[Federal Register Volume 64, Number 65 (Tuesday, April 6, 1999)]
[Rules and Regulations]
[Pages 16618-16621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8356]
FEDERAL HOUSING FINANCE BOARD
12 CFR Part 935
[No. 99-20]
RIN 3069-AA77
Collateral Eligible To Secure Federal Home Loan Bank Advances
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending
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
and securities representing an equity interest in eligible collateral,
qualify as eligible collateral to secure FHLBank advances. The final
rule also amends the Finance Board's regulation on collateral
verification to eliminate certain ambiguities therein.
DATES: This final rule is effective on April 15, 1999.
FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Attorney-Advisor,
[[Page 16619]]
Office of General Counsel, (202) 408-2932, Federal Housing Finance
Board, 1777 F Street, NW., Washington, DC 20006, or by electronic mail
at [email protected].
SUPPLEMENTARY INFORMATION:
I. The Proposed Rule
On December 8, 1998, the Finance Board published for comment a
proposed rule to amend its Advances Regulation, 12 CFR part 935,
primarily in order to codify in the Regulation provisions governing
various collateral arrangements that have been the subject of
regulatory interpretations and requests for such interpretations from
the FHLBanks and their members. See 63 FR 67625 (Dec. 8, 1998). The
sixty day public comment period closed on February 8, 1999. The Finance
Board received a total of forty comments: eleven from FHLBanks,
seventeen from FHLBank members, five from trade associations, two from
members of Congress, and one each from an investment broker/dealer
serving FHLBank members, an accounting firm, a state governor and a
non-member corporate credit union. Only the non-member corporate credit
union opposed the rule generally.
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 Advances Regulation implements and clarifies the
statutory requirements of section 10 of the Bank Act that relate to the
security interests that a FHLBank must obtain and maintain when making
advances to member institutions. 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. See 12 CFR 935.9-12.
In response to numerous requests from both FHLBanks and their
members to clarify or interpret these collateral provisions in the
context of specific transactions, the Finance Board proposed to amend
Sec. 935.9 to make explicit in the Regulation that the FHLBanks may
accept as collateral to secure advances to members: (1) the insured or
guaranteed portions of federally-insured or guaranteed loans,
regardless of delinquency status; (2) securities representing an equity
interest in eligible collateral; and (3) eligible mortgage or
government securities collateral held by members' wholly-owned
investment subsidiaries, under the conditions set forth in the proposed
rule. In addition, the Finance Board proposed to amend Sec. 935.11(b)
of the Advances Regulation, governing collateral verification, to
eliminate an ambiguous reference therein to standards established by
the Auditing Standards Board of the American Institute of Certified
Public Accountants (AICPA).
II. Comments on the Proposed Rule and Analysis of Changes Made in
the Final Rule
A. Eligible Collateral Pledged by a Qualifying Investment Subsidiary
The proposed rule would have amended Sec. 935.1 of the Advances
Regulation to include a definition of the term ``Qualifying Investment
Subsidiary'' (QIS), which was to include business entities that: (1)
Are wholly owned by a member; (2) are operated solely as passive
investment vehicles on behalf of that member; and (3) hold only cash
equivalents and assets that are eligible collateral under
Secs. 935.9(a)(1) and (2) of the Advances Regulation. In turn, the
proposed rule would have created a new Sec. 935.9(b) under which the
FHLBanks would have been expressly permitted to accept pledges of
eligible collateral from a member's QIS to secure advances to that
member where the FHLBank was able to obtain and maintain a security
interest in the collateral pursuant to which its rights and privileges
were functionally equivalent to those that the FHLBank would possess if
the member were to pledge the collateral directly.
These proposed provisions were intended primarily to address
requests from FHLBanks to accept as security for advances to members
eligible collateral held by Real Estate Investment Trust and state
security corporation subsidiaries. However, a large number of
commenters questioned the Finance Board's proposal to address only
pledges of collateral from a narrow class of wholly-owned subsidiaries,
while ignoring collateral arrangements with other types of affiliates
that may be permissible under the Bank Act. In light of these comments,
the Finance Board has decided to remove these QIS provisions from the
text of the final rule pending further analysis of the issue. It is
anticipated that, in the near future, the Finance Board will either
finalize the QIS provisions separately in a modified form, or will
issue a new proposed rule that addresses in a more comprehensive
fashion pledges of collateral from members' affiliates.
