[Federal Register Volume 65, Number 86 (Wednesday, May 3, 2000)]
[Proposed Rules]
[Pages 25676-25692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-10909]


=======================================================================
-----------------------------------------------------------------------

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 940, 950, 955 and 956

[No. 2000-20]
RIN 3069-AA98


Federal Home Loan Bank Acquired Member Assets, Core Mission 
Activities, Investments and Advances

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to add a new part 955 to its regulations to authorize the Federal Home 
Loan Banks (Banks) to hold acquired member assets (AMA) and to amend 
its recently adopted part 940 to enumerate the types of core mission 
assets (CMA) that must be addressed in the Banks' strategic business 
plans. The Finance Board is also proposing related changes to its 
regulations governing the Banks' investment and advances authorities.

DATES: Comments on this proposed rule must be received in writing on or 
before June 2, 2000.

ADDRESSES: Comments should be mailed 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, N.W., Washington, 
D.C. 20006. Comments will be available for public inspection at this 
address.

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director and Chief 
Economist, (202) 408-2821; Scott L. Smith, Deputy Director, (202) 408-
2991; Ellen E. Hancock, Senior Financial Analyst, (202) 408-2906; 
Christina K. Muradian, Senior Financial Analyst, (202) 408-2584, Office 
of Policy, Research and Analysis; or Eric M. Raudenbush, Senior 
Attorney-Advisor, (202) 408-2932; Office of General Counsel, Federal 
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

A. General

    On November 12, 1999, the President signed into law the Federal 
Home Loan Bank System Modernization Act of 1999 (Modernization Act), 
see Title VI of the Gramm-Leach-Bliley Act, Public Law 106-102 (1999), 
which amended the Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 
through 1449, among other things, to establish a new capital structure 
for the Banks, to authorize the Banks to accept additional types of 
collateral as security for advances, and to devolve to the Banks from 
the Finance Board full authority over their corporate governance, all 
subject to the rules and regulations of the Finance Board. In order to 
implement these and other statutory changes, the Finance Board has 
already adopted: a final rule devolving certain corporate governance 
authorities to the Banks, see 65 FR 13663 (March 14, 2000); an interim 
final rule conforming certain membership and advances requirements to 
the requirements of the Modernization Act, see 65 FR 13866 (March 15, 
2000); a final rule setting forth a corporate governance framework for 
the Banks, which was published in the Federal Register on May 1, 2000; 
a final rule reorganizing the Finance Board's regulations to better 
accommodate the substantive regulatory changes, see 65 FR 8253 (Feb. 
18, 2000); and a proposed rule that would amend the Finance Board's 
advances collateral regulation and make other related changes to the 
regulations. In addition, the Finance Board intends to adopt a proposed 
rule on risk management and capital during the second quarter of 2000. 
By statute, the Finance Board is required to publish a final rule on 
capital by November of 2000.
    Under the revised Bank Act and the new regulations, each Bank will 
have authority to engage in a wider range of asset activities than in 
the past, will have more discretion in establishing its capital 
structure, and will have more freedom to operate its business without 
the day-to-day involvement of the Finance Board. As the agency charged 
by Congress with the duty to ensure that the Banks carry out their 
statutory mission, see 12 U.S.C. 1422a(a), the Finance Board believes 
that it is especially important to keep the Banks focused on their 
mission as they exercise their expanded statutory and regulatory 
authorities. To this end, the Finance Board's recently-adopted final 
governance rule requires that each Bank's board of directors have in 
place at all times a strategic business plan that describes how the 
Bank's business activities will achieve the mission of the Bank (to be 
codified at 12 CFR 917.5). In order to clarify this requirement, the 
Finance Board established in its regulations a new part 940, which, in 
Sec. 940.2 defines the ``mission of the Banks'' as providing to members 
and associates financial products and services, including but not 
limited to advances, that assist and enhance such members' and 
associates financing of: (a) Housing, including single-family and 
multifamily housing serving consumers at all income levels; and (b) 
community lending. This definition of the mission of the Banks and the 
regulatory provisions that implement it are intended to ensure maximum 
use of the cooperative structure of the Bank System to provide funds 
for housing finance and community lending.
    In order to further clarify the strategic business planning 
requirement, this proposed rule would enumerate in regulation those 
specific Bank activities that the Finance Board considers to be ``core 
mission activities'' (CMA); that is, those activities that are within 
the

