paragraph (a)(i)(ii) of this section;
    (B) Second mortgage loans, including home equity loans;
    (C) Commercial real estate loans; and
    (D) Mortgage loan participations.
    (iii) A Bank shall not permit the aggregate amount of outstanding 
advances to any one member, secured by such other real estate-related 
collateral, to exceed 30 percent of such member's capital, as 
calculated according to GAAP, at the time the advance is issued or 
renewed.
    (b) Eligible advances collateral held by investment subsidiaries. 
(1) General rule. Assets held by a member's Qualifying Investment 
Subsidiary that are eligible to secure advances under paragraphs (a)(1) 
or (a)(2) of this section may be used to secure advances to that member 
if the Bank obtains and maintains a security interest pursuant to which 
the Bank's legal rights and privileges with respect to such assets are 
functionally equivalent in all material aspects to those that the Bank 
would possess if the member were to pledge eligible collateral 
directly;
    (2) Safe harbor provision. A Bank's legal rights and privileges 
with respect to eligible assets held by a Qualifying Investment 
Subsidiary will be deemed to be functionally equivalent in all material 
aspects to those that the Bank would possess if the member were to 
pledge eligible collateral directly if:
    (i) The Bank obtains from the Qualifying Investment Subsidiary, and 
maintains, a perfectible and legally enforceable security interest in 
collateral eligible to secure advances under paragraphs (a)(1) or 
(a)(2) of this section either:
    (A) To secure the member's obligation to repay advances; or
    (B) To secure a surety agreement under which the Qualifying 
Investment Subsidiary has assumed, along with the member, a primary 
obligation to repay advances made to the member;
    (ii) The Bank obtains from the Qualifying Investment Subsidiary a 
legally enforceable waiver of any defenses that the Subsidiary may have 
as a pledgor of collateral on behalf of a third party, or as a surety, 
as appropriate;
    (iii) The Bank takes such precautions as are necessary to ensure 
that the pledge of collateral by the Qualifying Investment Subsidiary 
will be neither voidable under the fraudulent conveyance provisions of 
applicable federal and state bankruptcy laws, nor subject to the claims 
of other creditors; and

[[Page 67629]]

    (iv) The Bank obtains from the member, and maintains, a perfectible 
security interest in securities representing the member's equity 
interest in its Qualifying Investment Subsidiary.
* * * * *
    4. Amend Sec. 935.11 by revising paragraph (b) to read as follows:


Sec. 935.11  Pledged collateral; verification.

* * * * *
    (b) Collateral verification. Each Bank shall establish written 
procedures and standards for verifying the existence of collateral 
securing the Bank's advances, and shall regularly verify the existence 
of the collateral securing its advances in accordance with such 
procedures and standards.

    Dated: December 2, 1998.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-32527 Filed 12-7-98; 8:45 am]
BILLING CODE 6725-01-P