[Federal Register Volume 65, Number 24 (Friday, February 4, 2000)]
[Proposed Rules]
[Pages 5447-5453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1852]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 951 and 997

[No. 2000-03]
RIN 3069-AA92


Determination of Appropriate Present-Value Factors Associated 
with Payments Made by the Federal Home Loan Banks to the Resolution 
Funding Corporation

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 regulations by adding a new part to implement provisions 
of the

[[Page 5448]]

Gramm-Leach-Bliley Act (Gramm-Leach-Bliley) related to the aggregate 
value of, and end date for, payments made by the Federal Home Loan 
Banks (Banks) to the Resolution Funding Corporation (REFCORP). These 
payments are used to pay a portion of the interest owed on bonds issued 
by REFCORP. Gramm-Leach-Bliley changed the method of assessing the 
Banks for mandated annual payments to REFCORP from a fixed payment of 
$300 million to a payment of 20 percent of the net earnings of the 
Banks. Gramm-Leach-Bliley also requires the Finance Board to adjust the 
final payment date for the Banks' obligation so that the value of the 
actual payments made under the new methodology will be equivalent to 
the value of a benchmark annuity, which corresponds to the payments 
that would have been made under the prior law. The relevant values are 
required to be discounted to reflect the time value of money, using 
appropriate present-value factors selected by the Finance Board in 
consultation with the Secretary of the Treasury.
    The proposed rule establishes a method for making the required 
present value calculations and for adjusting the termination date for 
the Banks' payments to REFCORP. As described more completely in the 
Supplementary Information, when 20 percent of the Banks' quarterly net 
earnings exceeds or falls short of a specified benchmark annuity, the 
excess or shortage will be ``used'' to defease or to extend the Banks' 
future obligations by simulating the purchase or sale of zero-coupon 
Treasury securities. The Banks' REFCORP obligation would cease when 
their payments equal the value of the benchmark annuity.

DATES: The Finance Board will accept comments on the proposed rule in 
writing on or before March 6, 2000.

ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by 
electronic mail at [email protected], or by regular mail to the 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: Joseph A. McKenzie, Deputy Chief 
Economist, Office of Policy, Research, and Analysis, (202) 408-2845, 
[email protected]; Austin J. Kelly, Senior Financial Economist, Office 
of Policy, Research, and Analysis, (202) 408-2541, [email protected]; or 
Thomas E. Joseph, Attorney-Advisor, (202) 408-2512, [email protected]. 
Staff also can be reached by regular mail at the Federal Housing 
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006. A 
telecommunication device for deaf persons (TDD) is available at (202) 
408-2579.

SUPPLEMENTARY INFORMATION:

