[Federal Register Volume 64, Number 28 (Thursday, February 11, 1999)]
[Proposed Rules]
[Pages 6819-6823]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3407]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 910

[No. 99-5]
RIN 3069-AA78


Allocation of Joint and Several Liability on Consolidated 
Obligations Among the Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
a rule to establish a framework for the orderly allocation of joint and 
several liability among the Federal Home Loan Banks (FHLBank or Bank) 
on consolidated obligations, i.e., bonds, notes or debentures issued by 
the Finance Board pursuant to section 11 of the Federal Home Loan Bank 
Act (Bank Act). The proposed rule is intended to protect holders of 
consolidated obligations to the greatest extent practical by providing 
a framework to ensure the continued timely payment of all principal and 
interest on consolidated obligations in the unlikely event of a 
projected inability of a Bank to meet its debt service payment 
obligations. The proposed rule in no way would limit, restrict or 
diminish the joint and several liability of the FHLBanks on the 
consolidated obligations issued by the Finance Board.

DATES: The Finance Board will accept comments on the proposed rule in 
writing on or before April 12, 1999.

ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by 
electronic mail at [email protected] or by regular mail at the Federal 
Housing Finance Board, 1777 F Street, NW., Washington, DC 20006. 
Comments will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Joseph McKenzie, Deputy Chief 
Economist, Office of Policy, Research and Analysis, by telephone at 
(202) 408-2845 or by electronic mail at [email protected], or 
Charlotte A. Reid, Special Counsel, Office of General Counsel, by 
telephone at (202) 408-2510, by electronic mail at [email protected], or 
by regular mail at the Federal Housing Finance Board, 1777 F Street, 
NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Bank Act, see 12 U.S.C. 1421 et seq., provides plenary 
authority to the Finance Board in connection with the issuance of 
bonds, debentures and notes (consolidated obligations or COs) for which 
the FHLBanks are jointly and severally liable.\1\ Section 11 of the 
Bank Act authorizes the Finance Board to issue rules and regulations 
governing the issuance of COs. See 12 U.S.C. 1431(a). Finance Board 
regulations governing the issuance of COs are set forth in 12 CFR Parts 
910 and 941.
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    \1\ A bond, note or debenture represents a loan made to the 
FHLBanks by a lender (``bondholder''). When the Finance Board issues 
a bond, note or debenture on behalf of the FHLBanks, the FHLBanks 
become legally obligated by the terms of the instrument to repay a 
specific amount of money, at a specific point in time, at a 
specified rate of interest. In practice, the FHLBanks receiving the 
proceeds of the issuance assume the obligation to service the 
principal and interest payments for that issuance on behalf of all 
of the FHLBanks. Interest payments on bonds usually are made twice a 
year. Because the Bank Act specifies that the FHLBanks are jointly 
and severally liable on the consolidated obligations issued by the 
Finance Board for the benefit of the FHLBanks, each FHLBank is 
liable for the repayment of the entire debt, including the interest 
payments, for each consolidated obligation. Consolidated obligations 
are sold in book entry form. The owner of the bond, note or 
debenture has no certificate, and there is no trust indenture 
associated with the issuance. Standard & Poors and Moody's are the 
two primary rating services that rate bonds. The rating services 
have developed a letter ranking system to indicate their assessment 
of the likelihood of default of the instruments rated. Bonds rated 
AAA by Standard & Poors and Aaa by Moodys are the highest quality 
debt obligations. All consolidated obligation bonds are rated AAA or 
Aaa.
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    The FHLBanks finance their operations principally with the proceeds 
from COs issued by the Finance Board on their behalf. As of September 
30, 1998, there were approximately $336.3 billion in consolidated 
obligations outstanding. In the history of the FHLBank System, no 
FHLBank has ever been delinquent or defaulted on a principal or 
interest payment on any consolidated obligation issued by the Finance 
Board or the Federal Home Loan Bank Board, its predecessor agency 
(FHLBB).
    Neither the Finance Board nor the FHLBB adopted regulations to 
establish the manner in which the joint and several liability of the 
FHLBanks would operate in the event of impending default or delinquency 
on a consolidated obligation. Although the FHLBank System remains 
financially healthy and strong, and no such default or delinquency is 
expected, the joint and several liability has become a matter of 
interest in recent years for other reasons. The municipal bankruptcy 
and resulting receivership of the County of Orange, California (Orange 
County), and the ensuing litigation brought by the receiver for Orange 
County against the FHLBanks, Office of Finance and United States (among 
others),\2\ raised issues concerning liability allocation arising from 
issuing and servicing consolidated obligations. Additionally, new 
initiatives and activities undertaken by the FHLBanks, such as the 
Mortgage Partnership FinanceTM, pilot program