[[Page 25677]]

authority of the Banks to undertake that are most central to the 
achievement of the Banks' mission.
    The addition of a CMA provision at this time will also help each 
Bank in developing and implementing its new capital structure plan, 
which, under the Modernization Act, must be submitted to the Finance 
Board for approval within 270 days after the promulgation of the 
Finance Board's final capital regulation. As required in the 
Modernization Act, the forthcoming capital rule will implement a risk-
based capital requirement and new leverage requirements that will be 
supported by new classes of stock, one of which will be considered 
permanent capital. To accomplish the transition to the new capital 
structure, the Modernization Act also requires each Bank to develop and 
submit for Finance Board approval its capital structure plan. The 
design of each Bank's plan, as well as the Bank's ability to sell 
equity to its members under its new capital structure, will depend on 
its projections of Bank business activities and income, which should 
conform to the Bank's strategic business plan. Because a Bank will need 
to address mission activities in its strategic business plan, the CMA 
definition will also be an important consideration in the drafting of 
the capital structure plan. Therefore, the Finance Board has determined 
that it is necessary for CMA to be defined prior to the Banks' drafting 
of their strategic business plans.
    In addition, the proposed rule would codify in regulation the 
Banks' authority to hold acquired member assets (AMA)--that is, whole 
loans eligible as collateral for Bank advances that may be acquired 
from Bank members or associates. This authority would be an expansion 
and refinement of the Banks' existing authority (granted by resolution 
of the Finance Board) to establish programs under which they acquire 
mortgage assets from members, while sharing with the member the credit 
risk associated with the loans. Because AMA would constitute a core 
mission activity, it is logical for the Finance Board to set forth in 
regulation the parameters for such acquisitions at this time.
    Finally, the proposed rule would codify new regulations regarding 
the investment and advances authorities of the Banks so that the Banks 
will have full regulatory authority to engage in CMA.

B. Bank Investment Practices as Related to the Definition of CMA

    Consolidated obligations (COs) issued under section 11 of the Bank 
Act, 12 U.S.C. 1431, are the primary source of funding for the Banks. 
COs are debt instruments issued in the global capital markets for which 
the twelve Banks are jointly and severally liable. Because of the 
Banks' status as government-sponsored enterprises (GSEs), the costs to 
the Banks of obtaining such funding are substantially less than the 
borrowing costs to other entities for issuing comparable debt. The 
Banks pass the benefit of this funding advantage to their members, 
primarily through wholesale loans (called advances) priced lower than 
the members could otherwise obtain to provide support for housing 
finance and community lending, in fulfillment of the Banks' mission. 
Prior to enactment of the Financial Institutions Reform, Recovery and 
Enforcement Act of 1989 (FIRREA), Public Law 101-73, 103 Stat. 413 
(1989), which amended the Bank Act in response to the savings and loan 
crisis of the 1980s, the Banks used all of their COs to fund advances, 
thus directly using their GSE funding advantage to meet their mission 
of enhancing the availability of housing finance.
    In large part due to the financial burdens imposed on the Banks as 
a result of the savings and loan crisis and the enactment of FIRREA, 
the Banks began in 1991 to use a portion of the proceeds from COs to 
finance investments--primarily money market investments and mortgage 
backed securities (MBS)--bearing little or no relation to the Banks' 
public purpose. Of these investments, MBS have been appreciably more 
profitable per dollar invested than money market investments.
    The Finance Board initially limited MBS investment by the Banks in 
part because of concern about the Banks' ability to manage the interest 
rate and options risk associated with these assets. However, now that 
the Banks have developed more effective techniques for hedging these 
risks, and there are policy limits in place constraining the Banks' 
interest rate risk exposure, the MBS limit can be viewed less as a 
safety and soundness constraint and more as a means to restrain a non-
mission-related activity. MBS generally are traded in large, well-
established and liquid markets. As such, it is the view of the Finance 
Board that the Banks' presence in these markets does not result in 
increased availability of funds for housing, or in a lower cost of 
funds. Moreover, and perhaps most importantly for the Finance Board, 
the Banks' MBS investments generally do not involve the Banks working 
with or through Bank System members and thus do not contribute to the 
cooperative nature of the Bank System as do advances and certain other 
financial products and services offered by the Banks. Thus, although 
MBS are housing-related, the extent to which these investments support 
the Banks' housing finance mission is debatable.
    The increase in investments not directly related to the Banks' 
public purpose was a rational response to the sharp fall-off in Bank 
System advances and net income that occurred as a result of the savings 
and loan crisis. As a percentage of total assets, the level of such 
non-mission-related investments rose substantially in the early 1990s, 
but has begun to decline appreciably in recent years as the membership 
base of the Bank System and the level of advances outstanding to 
members have increased. Investments represented 29 percent of Bank 
System assets at the end of 1999 compared with 50 percent at year-end 
1995.
    Bank System earnings and advances are now at record levels. 
Outstanding advances, surpassing the previous all time high of $167 
billion in the second quarter of 1997, reached $396 billion at year end 
1999. Net income has steadily increased to $2.1 billion in 1999 after 
dropping to a recent low of $850 million in 1992. In addition, although 
the Banks initially increased investments as a substitute for declining 
advances, Bank investments generally have increased since 1992 along 
with advances. Investments increased over 100 percent, from $79 billion 
to $171 billion, between 1992 and 1999. To some extent, the Finance 
Board has viewed this growth as a means to compensate for a trend 
toward lower spreads on advances due to increased funding competition 
from other sources.
    However, given its duty under the Bank Act to ensure that the Banks 
carry out their housing finance mission, see 12 U.S.C. 
1422a(a)(3)(B)(ii), the Finance Board has been concerned for some time 
that the Banks have used substantial amounts of the proceeds of their 
COs to finance arbitrage investments. Once the Banks' ability to 
generate income had demonstrably improved, the Finance Board initiated 
steps to address the Bank System-wide growth of non-mission-related 
investments. A first step was to recognize that, while the detailed 
list of restrictions and limits placed on the Banks' investment 
authority by the Federal Home Loan Bank System Financial Management 
Policy (FMP) \1\ successfully ensured the safety and soundness of the 
Banks, the FMP provided little, if any, flexibility or