I. Statutory Background

A. FIRREA

    The Financial Institutions Reform, Recovery, and Enforcement Act of 
1989 (FIRREA), Public Law 101-73, 103 Stat. 183 (Aug. 9, 1989), 
established REFCORP to provide funds for the Resolution Trust 
Corporation (RTC). 12 U.S.C. 1441b. REFCORP was authorized to issue up 
to $30 billion in debt obligations; as of September 20, 1999, REFCORP 
had $29.9 billion in non-callable bonds outstanding with maturities 
ranging from October 15, 2019, to April 15, 2030. The RTC used the 
proceeds from the sale of these bonds to pay the costs of liquidating 
failed savings associations. FIRREA amended the Federal Home Loan Bank 
Act (Bank Act) to require the Banks to pay $300 million annually toward 
the interest on those bonds if REFCORP's income from other sources 
specified in the Bank Act was insufficient to pay the interest on the 
REFCORP bonds. Income from these other sources has always been 
insufficient to pay the interest on the REFCORP bonds, and the Banks 
have paid $300 million annually to REFCORP. To the extent amounts 
available from the other statutorily specified sources and the Banks' 
$300 million are insufficient to pay the interest on the REFCORP bonds, 
the Bank Act directs the United States Department of the Treasury 
(Treasury) to pay to REFCORP additional amounts that will be used by 
REFCORP to pay the interest. 12 U.S.C. 1441b(f)(2)(E).
    It has been the practice of the Banks to make payments to REFCORP 
on a quarterly basis, typically on January 15, April 15, July 15, and 
October 15 of each year. These dates correspond to the dates on which 
REFCORP makes coupon payments on the outstanding bonds. The aggregate 
amount of the Banks' quarterly interest payments has been $75 million, 
which the Banks have accrued during the calendar-year quarter 
immediately preceding the payment. To date, the Banks have made all 
required REFCORP interest payments.\1\ Prior to the enactment of Gramm-
Leach-Bliley, Public Law 106-102, 113 Stat. 1338 (Nov. 12, 1999), the 
Banks' obligation to pay interest on the REFCORP bonds would have 
terminated upon payment of the $75 million due for the first quarter of 
2030, which would have been paid on April 15, 2030, the final maturity 
date for the last REFCORP bond.
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    \1\ REFCORP was capitalized through statutorily mandated 
contributions from the Banks that are held in the REFCORP principal 
fund. See 12 U.S.C. 1441b(g)(2). Those contributions, which the Bank 
Act required to be subtracted from the Banks' gross annual REFCORP 
interest obligation, ended in January 1991, and were sufficiently 
large so as to offset through January 1991 the Banks' annual 
obligations to pay a portion of the interest on the REFCORP bonds. 
The first Bank payment used exclusively to cover interest on the 
REFCORP bonds was that made for the first quarter of 1991, which was 
made on April 15, 1991.
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    As previously noted, the Banks' REFCORP obligation prior to the 
enactment of Gramm-Leach-Bliley was a fixed dollar amount that bore no 
relationship to the net income of any Bank. As a result, in the years 
that the Banks experience reduced income, as occurred in the early 
1990's, each Bank's REFCORP obligation, as a percent of its income, 
increases significantly. This historically has caused the Banks to seek 
ways to generate higher earnings to meet the statutorily mandated 
REFCORP and Affordable Housing Program \2\ obligations and to continue 
to pay a dividend sufficient to retain members. The Banks' historical 
solution to the dilemma has been to amass large portfolios of 
investment securities and generate arbitrage earnings. While this 
strategy has been profitable and has posed no safety and soundness 
threat to the Bank System, the Finance Board, Congress, and the 
Treasury have noted and criticized the strategy because the investments 
do not advance the mission of the Banks, which are government sponsored 
enterprises with a public purpose. The fixed-dollar nature of the 
REFCORP obligation has been cited by critics as part of the cause of 
the problem.
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    \2\ The Bank Act also requires each Bank to establish an 
Affordable Housing Program (AHP). See 12 U.S.C. 1430(j). In 1995 and 
subsequent years, each Bank annually must contribute 10 percent of 
its preceding year's net earnings (i.e., after REFCORP) to its AHP, 
subject to a Bank System-wide minimum contribution of $100 million. 
Id. The actual aggregate Bank-System AHP contribution in 1999 
exceeded $190 million.
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B. Gramm-Leach-Bliley

    Gramm-Leach-Bliley changed the Banks' REFCORP assessment from a 
fixed-dollar $300 million annual payment to an annual payment of 20 
percent of each Bank's net earnings. See Public Law 106-102, sec. 607, 
133 Stat. 1455-56 (amending 12 U.S.C. 1441b(f)(2)(C)). Gramm-Leach-
Bliley also contains provisions intended to assure that the change in 
the method of assessing the Banks' REFCORP obligation does not increase 
or decrease

[[Page 5449]]

the burden of paying interest on the REFCORP bonds either for the Banks 
or the Treasury. To accomplish this goal, the Gramm-Leach-Bliley 
amendments require the value of payments actually made by the Banks to 
REFCORP to equal the value of a $300 million annual annuity that 
commences on the issuance date of the first REFCORP bond (October 15, 
1989) and ends on the maturity date of the last REFCORP bond (April 15, 
2030), where the relevant values are properly discounted to account for 
the time value of money. This annuity exactly mimics the amounts that 
had been due from the Banks for interest on REFCORP bonds under the 
prior law.
    Gramm-Leach-Bliley specifically requires the Finance Board to make 
an annual determination of the extent to which the value of the 
aggregate amounts paid by the Banks exceeds or falls short of the value 
of an annuity of $300 million per year that commences on the issuance 
date and ends on the final scheduled maturity date of the obligations 
and to select appropriate present-value factors for making such 
determinations, in consultation with the Secretary of the Treasury. See 
Public Law 106-102, sec. 607, 113 Stat. 1455-56 (amending 12 U.S.C. 
1441b(f)(2)(C)(ii)). The Finance Board also is required to shorten or 
extend the term of the Banks' REFCORP obligation as necessary to ensure 
that the value of all payments made by the Banks is equivalent to the 
value of the referenced annuity. See id. (amending 12 U.S.C. 
1441b(f)(2)(C)(iii)). The Finance Board may, if required, extend the 
term of the payment obligation beyond the final scheduled maturity date 
for the REFCORP bonds. Id. (amending 12 U.S.C. 1441b(f)(2)(C)(iii) and 
(iv)).