[[Page 6820]]

have caused at least one FHLBank to suggest that it would be beneficial 
to clarify how the joint and several financial responsibility for the 
consolidated obligations would be allocated among the FHLBanks if a 
FHLBank were to experience a payment problem. The Finance Board 
believes that it is prudent to clarify for holders of COs how they will 
benefit from the statutory joint and several liability of the FHLBanks 
set forth in section 11 of the Bank Act and to clarify for the FHLBanks 
how their joint and several obligation would operate. The Finance Board 
also believes it is important to emphasize the Finance Board's intent 
that holders of COs will never experience an interruption in the flow 
of interest or principal payments. The regulatory proposal is designed 
to prevent delinquency in payment, to establish a payment priority 
system, and to specify as a regulatory matter that the Finance Board 
has ultimate authority and discretion at any time to call on any 
FHLBank to make those payments.
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    \2\ See County of Orange, et al. v. Federal Home Loan Bank of 
Boston, et al., Case No. SA VC 97-122-GLT (C.D. Cal.). See also 
County of Orange et al. v. Bear Stearns, & Co., et al., Case No. SA 
CV 98-0527-GLT, et al. (C.D.Cal.) (Order granting good faith 
settlement determinations entered November 30, 1998.) (Orange County 
agreed to drop all claims against the FHLBank System in connection 
with a settlement reached with Merrill, Lynch & Co. The FHLBanks, 
Office of Finance, and United States deny any wrongdoing and will 
not pay any amount in connection with the settlement.)
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    The Finance Board cannot and does not seek to alter the statutory 
joint and several liability of the FHLBanks for COs. Rather, pursuant 
to its authority to ensure that the FHLBanks remain able to raise funds 
in the capital markets and to adjust the relative equities among the 
FHLBanks in connection with the issuance of COs, see 12 U.S.C. 
1422a(a)(3)(B)(iii) and 1431(d), the Finance Board is proposing to 
establish a procedure to assure timely interest and principal payments 
on COs and a system of priorities among the FHLBanks under which the 
assets of a FHLBank participating in the proceeds of a consolidated 
obligation issuance would be applied first toward the satisfaction of 
that consolidated obligation before the assets of any other FHLBank 
would be reached.

II. Statutory and Regulatory Background

    The Finance Board, consistent with its primary duty to ensure that 
the FHLBanks operate in a financially safe and sound manner, must 
``ensure that the FHLBanks remain adequately capitalized and able to 
raise funds in the capital markets.'' See 12 U.S.C. 1422a(a)(3)(A) and 
(3)(B)(iii). Pursuant to the authority set forth in sections 11(b) and 
(c) of the Bank Act, the Finance Board may issue consolidated FHLBank 
debentures or bonds which ``shall be the joint and several obligations 
of all the Federal Home Loan Banks, and shall be secured and be issued 
upon such terms and conditions as the [Finance] Board may prescribe.'' 
See 12 U.S.C. 1431(b) and (c). Moreover, section 11(d) of the Bank Act 
provides that the Finance Board shall have full power to require the 
FHLBanks to ``deposit additional collateral or to make substitutions of 
collateral or to adjust equities between the Federal Home Loan Banks.'' 
12 U.S.C. 1431(d).
    The FHLBanks collectively are the sole obligor on COs. The Bank Act 
makes clear that COs are not the obligations of and are not guaranteed 
by the United States. See 12 U.S.C. 1435. Congress underscored this 
important precept when it enacted the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992, which provides in pertinent 
part:

    This chapter may not be construed as obligating the Federal 
Government, either directly or indirectly, to provide any funds to * 
* * the Federal Home Loan Banks, or to honor, reimburse, or 
otherwise guarantee any obligation or liability of the * * * Federal 
Home Loan Banks. This chapter may not be construed as implying that 
any such * * * Bank, or any obligations or securities of such * * * 
Bank, are backed by the full faith and credit of the United States.