[[Page 25678]]

incentive for the Banks to seek out and develop new assets and 
activities that are permissible under the Bank Act and that, because 
they assist and enhance member lending for housing finance, are 
consistent with the mission of the Bank System.
---------------------------------------------------------------------------

    \1\ The FMP is a non-codified policy of the Finance Board that 
governs Bank investments and other financial management matters.
---------------------------------------------------------------------------

    To address this lack of flexibility, the Finance Board amended the 
FMP in 1996 to permit the Banks, among other things, to engage in new 
activities designed in part to add to their balance sheets higher 
yielding, yet mission-related, assets that would also preserve and 
promote the cooperative nature of the Bank System. See FMP, section 
II.B.12. The first such activities were approved on a pilot program 
basis in 1996 and 1997 and have been in operation since then. After 
several years of experience with these pilot programs, the Finance 
Board approved a more general authorization for Bank acquisition of 
single-family mortgage assets, which required that these programs 
involve credit risk-sharing with members in order to promote the 
cooperative nature of the Bank System. See Finance Board Res. No. 99-50 
(Oct. 4, 1999), and Finance Board Resolution No. 99-66 (Dec. 14, 1999).
    Part 955 of the proposed rule would refine and expand these 
authorities by authorizing the Banks to hold AMA. As proposed in part 
955, AMA transactions would enhance the cooperative nature of the Bank 
System by allocating the risk components of the transaction between the 
member and the Bank according to the ability of each to manage such 
risk. Specifically, members are best suited to manage credit risk, 
because they are most familiar with their customers and the local 
market. Accordingly, under the general risk-sharing structure set forth 
in part 955 of the proposed rule, members would maintain their 
traditional customer relationships, including marketing, servicing, 
underwriting and managing credit risk. Because the Banks are capital 
market experts and have more ready access to these markets, they would 
be responsible for managing liquidity, interest rate, and options risks 
under proposed part 955. It is anticipated that expansion of these AMA 
activities will permit the Banks to reduce their holdings of money 
market investments and MBS, while providing an adequate return on 
investment of shareholder capital.
    A second major step taken by the Finance Board to address concerns 
about the Bank System-wide growth of non-mission-related investments 
was the publication of a proposed Financial Management and Mission 
Achievement (FMMA) rule. See 64 FR 52163 (Sept. 27, 1999). Among other 
things, the proposed FMMA rule would have established mission-related 
regulatory standards, including a definition of CMA and a CMA-to-COs 
percentage requirement. The Finance Board withdrew the proposed FMMA 
rule following enactment of the Modernization Act, as certain 
provisions of the FMMA rule, as proposed, would no longer meet the 
requirements of the Bank Act as amended.