II. Analysis of the Proposed Rule

A. Overview of the Proposed Present-Value Calculation

    In order to implement the provisions of Gramm-Leach-Bliley 
discussed above, the Finance Board is proposing a methodology for 
adjusting the date of the final REFCORP payment due from the Banks. The 
methodology entails the simulated purchase or sale each quarter of 
zero-coupon Treasury bonds.\3\ The effect of the simulated purchase or 
sale of the zero-coupon bonds will be to defease the most distant 
outstanding quarterly benchmark annuity payment or, in the case of a 
sale, to extend the benchmark annuity payment schedule in quarterly 
increments. When all quarterly annuity payments have actually been 
covered through payment or defeasance, the Banks' REFCORP obligation 
would cease. While this explanation discusses benchmark annuity 
``payments'' and the ``purchase'' and ``sale'' of zero coupon bonds, we 
emphasize that these payments, purchases, and sales are simulated and 
do not actually occur. They are used as a device to equate the cash 
flows, on a present-value basis, of the amounts paid by the Banks under 
the Gramm-Leach-Bliley provisions with the payments that would have 
been made under the prior law.
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    \3\ The use of zero-coupon Treasury bonds is consistent with 
Office of Management and Budget (OMB) Circular A-11, which 
implements the Federal Credit Reform Act of 1990 (FCRA). Under the 
FCRA, cash flows stemming from direct government loans and 
government loan guarantees are discounted by the interest rate nor 
zero-coupon Treasury securities with the same maturity as each 
quarter's projected cash flow. Thus, the recommended approach is 
consistent with the budgetary treatment of other government loan 
activities.
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    In theory, when an assessment of 20 percent of the Banks' net 
earnings exceeds the benchmark annuity value of $75 million, the excess 
amount would be used to simulate the purchase of zero-coupon Treasury 
bonds, the maturity dates of which correspond to the payment dates for 
the most-distant, non-defeased quarterly benchmark annuity and the par 
amount of which corresponds to the benchmark annuity payment due in 
that specific quarter. Because the purchased bonds ``mature'' on the 
``payment'' date for the benchmark annuity and have a par amount equal 
to the benchmark amount, the amount ``received'' upon maturity of the 
bonds can be used to ``pay'' the benchmark annuity payment. The 
simulated purchase of the zero-coupon bonds will defease the future 
benchmark annuity obligations. The estimates for the applicable 
interest rates on zero-coupon Treasury bonds maturing on specific dates 
in the future are available from, and will be provided to, the Finance 
Board by the Treasury's Office of Market Finance.
    For example, assume that on April 15, 2000, the date of the first 
REFCORP payment under the Gramm-Leach-Bliley provisions, 20 percent of 
the Banks' quarterly net earnings equals $86.3 million. Of that $86.3 
million, $75 million would be used to ``cover'' the quarterly benchmark 
annuity due on April 15, 2000 and the amount in excess of $75 million, 
or $11.3 million, would be used to simulate the purchase of a 30-year 
zero-coupon Treasury bond with a par amount of $75 million and a 
maturity date of April 15, 2030, the date of the final benchmark 
annuity payment. (The cost of the purchase of a zero-coupon bond can be 
found by taking the present value of the par amount of the bond, 
discounted at current interest rates.) At current interest rates, the 
(estimated) cost of a zero-coupon Treasury bond that matures on April 
15, 2030, has a par amount of $75 million, and is purchased on April 
15, 2000, would be approximately $11.3 million. The available excess, 
therefore, could completely defease the benchmark annuity payment of 
$75 million due on April 15, 2030.
    If 20 percent of net earnings for the first quarter of 2000 were 
greater than $86.3 million, then all or part of the penultimate 
benchmark annuity payment of $75 million due on January 15, 2030 also 
could be defeased. In this case, the ``cost' of the relevant 29-year, 
9-month zero-coupon Treasury bond with a par amount of $75 million and 
maturity date of January 15, 2030 would be approximately $11.5 million. 
Thus, if 20 percent of net earnings for the first quarter of 2000 were 
$97.8 million, the $75 million payment due on January 15, 2030, could 
also be fully defeased. (A payment of $97.8 million on April 15, 2000 
would be sufficient to cover the current $75 million quarterly 
benchmark annuity plus the $11.3 million required to defease the April 
15, 2030 annuity payment plus the $11.5 million needed to defease the 
quarterly annuity payment for January 15, 2030.)
    The reported net income for the Banks was $496 million in the 
second quarter of 1999 and $556 million in the third quarter of 1999. 
Twenty percent of these amounts would be $99.2 million and $111.2 
million, respectively, which would have produced an available quarterly 
excess much larger than was used in the above examples if the new 
assessment methodology had been in effect in 1999.
    The Finance Board is proposing that fractional parts of future 
payments can be defeased if the excess quarterly payment would defease 
less than a full payment. Using the previous example, if 20 percent of 
quarterly net income for the first quarter of 2000 were $80 million, 
only $5 million would be available to simulate the purchase of a zero-
coupon Treasury bond. This excess would go towards defeasing about 44 
percent of the April 15, 2030 payment (i.e., $5.0 million divided by 
$11.3 million). Any ``excess'' above $75 million from the Banks REFCORP 
payment due on July 15, 2000, would then be put toward defeasing the 
remainder of the April 15, 2030, benchmark annuity payment. 
Specifically, the July excess payment would be first used to simulate 
the purchase of a 29-year and 9-month zero-coupon Treasury bond that 
matures on April 15, 2030.