Pub. L. 102-550, 106 Stat. 3944, tit. XIII, sec. 1304 (Oct. 28, 1992), 
codified at 12 U.S.C. 4503.
    The issuance of COs is governed by Finance Board regulations set 
forth in 12 CFR Parts 910 and 941. The Finance Board sets the general 
parameters for the issuance of COs through periodic debt 
authorizations. See, e.g., Finance Board Res. No. 98-59 (Dec. 2, 1998).
    As originally enacted in 1932, section 11 of the Bank Act made no 
provision for the Finance Board's predecessor, the FHLBB, to issue COs 
on behalf of the FHLBanks. Section 11 permitted the FHLBanks, under 
certain conditions, to issue debt individually or in concert with one 
or more other FHLBanks. In all cases, as originally enacted, section 11 
required that ``the [FHL]Banks shall be jointly and severally liable 
for the payment when due of all bonds and debentures, and of notes and 
other obligations issued by any [FHL]Bank.'' 12 U.S.C. 1431 (1932). The 
FHLBanks were permitted to make agreements to ensure the payment of 
such obligations, so long as the agreements did not restrict in any way 
the FHLBanks' joint and several liability. Thus, under the original 
statutory scheme, the FHLBanks were jointly and severally liable for 
the debt of any FHLBank and were required (subject to the rules, 
regulations and orders of the FHLBB) to make provisions for the payment 
of their obligations on the bonds, etc., so long as there was no 
restriction on the joint and several liability of the FHLBanks. To 
date, no FHLBank has issued any debt instrument in the capital markets. 
See H.R. Rep. No. 1922, 73rd Cong., 2d Sess., at 72-74 (1934).
    In 1934, Congress amended section 11 of the Bank Act to give the 
FHLBank System more ready access to the capital markets. Section 503 of 
the National Housing Act of 1934 amended section 11 of the Bank Act to 
authorize the FHLBB to issue consolidated obligations on which the 
FHLBanks would be jointly and severally liable. 12 U.S.C. 1431(b) and 
(c). The constraints on the FHLBanks' power to issue debt contained in 
section 11 as originally enacted were replaced by a provision that made 
the FHLBanks' power to issue debt ``generally subject to the rules and 
regulations prescribed by the Federal Home Loan Bank Board.'' 12 U.S.C. 
1431 (1932). The 1934 amendments also eliminated the requirement that 
the FHLBanks must be jointly and severally liable for any individual 
FHLBank's issuance. Section 11 as it reads now is essentially unchanged 
from the 1934 amendments.
    Sections 11(b) and (c) of the Bank Act provide that every 
consolidated obligation ``shall be the joint and several liability of 
all [FHL]Banks. * * *'' See 12 U.S.C. 1431(b) and (c). The imposition 
of joint and several liability means that each FHLBank is an obligor on 
every consolidated obligation; that is, each FHLBank is bound jointly 
with all other FHLBank-obligors and is liable separately for the entire 
obligation.\3\ The legal effect of joint and several liability is that 
a ``creditor may sue one or more of the parties to such liability 
separately, or all of them together at his option.''\4\
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    \3\ See Williston & Jaeger, 2 A Treatise on the Law of Contracts 
Sec. 316 (3d ed., 1959).
    \4\ See Black's Law Dictionary 751 (5th ed. 1979). ``On such a 
contract each obligor is liable severally or jointly with his co-
obligors for all of the damages caused by a breach. There is, 
therefore, one more cause of action than there are obligors.'' Id.
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    Pursuant to the statutory authority recited above, the Finance 
Board has promulgated regulations governing the issuance of 
consolidated obligations. In 1989, Congress authorized the Finance 
Board to maintain the Office of Finance, a joint office of the 
FHLBanks, and to delegate the ministerial functions associated with the 
issuance of the consolidated obligations. See 12 U.S.C. 1422b(b)(1) and 
(2). See also Financial Institutions Reform, Recovery and Enforcement 
Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 183, tit. VII, sec. 
702, Aug. 9, 1989. Accordingly, the Finance Board delegated to the 
Office of Finance the authority to issue consolidated obligations under 
section 11 of the Bank Act subject to Finance Board regulations, 
resolutions or