C. Comments Received on the Proposed FMMA Rule Related to the Core 
Mission Definition and Requirement

    Prior to and following the withdrawal of the proposed FMMA rule, 
the Finance Board received 19 comments on the provisions of the 
proposal that related to mission achievement: six from Banks, four from 
Bank members, four from trade associations, two from community groups, 
one from a Bank Affordable Housing Advisory Council, one from a state 
housing finance agency and one from a private sector individual. In 
general, the comments expressed concerns about the mission provisions 
of the rule. The comments from the Banks, Bank members and several 
trade associations primarily focused on their opposition to two 
provisions related to CMA: (1) A requirement that, following a 
transition period, each Bank maintain an annual average ratio of at 
least 100 percent of CMA to the book value of the Bank's total 
outstanding COs; and (2) a limitation on the dollar amount of advances 
to members with assets of greater than $500 million that would count as 
CMA. Neither of these provisions is included in this proposed rule.
    The Banks, Bank members and several trade associations also opposed 
the general exclusion of MBS as a core mission activity in the proposed 
FMMA rule. Several commenters argued that it is not within the province 
of the Finance Board to determine that investment in MBS is not part of 
the mission of the Banks. To the contrary, the Bank Act authorizes the 
Finance Board to supervise the Banks and to promulgate and enforce such 
regulations and orders as are necessary from time to time to carry out 
the provisions of the Bank Act. See 12 U.S.C. 1422b(a)(1). Among the 
provisions of the Bank Act are those outlining the duties of the 
Finance Board, which include the duty to ensure that the Banks carry 
out their housing finance mission. See id. Sec. 1422a(a)(3)(B)(ii).
    Because Congress has not expressly defined the parameters of the 
Banks' housing finance mission, it is the responsibility of the Finance 
Board--as the body charged with the duty to ensure that the Banks 
fulfill that mission and, more generally, as the supervisory regulator 
of the Banks and the agency charged with the administration of the Bank 
Act--to make this judgment reasonably considering both empirical 
evidence and the provisions of the Bank Act.
    As discussed above, the MBS markets are large, well-established and 
liquid and the Finance Board has been presented with no evidence that 
the Banks' presence in these markets generally results in increased 
availability of funds for housing or reduces the cost of funds. 
Additionally, these investments generally do not involve working with 
or through Bank System members and, therefore, do not contribute to the 
cooperative nature of the Bank System. As a result, the Finance Board 
has chosen to continue to exclude MBS from the definition of core 
mission activities in this proposed rule.
    Several Banks, one Bank Affordable Housing Advisory Council, one 
trade association and one state housing finance agency expressed 
concerns about the ability of housing finance agencies to meet the 
requirements necessary for housing finance agency (HFA) bonds to count 
as CMA under the proposed FMMA rule. It is the judgment of the Finance 
Board that HFA bonds that are acquired from a Bank System member or 
associate have the characteristics of AMA. Accordingly, under this 
proposed rule, HFA bonds qualify as AMA and, thus, also as CMA. The 
Finance Board has attempted to address these comments regarding HFA 
bonds in drafting proposed part 955 (see the discussion of part 955 
below) explaining under what conditions HFA bonds meet the requirements 
of AMA and therefore qualify as CMA.
    Two community groups supported the targeted equity investments 
included as CMA in the proposed FMMA rule and suggested that the 
authority should be expanded to include a wider range of investments. 
The Finance Board has expanded the targeted investments that qualify as 
CMA in this proposed rule to include certain debt investments, as well 
as equity investments. The private sector commenter described an 
investment vehicle that he felt would assist the Banks in making 
investments in small business investment companies formed pursuant to 
15 U.S.C. 681(d) (SBICs) included as CMA in the proposed FMMA rule. 
These comments

[[Page 25679]]

were considered by the Finance Board in drafting this proposed rule.
    The Finance Board invites anyone with an interest in this proposed 
rule, including all those who commented on the proposed FMMA rule, to 
submit written comments to the Finance Board during the comment period.