[[Page 5450]]

    If 20 percent of quarterly net income were less than $75 million, 
the defeasance scheme would work in reverse. Instead of simulating the 
purchase of zero-coupon Treasury bonds, the calculation would simulate 
the sale of zero-coupon bonds with a maturity corresponding to the last 
non-defeased quarterly annuity payment or to the first quarter 
thereafter if the last non-defeased annuity payment already equaled $75 
million. The interest rate would be the same as that for a zero-coupon 
Treasury bond with the same maturity date. In effect, the Banks are 
agreeing to pay back the deficit still owed on the quarterly benchmark 
annuity at a future date, and are being charged interest at the zero-
coupon Treasury rate.
    Because no quarterly benchmark annuity payment will be more than 
$75 million, if a payment deficit has a future value of more than $75 
million (or raises the value of a partially defeased quarterly 
benchmark annuity payment to more than $75 million), another quarter 
will be added at the end of the annuity schedule and the amount in 
excess of $75 million will be owed in that newly added quarter. The 
interest rate for a zero-coupon Treasury maturing in the newly added 
quarter will be used to calculate the future value of such excess 
amount. The result of these calculations would be to lengthen the end 
date of the quarterly benchmark annuity payments and effectively extend 
the Banks' REFCORP obligation. To the extent that the Banks must make 
any payments beyond the final maturity date of the REFCORP bonds, those 
payments would be made to the Treasury.
    The Finance Board believes the proposed methodology will be simple 
to implement. The only information needed to calculate the date of the 
Banks' last REFCORP payment is quarterly net income and the interest 
rate on zero-coupon Treasury bonds the maturities of which coincide 
with and bracket the date of the last non-defeased benchmark quarterly 
payment. The Treasury's Office of Market Finance has indicated that it 
will provide and certify these rates to the Finance Board, as it does 
for a number of other agencies. The Treasury uses information from 
market transactions when it estimates the interest rates on zero-coupon 
Treasury bonds.
    The Finance Board solicits comments on all aspects of the proposed 
methodology.\4\
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    \1\ Gramm-Leach-Bliley provides that the Finance Board shall 
select appropriate present-value factors for making the statutorily 
required determinations in ``consultation with the Secretary of the 
Treasury.'' Pub. L. 106-102, sec. 607,113 Stat. 1455-56 (amending 12 
U.S.C. 1441b(f)(2)(C)(ii). Finance Board staff has met with staff 
from OMB and Treasury, and will provide a copy of the proposed rule 
to the Secretary of the Treasury for comment.
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B. Definitions--Section 997.1.