[[Page 6821]]

policies. See 12 CFR 900.30. The operations of the Office of Finance 
are governed by regulations promulgated by the Finance Board in 12 CFR 
Part 941.
    The issuance of the consolidated obligations is governed by the 
regulations set forth in 12 CFR Parts 910 and 941. The Finance Board 
also adopted a regulation that provides for a leverage limit on the 
issuance of consolidated obligations. The rule prohibits the issuance 
of senior bonds where immediately following such issuance the aggregate 
amount of senior bonds and unsecured, senior liabilities would exceed 
twenty times the total paid-in capital stock, retained earnings, and 
reserves (exclusive of loss and deposit reserves required pursuant to 
section 1431(g) of all of the FHLBanks).\5\ Additionally, the Finance 
Board promulgated a regulation requiring the FHLBanks to maintain 
certain assets at all times free of lien or pledge (the so-called 
``negative pledge'' requirement) to ensure sufficient collateralization 
of the consolidated obligations.\6\ Since the Finance Board was 
authorized to issue consolidated obligations on which the FHLBanks are 
jointly and severally liable, no FHLBank has defaulted on any principal 
or interest payment.
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    \5\ The following definitions apply to the leverage limit 
provisions: ``(b) `Consolidated bonds' means bonds or notes issued 
on behalf of all [FHL]Banks. (c) `Senior bonds' means consolidated 
bonds issued pursuant to 12 U.S.C. 1431 and this part and not 
defeased, other than bonds specifically subordinated to any then 
outstanding consolidated bonds. (d) `Unsecured, senior liabilities' 
means all obligations of the Banks recognized as a liability under 
Generally Accepted Accounting Principles, except (1) Liabilities 
that are covered by a perfected security interest; (2) Consolidated 
bonds; (3) Bonds issued pursuant to 12 U.S.C. 1431(a); and (4) 
Allowances for losses for off-balance sheet obligations.'' 12 CFR 
910.0(b)-(d).
    \6\ See 12 CFR 910.1(c). ``The [FHL]Banks shall at all times 
maintain assets of the following types, free from any lien or 
pledge, in a total amount at least equal to the amount of senior 
bonds outstanding: (1) Cash; (2) Obligations of or fully guaranteed 
by the United States; (3) Secured advances; (4) Mortgages as to 
which one or more [FHL]Banks have any guaranty or insurance, or 
commitment therefore, by the United States or any agency thereof; 
(5) Investments described in section 16(a) of the Bank Act, as 
amended (12 U.S.C. 1436(a)); and (6) Other securities which have 
been assigned a rating or assessment by a major nationally 
recognized securities rating agency that is equivalent to or higher 
than the rating or assessment assigned by such agency or senior 
bonds outstanding. (Proviso omitted.)''
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    Under the present system, a FHLBank that needs funds for its 
operations contacts the Office of Finance to begin negotiations with 
one or more of the numerous broker-dealers who have been pre-screened 
and qualified by the Office of Finance to purchase and resell 
consolidated obligations in the capital markets. Once the parties are 
in agreement on the terms of the obligation, offering documents are 
prepared and the Office of Finance issues instructions for the delivery 
of the consolidated obligation to, and simultaneous receipt of the 
proceeds from, the purchaser through the electronic payment system 
operated by the Federal Reserve Bank of New York (``FEDWIRE''). A 
``Master Fiscal Agency Agreement'' is in place between the FHLBanks and 
the Board of Governors of the Federal Reserve System for this purpose. 
The Office of Finance has an account at the Federal Reserve Bank of New 
York (NY Fed) that is used to effect delivery and payment transactions. 
Pursuant to FEDWIRE instructions from the Office of Finance, the NY Fed 
credits OF's account with the proceeds of a consolidated obligation 
issuance. Likewise, the NY Fed debits OF's account for interest and 
principal payments on a consolidated obligation. (In some cases, more 
than one FHLBank may participate in an issuance, and is entitled to the 
proceeds in the proportions agreed upon, and required to make principal 
and interest payments accordingly.) At the end of each business day, 
the OF nets the proceeds against the principal and interest payments 
due for each participating FHLBank. While a participating FHLBank is 
obligated to make the principal and interest payments on its 
consolidated obligations, all FHLBanks, by law, are jointly and 
severally liable for the interest and principal payments on all 
consolidated obligations, which is stated on the face of the Offering 
Circular.
    The likelihood of a delinquency or default on a consolidated 
obligation has been and continues to be extremely remote. In order to 
avoid the possibility of such delinquency or default on a consolidated 
obligation, however remote, the Finance Board believes it is important 
to adopt a regulation that will codify the authority of the Finance 
Board to act promptly to intercede before any substantial deterioration 
of a FHLBank's earnings, and to ensure the continued timely servicing 
of any and all COs. To the maximum extent possible under the law, 
holders of consolidated obligations will have first priority in any 
payment plan. The FHLBanks that participate in a consolidated 
obligation will be called upon to use all of their available assets to 
make good on their payment obligations. Any non-participating FHLBank 
that makes an interest payment or otherwise makes good on a 
consolidated obligation shall be entitled to reimbursement from the 
participating FHLBanks and all other FHLBanks as the Finance Board 
determines pursuant to this proposed rule.