II. Analysis of Proposed Rule

A. Core Mission Activities--Part 940

    The proposed rule would define the on- and off-balance sheet items 
that the Finance Board has determined qualify as CMA for the Banks. The 
Finance Board would define CMA at this time in order to clarify for the 
Banks the types of business activities that the Finance Board considers 
to be consistent with maximizing the public benefit of the Banks' GSE 
status and to aid the boards of directors of the Banks in the strategic 
planning required of them under new Sec. 917.5 of the regulations.
    Section 940.1 of the proposed rule would set forth definitions of 
terms used in part 940. These terms are discussed below as they relate 
to the substantive provisions of the proposed rule.
1. Advances as CMA--Sec. 940.3(a)(1)
    Proposed Sec. 940.3 lists those Bank activities that would qualify 
as CMA. Under proposed Sec. 940.3(a)(1), all Bank advances would 
qualify as CMA.
2. Acquired Member Assets as CMA--Sec. 940.3(a)(2)
    Under proposed Sec. 940.3(a)(2), all AMA held pursuant to proposed 
part 955 (discussed in detail below) would qualify as CMA except for 
United States government-insured or guaranteed whole single-family 
residential mortgage loans \2\ acquired under a commitment entered into 
after April 12, 2000. These loans would qualify as CMA only in a dollar 
amount up to 33 percent of the total dollar amount of AMA (not 
including government-insured or guaranteed whole single-family 
residential mortgage loans acquired under a commitment entered into on 
or before April 12, 2000) acquired by a Bank during each calendar year. 
For the year 2000, this calculation would be made on a pro-rata basis, 
based only on transactions occurring after April 12, 2000.
---------------------------------------------------------------------------

    \2\ Whole single family residential mortgage loans insured by 
the United States government consist of loans insured by the Federal 
Housing Administration (FHA), guaranteed by the Veterans 
Administration (VA) and insured by the Rural Housing Service (RHS).
---------------------------------------------------------------------------

    In recognition of the fact that many Banks do, and will in the 
future, hold participation interests in AMA originally acquired by 
other Banks, the proposed rule would permit one or more Banks to make 
the above-described calculation by aggregating both the total and 
government-insured AMA on their respective balance sheets. Naturally, 
under this provision, a Bank may include itself in only one such 
aggregated calculation in any calendar year.
    The Finance Board recognizes that both conventional and government-
insured or guaranteed residential mortgage loans are within the 
parameters established for AMA. However, in order to provide incentive 
for the Banks to maintain a broad focus that encompasses acquisition of 
significant amounts of conventional loans, the Finance Board is 
permitting Banks to count as CMA one dollar of government-insured AMA 
for every two dollars of conventional loans acquired as AMA.
    The distribution of the Banks' current mortgage portfolio suggests 
that a high percentage of government-insured loans have been acquired 
when compared to the percentage of such loans in the total mortgage 
market. The proposed rule would encourage the Banks to see to it that 
the composition of their mortgage portfolios more closely reflects the 
distribution of loans made in the marketplace. This provision is 
intended to reduce the emphasis on government-insured loans that 
currently exists in the Banks' mortgage portfolio and to provide an 
incentive for Bank acquisition of conventional mortgages, which was the 
original intent of the Bank mortgage acquisition programs approved by 
the Finance Board over the last several years.
3. Letters of Credit and Intermediary Derivative Contracts as CMA--
Secs. 940.3(a)(3) and (a)(4)
    Under proposed Secs. 940.3(a)(3) and (a)(4), standby letters of 
credit (SLOCs) and intermediary derivative contracts (primarily 
interest rate swaps), respectively, would qualify as CMA.
4. Targeted Debt and Equity Investments as CMA--Sec. 940.3(a)(5)
    Under proposed Sec. 940.3(a)(5)(i), non-securitized debt 
investments and equity investments that primarily benefit low- or 
moderate-income households or areas targeted for redevelopment by 
local, state, tribal or Federal government (including Federal 
empowerment zones and enterprise and champion communities) would be 
considered to be CMA if the investment provides or supports: affordable 
housing; economic development; community services; permanent jobs for 
members of low- or moderate-income households; or area revitalization 
or stabilization. This list of investments is drawn primarily from the 
Office of the Comptroller of the Currency's regulatory definition of 
public welfare investments that are permitted for national banks. See 
12 CFR 24.3(a). Examples of investments that would qualify as CMA under 
proposed Sec. 940.3(a)(5)(i) include, among other things, stock in 
Community Development Financial Institutions (CDFIs), and secondary 
capital in community development credit unions. Part 956 of the 
proposed rule (discussed in detail below) would authorize the Banks to 
make such targeted investments.
    For purposes of proposed Sec. 940.3(a)(5)(i), a low- or moderate-
income household is defined to mean a household with an income that is 
at or below 115 percent of the area median income, as published by the 
Department of Housing and Urban Development (HUD). Defining low- or 
moderate-income as no more than 115 percent of area median income is 
consistent with the low- or moderate-income targeted beneficiaries of 
other Finance Board housing and community lending programs as set forth 
in the Community Investment Cash Advance (CICA) Programs regulation. 
See 12 CFR 952.3.
    Proposed Sec. 940.3(a)(5)(ii) would require that these targeted 
non-securitized debt investments and targeted equity investments 
involve one or more members or associates in a manner, financial or 
otherwise, and to a degree to be determined by the Bank. For instance, 
a Bank could determine at a minimum that a member's or associate's 
sponsorship of a nonprofit or other community-based partner seeking an 
investment constitutes sufficient involvement for purposes of this 
section. Another Bank may require a greater degree of member or 
associate participation, including financial participation, at the 
Bank's discretion. This requirement is designed to promote the 
cooperative nature of the Bank System, yet provide flexibility to the 
Bank in making such targeted investments.
    Because proposed Sec. 940.3(a)(5)(i) specifies that targeted 
investments that count as CMA must be non-securitized debt investments, 
investments in mortgage-backed and other asset-backed securities would 
not count as CMA even if such securities appear to meet the other 
requirements of proposed Sec. 940.3(a)(5). For example, the loans in 
collateral pools for MBS securitized by loans made pursuant to the 
Community Reinvestment Act (CRA MBS) provide affordable housing for 
low- or moderate-