    Section 997.1 of the proposed rule sets forth the definitions for a 
number of terms used in new part 997.
    The term ``actual quarterly payment'' is defined as the amounts 
that the Banks actually pay to REFCORP in accordance with a calendar-
year quarterly assessment equal to 20 percent of each Bank's quarterly 
net earnings. The Finance Board understands from discussions with 
REFCORP that the Banks will continue to make quarterly payments to 
REFCORP as set forth in the now-existing payment schedule. 
Specifically, quarterly payments are proposed to be made, as they are 
now, on January 15, April 15, July 15, and October 15 of each year (or 
on the next business day if those dates fall on weekends or holidays).
    The term ``benchmark quarterly payment'' is defined as $75 million, 
which equals one-quarter's payment on the benchmark annuity of $300 
million per year prescribed in Gramm-Leach-Bliley, or such amounts that 
may result from adjustments required by the calculations made in 
accordance with part 997. The definition, therefore, recognizes that 
the value of certain benchmark quarterly payments will be adjusted in 
line with the calculations set forth in proposed Secs. 997.2 and 997.3. 
Initially, the end date for all benchmark quarterly payments will be 
April 15, 2030, although that date will be adjusted by the calculations 
made under the proposed rule. The implicit assumption in the proposed 
rule is that the benchmark quarterly payments are due on the same date 
that the Banks' actual quarterly payments are due.
    By dividing the annual annuity into quarterly payments, the annuity 
schedule exactly corresponds to the payment schedule of $75 million per 
quarter that existed prior to the enactment of Gramm-Leach-Bliley. 
Using a quarterly benchmark annuity payment, therefore, best assures 
that the Banks' RECORP payments made under Gramm-Leach-Bliley will be 
compared exactly to the payments that would have been made under the 
prior law.
    The term ``current benchmark quarterly payment'' is defined in the 
proposed rule as the benchmark quarterly payment that corresponds to 
the actual quarterly payment. The current benchmark quarterly payment 
will almost always equal $75 million. The only exception may occur for 
the final remaining benchmark quarterly payment if that payment is less 
than $75 million because of adjustments made under Sec. 997.2 or 
Sec. 997.3.
    The terms ``excess quarterly payment'' and ``deficit quarterly 
payments'' are defined in the proposed rule as the amounts by which the 
payments actually assessed and made by the Banks to REFCORP either 
exceed or fall short of the current quarterly benchmark annuity, 
respectively. These will be the amounts used to simulate the purchase 
of the zero-coupon Treasury bonds needed to defease future benchmark 
quarterly payments or used to simulate the sale of the zero-coupon 
bonds which will effectively extend the term of the Banks' REFCORP 
obligation.
    The term ``quarterly present value determination'' is defined by 
the proposed rule to mean the calculation that will be performed under 
either Sec. 997.2 or Sec. 997.3. More importantly, the definition is 
designed to provide the method whereby the Finance Board can fulfill 
the requirement in Gramm-Leach-Bliley that ``the [Finance] Board 
annually shall determine the extent to which the value of the aggregate 
amounts paid by the Federal home loan banks exceeds or falls short of 
the value of [the benchmark] annuity.'' Public Law 106-102, sec. 607 
113 Stat. 1456 (amending 12 U.S.C. 1441b(f)(2)(C)(ii)).
    The proposed quarterly determination reflects the longstanding 
practice that the Banks pay REFCORP quarterly. More importantly, a 
calculation on other than a quarterly basis, for example on an annual 
basis, would not give the Banks credit for the time value of money 
associated with excess quarterly payments. Conversely, an annual 
calculation would not charge the Banks any interest during a year for a 
deficit quarterly payment. The Finance Board believes its proposal is 
consistent with the requirements of Gramm-Leach-Bliley. Further, the 
Finance Board believes that making its determination quarterly and at 
the same time when the Banks make their actual REFCORP payments will 
best serve Gramm-Leach-Bliley's goal of assuring that the change in the 
method of assessing the Banks' obligation will not increase or decrease 
the burden of paying interest on the REFCORP bonds either for the Banks 
or the Treasury. The Finance Board recognizes that, if the quarterly 
payment schedule for the Banks' REFCORP obligations changes, 
corresponding modifications to these rules may be necessary.

[[Page 5451]]

C. Reduction of the Payment Term--Section 997.2.

    Section 997.2 sets forth the calculation that the Finance Board 
proposes to use to determine the amount by which the term of the Banks' 
REFCORP obligation will be reduced when the Banks actual quarterly 
payment results in an excess quarterly payment. Under Sec. 997.2 of the 
proposed rule, the future value of any excess quarterly payment would 
be calculated using the interest rate on a zero-coupon Treasury bond 
rate that matures on the date of the last outstanding benchmark 
quarterly payment. The interest rate will be obtained from the Treasury 
and will be the spot interest rate for the relevant Treasury zero-
coupon bond as of the day of the Banks' actual quarterly payment. The 
future value calculation set forth in Sec. 997.2 of the proposed rule 
is the mathematical equivalent of the calculations discussed in the 
explanation in Part I above. Specifically, the calculation described in 
the proposed rule is equivalent to calculating the present value, or 
``cost,'' of a zero-coupon Treasury bond with a par amount and maturity 
date that are the same as the amount and due date for the last non-
defeased benchmark quarterly payment.
    The applicable interest rate would always be for a zero-coupon 
Treasury bond maturing on the due date of the benchmark quarterly 
payment that is affected by the defeasance calculation. Therefore, 
where an excess quarterly payment is sufficiently large so that more 
than one benchmark quarterly payment can be defeased, additional 
calculations would be made with respect to the future value amount 
remaining after the last outstanding benchmark quarterly payment has 
been defeased. First, the future value calculation for this residual 
amount would be reversed. Then, a new future value for the resulting 
residual excess quarterly payment would be calculated using the 
interest rate for a zero-coupon Treasury bond maturing in the quarter 
immediately prior to the one for which the benchmark quarterly payment 
had just been defeased.
    Given the proposed calculation, an excess quarterly payment would 
always result in removing from the benchmark annuity schedule both the 
current benchmark quarterly payment and all or part of the most-
distant, outstanding quarterly benchmark payment(s) still remaining on 
the schedule.