III. Analysis of Proposed Rule

    In furtherance of the Finance Board's duties to ensure that the 
FHLBanks operate in a safe and sound manner and are able to obtain 
funding in the capital markets, the proposed rule sets forth the means 
by which the Finance Board will apportion the joint and several 
liability on consolidated obligations among the FHLBanks. The proposed 
rule would establish a process by which the Finance Board would look 
first to the assets of a FHLBank that received the proceeds of a 
consolidated obligation to make the principal and interest payments on 
that consolidated obligation, and defines such a FHLBank as a 
``participating FHLBank'' for purposes of that issuance. The proposed 
rule would define a FHLBank that projected a net loss, non-compliance 
with statutory and regulatory liquidity requirements set forth in 
section 11 of the Bank Act, 12 U.S.C. 1431(g), and section III of the 
Finance Board's Financial Management Policy (FMP), or an inability to 
service the interest and principal payments due on the consolidated 
obligations in which it was a participating FHLBank as a ``non-
performing FHLBank.'' The proposed rule would require each FHLBank to 
submit quarterly certifications to the Finance Board regarding the 
consolidated obligations in which the FHLBank is a participating 
FHLBank. Each participating FHLBank must certify quarterly that it will 
not suffer a net loss, will remain in compliance with the statutory and 
regulatory liquidity requirements set forth in section 11 of the Bank 
Act, 12 U.S.C. 1431(g), and the FMP, and will remain capable of 
satisfying all consolidated obligation payments due in the next 
quarter. The proposed rule further provides that any participating 
FHLBank that cannot so certify shall file a consolidated obligation 
payment plan with the Finance Board specifying the measures the FHLBank 
will undertake to fully and timely meet its payment obligations. The 
proposed rule would require a non-performing FHLBank to refrain from 
incurring non-essential expenses, paying dividends or redeeming stock 
until its plan has been approved by the Finance Board or all of its 
consolidated obligation payment obligations for the quarter have been 
satisfied. The proposed rule would require a non-performing FHLBank to 
apply all of its assets to meet its consolidated obligation payments. 
Furthermore, the proposed rule would codify the authority of the 
Finance Board to

[[Page 6822]]

require any other FHLBank to make any such payment; and provide for any 
FHLBank making consolidated obligation payments on behalf of a non-
performing FHLBank to receive reimbursement.
    The proposed rule would add two new definitions to section 910.0--
``Participating Federal Home Loan Bank,'' and ``Non-performing Federal 
Home Loan Bank.'' The proposed rule would also add a new section 910.7. 
Section 910.7(a) would state the joint and several liability of the 
FHLBanks and the duty of the FHLBanks to give priority to consolidated 
obligation payments. Proposed section 910.7(b)(1) would require 
quarterly certification by each FHLBank to the Finance Board that the 
FHLBank will not suffer a net loss, will remain in compliance with the 
statutory and regulatory liquidity requirements set forth in section 11 
of the Bank Act, 12 U.S.C. 1431(g), and the FMP, and will remain 
capable of servicing all of its consolidated obligation payments due 
during that quarter. Section (b)(2) would require a participating 
FHLBank to report immediately any projected net loss, inability to 
service its consolidated obligations, or any non-compliance with the 
statutory and regulatory liquidity requirements. The proposed rule in 
section (b)(3) would codify the authority of the Finance Board to 
require a FHLBank to file a report pursuant to section (b)(2) under 
certain circumstances. Under section (c) of the proposed rule any 
FHLBank projecting or experiencing an inability to service its current 
consolidated obligations would be required to submit a consolidated 
obligation payment plan to the Finance Board and would be required to 
refrain from incurring non-essential operating expenses, declaring or 
paying dividends, or redeeming any stock, until its consolidated 
obligation payment plan is approved by the Finance Board and its 
consolidated obligation payment obligations are satisfied. In the 
remote event that any participating FHLBank would be unable, due to 
actual or projected cash flow or balance sheet deficiencies, to service 
such consolidated obligations, section (d) of the proposed rule 
provides that the Finance Board would order one or more other FHLBanks 
to make such payments. The non-performing FHLBank would be liable to 
those other FHLBanks for reimbursement. The Finance Board would look to 
the assets of the non-performing FHLBank for reimbursement of such 
payments.
    Under section (e) of the proposed rule, the reallocation of the 
payment obligations among the other FHLBanks would be based on the pro 
rata participation of each FHLBank in all consolidated obligations 
outstanding as of the most recent month end for which the Finance Board 
has data. The reallocation (as opposed to payments that may be ordered 
by the Finance Board) would occur only after the non-performing FHLBank 
had applied all of its assets to service any consolidated obligation. 
Finally, section (f) of the proposed rule codifies the authority of the 
Finance Board to act if the inability of any FLHBank to service its 
consolidated obligations cannot be cured promptly.