[[Page 25680]]

income households. However, the characteristics of and market for CRA 
MBS are very similar to the characteristics of and market for other 
MBS. As discussed above, although MBS are housing-related, the extent 
to which these investments support the Banks' housing finance mission 
is debatable given the large, well-established and liquid markets in 
which they trade. Moreover, MBS investments generally do not involve 
the Banks working with or through their members and thus do not 
contribute to the cooperative nature of the Bank System. However, the 
Finance Board realizes that there are some mortgage-backed or asset-
backed securities that should be granted CMA status under proposed 
Sec. 940.3(a)(5)(i) based upon a determination that a Bank's purchase 
of such securities would substantially contribute to opening an 
underserved market that would not otherwise be reached by the private 
sector. The Finance Board's goal is to characterize as CMA those 
mortgage-backed and asset-backed securities that substantially 
contribute to opening an underserved market that would not otherwise be 
reached by the private sector, while at the same time not 
characterizing as CMA those securities that are already traded in 
large, well-established and liquid markets. The Finance Board invites 
comment on an appropriate standard for distinguishing between mortgage-
backed or asset-backed securities that do substantially contribute to 
opening underserved markets and those that do not.
    The Finance Board supports the use of private capital to meet the 
needs of underserved markets, communities and areas and encourages the 
Banks to consider making targeted investments as described in proposed 
Sec. 940.3(a)(5). It is anticipated that each Bank could accumulate $10 
million to $30 million of such investments, depending on the size of 
the Bank, for a Bank System-wide total of approximately $200 million in 
targeted investments. Any such investment by a Bank would be subject to 
the new business activity requirements of proposed part 980 (which is 
included in the Finance Board's recently-adopted proposed rule on 
advances collateral, and which is discussed in more detail below), and 
the requirements of the risk-based capital rule to be proposed shortly 
by the Finance Board. Specifically, it is anticipated that, in the 
forthcoming capital rule, the Finance Board will assign the same 
capital treatment under its risk-based capital requirement for targeted 
investments that is assigned to public welfare investments for national 
banks. However, should the Banks acquire more than $200 million of such 
targeted investments, or should any one Bank acquire more than the $10 
million to $30 million of such targeted investments, the Finance Board 
might consider imposing a higher capital charge for additional amounts.
    Since the proposed targeted investment authority is new, the 
Finance Board specifically requests comment on any impediments the 
Banks may face in making targeted investments and how the Finance Board 
might assist in reducing such impediments.
5. Stock in SBICs as CMA--Sec. 940.3(a)(6)
    Under proposed Sec. 940.3(a)(6), investments in SBICs formed 
pursuant to 15 U.S.C. 681(d) would qualify as CMA to the extent that 
the investment is structured to be matched by an investment in the same 
SBIC by a member or associate of the Bank making the investment in the 
SBIC. Investment in such SBICs is explicitly authorized under section 
11(h) of the Bank Act, 12 U.S.C. 1431(h), and under part 956 of the 
proposed rule, to the extent that such investments are for the purpose 
of aiding members. The member matching requirement will be deemed to 
satisfy the statutory requirement that Bank investments in SBICs be for 
the purpose of aiding members.
6. Other CMA Investments--Sec. Sec. 940.3(a)(7), (a)(8) and (a)(9)
    Three other specific investments would qualify as CMA under 
proposed Sec. Sec. 940.3(a)(7), (a)(8) and (a)(9): The short-term 
tranche of SBIC securities guaranteed by the Small Business 
Administration (SBA); Section 108 Interim Notes and Participation 
Certificates guaranteed by HUD pursuant to section 108 of the Housing 
and Community Development Act of 1974 (as amended), 42 U.S.C. 5308; and 