D. Extension of the Payment Term--Section 997.3

    Section 997.3 of the proposed rules sets forth the calculation that 
the Finance Board proposes to use to determine the amount by which the 
term of the Banks' REFCORP obligation will be extended if the Banks 
actual quarterly payment results in a deficit quarterly payment. The 
future value calculation under this section is proposed to be the same 
as the one described for proposed Sec. 997.2, except that the amount 
resulting from the calculation will be added to the last outstanding 
partial quarterly benchmark payment. Where the last outstanding 
quarterly benchmark payment is $75 million, the future value of the 
deficit quarterly payment would be applied to a new quarterly payment 
extending the annuity schedule. In no case would a benchmark quarterly 
payment exceed $75 million.
    The zero-coupon interest rate used in the proposed calculation 
would always correspond to a zero-coupon Treasury bond maturing in the 
quarter for which a new benchmark quarterly payment is being adjusted 
upward or which is being added to the annuity schedule. Given the 
proposed calculation, a deficit quarterly payment would always result 
in removing from the benchmark annuity schedule the current benchmark 
quarterly payment but adding amounts to the last outstanding benchmark 
quarterly payment or adding new benchmark quarterly payments to the 
schedule. The proposed rule makes clear that the Finance Board would 
act on its authority to extend the Banks REFCORP payment obligation 
beyond April 15, 2030, if required to do so based upon the calculations 
made under this section. See Public Law 106-102, sec. 607, 113 Stat. 
1455-56 (amending 12 U.S.C. 1441b(f)(2)(C)(iii) and (iv)).

E. Calculation of the Quarterly Present-Value Determination--Section 
997.4

    Section 997.4 of the proposed rule is based upon the assumption 
that REFCORP will make the calculations required under Secs. 997.2 and 
997.3, and provide the results of the calculations to the Finance 
Board. The Finance Board understands that REFCORP is willing and able 
to perform this task. Moreover, the Finance Board believes that REFCORP 
is the best entity to calculate the quarterly present-value 
determination. A REFCORP model is currently used both to assess the 
Banks' actual quarterly payments and to calculate the Banks' required 
AHP payments. It would be relatively simple to adjust the existing 
REFCORP model to perform the calculations required under this part. 
Allowing REFCORP both to estimate the Banks' quarterly payment 
assessment and to calculate the quarterly present-value determination 
would also centralize the relevant calculations in one entity, and thus 
facilitate the supervision and auditing of the process set forth in 
this rule.
    As proposed, Sec. 997.4 requires the Finance Board to obtain from 
Treasury the zero-coupon Treasury bond interest rates needed to 
complete the calculations and provide those rates to REFCORP. REFCORP, 
itself, will know the value of the Banks' actual quarterly payments 
since REFCORP collects those payments from the Banks. The Finance Board 
would maintain the official record of the results of the calculations. 
Section 997.4 of the proposed rule also makes clear that the Finance 
Board will perform the calculations required under this part if the 
Banks' payment obligations extend beyond April 15, 2030 or if REFCORP 
is for any reason unable to perform the calculations or make the 
results known to the Finance Board. With respect to the date of April 
15, 2030, REFCORP is to be dissolved ``as soon as practicable, after 
the maturity and full payment of all obligations issued by [it],'' 12 
U.S.C. 1441b(j), which occurs on April 15, 2030, when the last REFCORP 
bond matures, and this contingency provision has been included in case 
the term of the Banks' payment obligation has been extended beyond that 
date.

F. Termination of the Obligation--Section 997.5.

    Section 997.5 of the proposed rules establishes a method for 
determining when the Banks' obligation to pay REFCORP will terminate. 
Gramm-Leach-Bliley provides that the Finance Board must extend or 
shorten the Banks' payment obligation to REFCORP until such time as 
``the value of all payments made by the Banks is equivalent to the 
value of [the benchmark] annuity [described therein].'' Public Law 106-
102, sec. 607, 113 Stat. 1455-56 (amending 12 U.S.C. 
1441b(f)(2)(C)(iii)). This will occur when the actual quarterly 
payment, after performing any calculation required by proposed 
Sec. 997.2, equals the last outstanding quarterly benchmark payment(s). 
It should be noted that if the sole remaining outstanding quarterly 
benchmark payment is less than $75 million because of adjustments made 
under proposed Secs. 997.2 and 997.3, the Banks will terminate their 
obligation as long as 20 percent of net earnings at least equals that 
outstanding amount,

[[Page 5452]]