IV. Regulatory Flexibility Act

    The proposed rule applies only to the FHLBanks, 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, 5 U.S.C. 605(b), the Finance Board 
hereby certifies that this proposed rule, if promulgated as a final 
rule, will not have significant economic impact on a substantial number 
of small entities.

V. Paperwork Reduction Act

    This proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 350, et 
seq. Consequently, the Finance Board has not submitted any information 
to the Office of Management and Budget for review.

List of Subjects in 12 CFR Part 910

    Consolidated bonds and debentures, Federal home loan banks, 
Securities.

    For the reasons stated in the preamble, the Finance Board proposes 
to amend 12 CFR part 910 as follows:

PART 910--CONSOLIDATED BONDS AND DEBENTURES

    1. Revised the authority citation for part 910 to read as follows:

    Authority: 12 U.S.C. 1422a, 1422b and 1431.

    2. Amend Sec. 910.0 by adding paragraphs (e) and (f) to read as 
follows:


Sec. 910.0  Definitions.

* * * * *
    (e) Participating Federal Home Loan Bank means the Federal Home 
Loan Bank or Banks that received proceeds from the sale of a 
consolidated obligation issued by the Board pursuant to section 11 of 
the Federal Home Loan Bank Act (12 U.S.C. 1431).
    (f) Non-Performing Federal Home Loan Bank means any participating 
Federal Home Loan Bank that fails to certify pursuant to 
Sec. 910.7(b)(1) of this part that it is able to pay principal and 
interest payments when due, that fails to make such payments when due, 
that fails to file a plan with the Board to meet its obligations on 
consolidated obligations, that is required by the Board pursuant to 
Sec. 910.7(b)(3) of this part to file a report, or that is determined 
by the Board to require assistance in meeting its obligations on 
consolidated obligations.
    3. Add Sec. 910.7 to read as follows:


Sec. 910.7  Joint and several liability

    (a) In general. (1) Each and every Federal Home Loan Bank, 
individually and collectively, has a duty to make full and timely 
payment of all principal and interest on consolidated obligations when 
due.
    (2) Each and every Federal Home Loan Bank individually and 
collectively shall ensure that the timely payment of principal and 
interest on all consolidated obligations is given priority over, and is 
paid in full in advance of any payment to or redemption of shares from 
any shareholder, or any other creditor not entitled by law or contract 
to priority over or parity with the holder of consolidated obligations.
    (b) Certification and Reporting. (1) Before the end of each 
calendar quarter, and before declaring or paying any dividend for that 
quarter, the President of each Federal Home Loan Bank shall certify in 
writing to the Finance Board that the Federal Home Loan Bank will not 
suffer a net loss, will remain in compliance with the statutory and 
regulatory liquidity requirements set forth in section 11 of the 
Federal Home Loan Bank Act (12 U.S.C. 1431(g)), and the Board's 
Financial Management Policy, and will remain capable of making full and 
timely payment of all interest and principal payments on consolidated 
obligations coming due during the upcoming quarter, in which such 
Federal Home Loan Bank is a participating Federal Home Loan Bank (as 
defined in Sec. 910.0(e) of this part).
    (2) A Federal Home Loan Bank shall report immediately to the Board 
if at any time:
    (i) The Federal Home Loan Bank is unable to provide the 
certification required in paragraph (b)(1) of this section;
    (ii) Subsequent to providing the certification required in 
paragraph (b)(1) of this section, the Federal Home Loan Bank projects 
that it will incur a net loss, fail to comply with statutory and 
regulatory liquidity requirements, or will be unable to timely and 
fully service consolidated obligations in which the Federal Home Loan 
Bank is