B. Equity Interests in Eligible Collateral
Section 935.9(a)(1)(iii) of the proposed rule expressly authorized
FHLBanks to accept as collateral for advances to members any security
the ownership of which represents an undivided equity interest in whole
mortgages or mortgage-backed securities (MBS), all of which qualify as
eligible collateral under Sec. 935.9(a)(1). Similarly,
Sec. 935.9(a)(2)(ii) of the proposed rule expressly authorized FHLBanks
to accept as collateral any security the ownership of which represents
an undivided equity interest in underlying assets, all of which qualify
as eligible government securities collateral under Sec. 935.9(a)(2).
These provisions were intended to permit FHLBanks to accept as
collateral shares of mutual funds and similar equity investments where
the underlying assets of the fund comprise only eligible collateral.
Seven commenters (two FHLBanks, two members, two trade associations
and the investment broker/dealer) expressly supported, and no
commenters expressly opposed, these provisions. However, the two
FHLBanks opposed the proposed rule's requirement that the underlying
assets of the fund consist only of eligible collateral. Noting that it
is likely that, for liquidity purposes, such funds may hold a small
percentage of assets that do not qualify as eligible collateral, one
FHLBank suggested that the FHLBanks be authorized to accept shares of
funds where at least 90 percent of the underlying assets are eligible
collateral. The other FHLBank suggested that FHLBanks be permitted to
lend against the pro-rata share of the underlying assets that do
qualify as eligible collateral. In the final rule, the Finance Board
has combined the material contained in proposed Secs. 935.9(a)(1)(iii)
and (a)(2)(ii) into a new Sec. 935.9(a)(5), under which the FHLBanks
are permitted to accept shares of mutual funds and similar investments
that represent an undivided equity interest in underlying assets that
qualify as eligible collateral under either Sec. 935.9(a)(1) or (a)(2).
This change makes clear that FHLBanks may accept shares of funds that
hold a combination of eligible mortgage assets and eligible government
securities, in addition to
[[Page 16620]]
those that hold either one or the other type of eligible collateral. In
addition, new Sec. 935.9(a)(5) makes clear that such funds may also
hold cash or cash equivalents without losing their eligibility as
collateral for advances. Because of the complexities of monitoring the
fluctuating asset pools of mutual funds and similar investments, the
Finance Board has determined that it will not, at this time, permit
FHLBanks to accept under new Sec. 935.9(a)(5) shares of funds that hold
any assets that are neither eligible collateral under Secs. 935.9(a)(1)
or (a)(2), nor cash or cash equivalents. Depending on the mix of the
underlying assets, however, shares of such funds may constitute
eligible collateral under Sec. 935.9(a)(4).
C. Government Securities
In the proposed rule, the Finance Board proposed to redesignate the
existing text of Sec. 935.9(a)(2) of the Advances Regulation as
Sec. 935.9(a)(2)(i)(A) and to add: a new paragraph (i)(B) to make clear
that FHLBanks may accept, as eligible government securities collateral,
mortgages or other loans, regardless of delinquency status, to the
extent that the repayment of the principal and/or interest on such
mortgages or loans is backed by the United States Government or any of
its agencies; and a new paragraph (i)(C) to make clear that FHLBanks
may also accept as eligible 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
(to the extent of such insurance or guarantee), even if the investment
instrument itself is not so insured or guaranteed. Proposed
Secs. 935.9(a)(2)(i)(B) and (C) have been redesignated in the final
rule as Secs. 935.9(a)(2)(ii) and (iii), respectively.
Nineteen commenters (nine members, four trade associations, three
FHLBanks, two members of Congress and one state governor) expressly
supported these changes and one commenter (the non-member corporate
credit union) expressly opposed them. Several commenters noted
specifically that, in the risk-based capital provisions of their
respective regulations, the federal financial institution regulatory
agencies recognize that individual loans that are insured or guaranteed
by the United States Government possess risk equal to that of
government-insured or guaranteed securities representing interests in
pools of loans.
A significant number of commenters requested that the Finance Board
make clear in the preamble to the final rule that Sallie Mae student
loans reinsured by the U.S. Department of Education (DOE) and
certificates backed by pools of such loans will be considered to be
eligible collateral pursuant to the new provisions. The Finance Board
understands that, with respect to at least some Sallie Mae loans made
under the Federal Family Education Loan Program (FFELP), the holder of
the loan benefits directly only from the guarantee of a Guarantee
Agency that is not part of the federal government. While a Guarantee
Agency may have a legal right to be reimbursed by the DOE for a portion
of guarantee payments made to holders of defaulted student loans, the
holders of these loans do not, in most circumstances, have any right to
reimbursement from the federal government. Without concluding that
Sallie Mae loans may never be considered to be ``government
securities,'' the Finance Board has determined that, where a member
holding a loan is not the direct beneficiary of insurance or a
guarantee payable by the United States or its agencies, such loans will
not be considered to be eligible government securities collateral under
section 10(a)(2) of the Bank Act. Accordingly, the text of final
Sec. 935.9(a)(2)(ii) has been revised to reflect this requirement.