even if 20 percent of net earnings is less than $75 million.
    Gramm-Leach-Bliley requires the Banks' REFCORP obligation to 
terminate when the aggregate value of their payments equals the value 
of the benchmark annuity. To ensure that these values are equal, the 
final actual quarterly payment (after making any calculation required 
by proposed Sec. 997.2) made by the Banks must not be more than any 
outstanding benchmark quarterly payment(s). This would require the 
final actual quarterly payment to be reduced if 20 percent of the 
Banks' quarterly net earnings exceeds the amounts needed to cover the 
outstanding benchmark quarterly payment(s). In fact, Gramm-Leach-Bliley 
specifically directs the Finance Board to pro rate the final REFCORP 
payment to assure the equivalence in the value of the Banks' aggregate 
payments and the benchmark annuity, if the final payment occurs after 
April 15, 2030. See Public Law 106-102, sec. 607, 113 Stat. 1455-56 
(amending 12 U.S.C. 1441b(f)(2)(C)(iv)). However, if the Banks' final 
payment occurs before April 15, 2030, the authority to assess the 
Banks' quarterly payments will continue to rest with REFCORP, acting 
under the supervision of Treasury, see 12 U.S.C. 1441b and 12 CFR part 
1510, and REFCORP would need to make any required adjustments.
    The wording of Sec. 997.5 also reflects the fact that Gramm-Leach-
Bliley requires the Banks to make their payments to REFCORP until April 
15, 2030 and directly to Treasury after that date. Public Law 106-102, 
sec. 607, 113 Stat. 1455-56 (amending 12 U.S.C. 1441b(f)(2)(C)(i) and 
(iv)).

G. Technical Amendment--Section 951.1.

    The Finance Board is also proposing to amend the definition of the 
term ``net earnings of a Bank'' as used in the Finance Board's 
Affordable Housing Program regulation and set forth in recently 
proposed redesignated 12 CFR 951.1 (formerly 12 CFR 960.1) (64 FR 
52148, September 27, 1999). The amendment is technical in nature and 
reflects the fact that under the Gramm-Leach-Bliley amendments, each 
Bank will pay to REFCORP an amount equal to 20 percent of its net 
earnings rather than a pro rata amount of the Bank System's fixed 
annual contribution of $300 million, as required under the prior law. 
Accordingly, the Finance Board is proposing to delete the words ``pro 
rata share of the'' from the definition of ``net earnings of a Bank'' 
in Sec. 951.1.

III. Regulatory Flexibility Act

    The proposed rule applies only to the Finance Board and 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, 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 
effect on a substantial number of small entities.

IV. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 33 U.S.C. 3501 et 
seq. Therefore, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.

List of Subjects

12 CFR Part 951

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

12 CFR Part 997

    Federal home loan banks, Resolution funding corporation.
    For the reasons set forth in the preamble, the Finance Board 
proposes to amend 12 CFR chapter IX as follows:

PART 951--AFFORDABLE HOUSING PROGRAM

    1. The authority citation for part 951, as proposed to be 
redesignated at 64 FR 52150, continues to read as follows:

    Authority:  12 U.S.C. 1430(j).


Sec. 951.1  [Amended]

    2. Amend Sec. 951.1, as proposed to be redesignated at 64 FR 52150, 
by removing the words ``pro rata share of the'' from the definition 
``Net earnings of a Bank''.
    3. Add part 997 to subchapter L, as proposed to be added at 64 FR 
52150, to read as follows:

PART 997--RESOLUTION FUNDING CORPORATION OBLIGATIONS OF THE BANKS

Sec.
997.1   Definitions.
997.2   Reduction of the payment term.
997.3   Extension of the payment term.
997.4   Calculation of the quarterly present-value determination.
997.5   Termination of the obligation.

    Authority:  12 U.S.C. 1422b(a) and 1441b(f).


Sec. 997.1  Definitions.

    As used in this part:
    Actual quarterly payment means the quarterly amount paid by the 
Banks to fulfill the Banks' obligation to pay toward interest owed on 
bonds issued by the REFCORP. The amount will equal 20 percent of the 
quarterly net earnings of the Banks, or such other amount assessed in 
accordance with the Act and the regulations adopted thereunder.
    Benchmark quarterly payment means $75 million, or such amount that 
may result from adjustments required by calculations made in accordance 
with Secs. 997.2 and 997.3.
    Current benchmark quarterly payment means the benchmark quarterly 
payment that corresponds to the date of the actual quarterly payment.
    Deficit quarterly payment means the amount by which the actual 
quarterly payment falls short of the current benchmark quarterly 
payment.
    Excess quarterly payment means the amount by which the actual 
quarterly payment exceeds the current benchmark quarterly payment.
    Quarterly present-value determination means the quarterly 
calculation that will determine the extent to which an excess quarterly 
payment or deficit quarterly payment alters the term of the Banks' 
obligation to the REFCORP. This determination will fulfill the 
requirements of 12 U.S.C 1441b(f)(2)(C)(ii), as amended by section 607, 
Public Law 106-102, 113 Stat. 1455-1456.
    REFCORP means the Resolution Funding Corporation established in 12 
U.S.C. 1441b.


Sec. 997.2  Reduction of the payment term.