[[Page 6823]]

a participating Federal Home Loan Bank due during the quarter;
    (iii) The Federal Home Loan Bank actually incurs a net loss, fails 
to comply with statutory and regulatory liquidity requirements, or will 
be unable to timely and fully service consolidated obligations in which 
the Federal Home Loan Bank is a participating Federal Home Loan Bank 
due during the quarter.
    (iv) The report shall be accompanied by the consolidated obligation 
payment plan referenced in paragraph (c) of this section.
    (3) If at any time the Board has reason to believe that a Federal 
Home Loan Bank will incur a net loss, cease to be in compliance with 
the statutory and regulatory liquidity requirements, or will lack the 
capacity to timely and fully service its consolidated obligations, the 
Board may require such Federal Home Loan Bank to file a report pursuant 
to paragraph (b)(2) of this section.
    (c) Consolidated obligation payment plans. (1) If a participating 
Federal Home Loan Bank becomes a non-performing Federal Home Loan Bank 
(as defined in Sec. 910.0(f) of this part) as a result of failing to 
provide the certification required in paragraph (b)(1) of this section, 
that Federal Home Loan Bank shall, prior to the beginning of the 
quarter in which the shortfall is estimated to occur, submit a 
``consolidated obligation payment plan.'' A consolidated obligation 
payment plan shall specify the measures the non-performing Federal Home 
Loan Bank will undertake to make full and timely payments of all 
principal and interest consolidated obligation payments due during the 
quarter.
    (2) A Federal Home Loan Bank submitting a report pursuant to 
paragraphs (b)(2) or (b)(3) of this section, shall at the same time 
submit a consolidated obligation payment plan as described in paragraph 
(c)(1) of this section.
    (3) A non-performing Federal Home Loan Bank shall refrain from 
incurring any non-essential expenses, from declaring or paying 
dividends, and from redeeming any capital stock, until such time as the 
Board has approved the Federal Home Loan Bank's consolidated obligation 
payment plan or ordered another remedy, and all of the non-performing 
Federal Home Loan Bank's consolidated obligation payments have been 
brought current.
    (d) Board payment orders. (1) The Board, in its discretion, may 
order any Federal Home Loan Bank to make any principal or interest 
payment due on any consolidated obligation.
    (2) To the extent that a Federal Home Loan Bank is ordered by the 
Board to make, or otherwise by agreement makes, any payment on any 
consolidated obligation in excess of its obligations as a participating 
Federal Home Loan Bank, the Federal Home Loan Bank shall be entitled to 
reimbursement from the non-performing Federal Home Loan Bank (which 
shall have a corresponding obligation to reimburse the Federal Home 
Loan Bank providing assistance) to the extent of such payment and other 
associated costs, including reasonable interest.
    (e) Adjustment of equities. (1) Any non-performing Federal Home 
Loan Bank shall apply its assets to fulfill its consolidated 
obligations payment obligations, which shall include reimbursement 
(including reasonable interest) to any Federal Home Loan Bank that has 
made payments on behalf of the non-performing Federal Home Loan Bank, 
whether by agreement with the non-performing Federal Home Loan Bank or 
by order of the Board.
    (2) If the assets of a non-performing Federal Home Loan Bank are 
insufficient to satisfy all consolidated obligation payment obligations 
set forth in paragraph (e)(1) of this section, then the Board shall 
allocate the outstanding liability among the remaining Federal Home 
Loan Banks on a pro rata basis in proportion to each Federal Home Loan 
Bank's participation in all consolidated obligations outstanding as of 
the end of the most recent month for which the Board has data.
    (f) Reservation of authority. Nothing in this section shall affect 
the Board's ability to take such enforcement or other action against 
any Federal Home Loan Bank pursuant to the Board's authority under the 
Federal Home Loan Bank Act or otherwise to supervise the Federal Home 
Loan Banks and ensure that they are operated in a safe and sound 
manner.

    Dated: January 27, 1999.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-3407 Filed 2-10-99; 8:45 am]
BILLING CODE 6725-01-P