Many commenters responded favorably to the statement in the
preamble to the proposed rule that, pursuant to the new provisions, the
guaranteed portions of small business loans guaranteed by the Small
Business Administration (SBA) could be accepted as government
securities collateral under Sec. 935.9(a)(2). Since the publication of
the proposed rule, the Finance Board has learned that, under SBA
regulations, holders of SBA guaranteed loans made under the SBA's 7(a)
Program may not use the guaranteed portions of these loans as
collateral for any borrowing without the prior written consent of the
SBA, which will be granted only if certain conditions are met. See 13
CFR 120.420. While the Finance Board continues to consider the
guaranteed portions of SBA loans to be eligible collateral under
Sec. 935.9(a)(2)(ii) of the final rule, it is the responsibility of the
FHLBank and its borrowing member to ensure that these and any other
statutory and regulatory requirements pertaining to the pledging of
government-insured or guaranteed loans are met at the time such assets
are taken as collateral. The Finance Board has no authority to
interpret, waive, or enforce the regulations of other federal agencies
and has not undertaken a comprehensive survey of statutory and
regulatory requirements that may apply to government-insured or
guaranteed loans that may be accepted as collateral under new
Secs. 935.9(a)(2)(ii) and (iii).
The one commenter that opposed the adoption of the new government
securities provisions argued that, by permitting FHLBanks to accept, in
addition to mortgages, ``other loans'' insured or guaranteed by the
United States or its agencies, the Finance Board is permitting the
FHLBanks to stray from their housing finance mission. In fact, section
10(a)(2) of the Bank Act--which is the source of statutory authority
for Sec. 935.9(a)(2) of the regulations--does not require that
government securities be mortgage-related to be eligible as collateral
for FHLBank advances. See 12 U.S.C. 1430(a)(2).
D. Collateral Verification
Finally, in the proposed rule, the Finance Board proposed to amend
Sec. 935.11(b) of the Advances Regulation, governing the verification
of the existence of collateral, to remove therefrom a requirement that
each FHLBank establish written collateral verification procedures
containing standards similar to those established by the AICPA. Three
commenters (two FHLBanks and one member) expressly supported the
amendment. Two commenters (one member and the AICPA), while not
objecting generally to revising Sec. 935.11(b), stated that any
amendment should more clearly set forth objectively measurable
expectations regarding collateral verification.
The intent behind the proposed amendment is to direct the FHLBanks
to maintain appropriate collateral verification standards and processes
and to give the Finance Board examination staff the flexibility to
assess the adequacy of specific standards and procedures adopted by
each FHLBank. Although, in the course of such a review, examiners would
normally look for consistency with generally accepted standards, such
as those established by the AICPA, to mandate particular standards in
the rule would eliminate the flexibility that the Finance Board has
determined is necessary in carrying out these examinations.
Accordingly, this amendment remains unchanged in the final rule.
III. Regulatory Flexibility Act
The final 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
[[Page 16621]]
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.
Accordingly, the Finance Board amends 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'' 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.
* * * * *
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. Revise paragraph (a) 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; or
(ii) Privately issued mortgage-backed securities, excluding the
following:
(A) Securities that represent a share of only the interest payments
or only the principal payments from the underlying mortgage loans;
(B) Securities that represent a subordinate interest in the cash
flows from the underlying mortgage loans;
(C) Securities that 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.
(2) Agency securities. Securities issued, insured or guaranteed by
the United States Government, or any agency thereof, including without
limitation:
(i) 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;
(ii) Mortgages or other loans, regardless of delinquency status, to
the extent that the 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, and such insurance, guarantee or
other backing is for the direct benefit of the holder of the mortgage
or loan; and
(iii) Securities backed by, or representing an equity interest in,
mortgages or other loans referred to in paragraph (a)(2)(ii) 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)(1)(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.
(5) Securities representing equity interests in eligible advances
collateral. Any security the ownership of which represents an undivided
equity interest in underlying assets, all of which qualify either as:
(i) Eligible collateral under paragraphs (a)(1) or (2) of this
section; or
(ii) Cash or cash equivalents.
* * * * *
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: March 19, 1999.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-8356 Filed 4-5-99; 8:45 am]
BILLING CODE 6725-01-P