    (a) Generally. The Finance Board shall shorten the term of the 
obligation of the Banks to make payments toward the interest owed on 
bonds issued by the REFCORP each quarter in which there is an excess 
quarterly payment.
    (b) Excess quarterly payment. Where there is an excess quarterly 
payment, the quarterly present-value determination shall be as follows:
    (1) The future value of the excess quarterly payment shall be 
calculated using the estimated interest rate, as provided to the 
Finance Board by the Department of the Treasury, on a zero-coupon 
Treasury bond the maturity of which is the payment date of the last 
non-defeased benchmark quarterly payment.
    (2) The future value calculated in paragraph (b)(1) of this section 
shall be subtracted from the amount of the last non-defeased quarterly 
benchmark payment.
    (3) If the difference resulting from the calculation in paragraph 
(b)(2) of this

[[Page 5453]]

section is greater than zero, then the last non-defeased quarterly 
benchmark payment is reduced by the future value of the excess 
quarterly payment.
    (4) If the difference resulting from the calculation in paragraph 
(b)(2) of this section is less than zero, then the last non-defeased 
quarterly benchmark payment shall be defeased and the payment term 
shall be shortened.
    (5) The amount of the excess quarterly payment that is not already 
applied to defeasing the payment under paragraph (b)(4) of this section 
shall be applied toward defeasing the last non-defeased quarterly 
benchmark payment using the estimated interest rate, as provided to the 
Finance Board by the Department of the Treasury, on a zero-coupon 
Treasury bond the maturity of which is the date of the payment to be 
defeased.


Sec. 997.3  Extension of the payment term.

    (a) Generally. The Finance Board will extend the term of the 
obligation of the Banks to make payments toward interest owed on bonds 
issued by the REFCORP each calendar quarter in which there is a deficit 
quarterly payment.
    (b) Deficit quarterly payment. Where there is a deficit quarterly 
payment, the quarterly present-value determination shall be as follows:
    (1) The future value of the deficit quarterly payment shall be 
calculated using the estimated interest rate, as provided to the 
Finance Board by the Department of the Treasury, on a zero-coupon 
Treasury bond the maturity of which is the payment date of the last 
non-defeased benchmark quarterly payment, or the first quarter 
thereafter if the last non-defeased benchmark quarterly payment already 
equals $75 million.
    (2) The future value calculated in paragraph (b)(1) of this section 
shall be added to the amount of the last non-defeased quarterly 
benchmark payment if that sum is $75 million or less.
    (3) If the sum calculated in paragraph (b)(2) of this section 
exceeds $75 million, the last non-defeased quarterly benchmark payment 
will become $75 million, and the quarterly benchmark payment term will 
be extended.
    (4) The extended payment will equal the future value of the amount 
of the deficit quarterly payment that has not already been applied to 
raising the quarterly benchmark payment to $75 million under paragraph 
(b)(3) of this section, using the estimated interest rate, as provided 
to the Finance Board by the Department of the Treasury, on a zero-
coupon Treasury bond whose maturity is the date of the extended 
payment.
    (c) Term beyond maturity. The benchmark quarterly payment term may 
be extended beyond April 15, 2030, if such extension is necessary to 
ensure that the value of the aggregate amounts paid by the Banks 
exactly equals the present value of an annuity of $300 million per year 
that commences on the date on which the first obligation of the REFCORP 
was issued and ends on April 15, 2030.


Sec. 997.4  Calculation of the quarterly present-value determination.

    (a) Applicable interest rates. The Finance Board shall obtain from 
the Department of the Treasury the applicable estimated zero-coupon 
bond interest rates and provide those rates to the REFCORP so that the 
REFCORP can perform the calculations required under Secs. 997.2 and 
997.3.
    (b) Calculation by the Finance Board. If Sec. 997.3 requires that 
the term for the Banks' actual quarterly payments extend beyond April 
15, 2030 or if, for any reason, the REFCORP is unable to perform the 
calculations or provide to the Finance Board the results of the 
calculations, the Finance Board shall make all calculations required 
under this part.
    (c) Records. The Finance Board will maintain the official record of 
the results of all quarterly present-value determinations made under 
this part by either the REFCORP or the Finance Board.


Sec. 997.5  Termination of the obligation.

    (a) Generally. The Banks' obligation to the REFCORP, or to the 
Department of the Treasury if the term of that obligation extends 
beyond April 15, 2030, will terminate when the aggregate actual 
quarterly payments made by the Banks exactly equal the present value of 
an annuity that commences on the date on which the first obligation of 
the REFCORP was issued and ends on April 15, 2030.
    (b) Date of the final payment. The aggregate actual quarterly 
payments made by the Banks exactly equal the present value of the 
annuity described in paragraph (a) of this section when the value of 
any remaining benchmark quarterly payment(s), after the benchmark 
quarterly payments have been adjusted as required by Secs. 997.2 and 
997.3, exactly equals the actual quarterly payment.

    Dated: January 19, 2000.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-1852 Filed 2-3-00; 8:45 am]
BILLING CODE 6725-01-P