investments and obligations for housing and community development 
issued or guaranteed under Title VI of the Native American Housing 
Assistance and Self-Determination Act of 1996 (NAHASDA), 25 U.S.C. 4191 
through 4195. These investments are all related to housing and 
community lending and supported by various government programs at the 
federal level. The Finance Board proposes to treat these investments as 
CMA because of their potential to move the private markets to better 
assist low- and moderate-income communities to become more prosperous. 
By treating these investments as CMA, the Finance Board would be 
intentionally creating a greater incentive for the Banks to make these 
investments.
    The Finance Board specifically requests comment on whether any 
other investment instruments that are products of federal programs 
designed to support housing and community lending programs, should also 
be included as CMA.
7. Status of MBS and HFA Bonds Acquired Under the FMP--Sec. 940.3(b)
    As discussed previously, the proposed rule would neither prohibit 
the Banks from making any investments that they are currently permitted 
to make under the FMP, nor restrict the extent to which the Banks may 
fund any particular investments with the proceeds of COs. Proposed 
Sec. 940.3(b) would make clear that, should the Finance Board enact any 
such prohibitions or restrictions at some future date, the agency will 
not limit the authority of a Bank to hold to maturity, or fund with the 
proceeds of COs, any investments made under sections II.B.8., 9., 10. 
or 11. of the FMP on or before April 12, 2000 (the date the Finance 
Board adopted this proposed rule), except as may be necessary to ensure 
the safety and soundness of the Banks.
    These investments include: agency and highly-rated private MBS; 
highly-rated securities backed by manufactured housing or home equity 
loans; and state or local HFA bonds. While HFA bonds issued by, 
through, or on behalf of a member or associate will qualify as AMA 
under proposed part 955 (and, thus, also as CMA), those that are issued 
by, through, or on behalf of outside parties do not so qualify. 
Although, under part 956 of the proposed rule, Banks may continue to 
invest in nonmember or associate-related HFA bonds, these would not 
qualify as CMA. Similarly, neither MBS, nor securities backed by 
manufactured housing or home equity loans, would qualify as CMA under 
the proposed rule.

B. Advances to Out-of-District Members and Associates--Sec. 950.18

    The proposed rule would add to the Finance Board's advances 
regulation a new Sec. 950.18, which would govern Bank creditor 
relationships with out-of-district members and associates. Proposed 
Sec. 950.18(a) would expressly permit a Bank to purchase an outstanding 
advance, or a participation interest therein, from another Bank, or to 
establish a debtor/creditor relationship with a Bank System member or 
associate in another district at the time an advance is made, subject 
to an arrangement with the member's or associate's local Bank. Proposed

[[Page 25681]]

Sec. 950.18(b) would make clear that any debtor/creditor relationship 
established pursuant to Sec. 950.18(a) would be subject to all of the 
appropriate advances requirements of part 950. The Finance Board is 
proposing this addition to its regulations at this time in order to 
make explicit the parallel treatment of advances and AMA transactions, 
in which Banks may engage as an incidental aspect to their advances 
authority.

C. Acquired Member Assets--Part 955

    Part 955 of the proposed rule addresses AMA--that is, assets that a 
Bank may acquire from or through its members or associates in a 
transaction that is in purpose and economic substance functionally 
equivalent to the business of making advances in that: (1) It allows 
the member or associate to use its eligible assets to access liquidity 
for further mission-related lending; and (2) all, or a material portion 
of, the credit risk attached to the assets is being borne by the member 
or associate.
    Proposed Sec. 955.1 would set forth definitions of terms used in 
part 955. These are discussed below in the context of the substantive 
provisions.
1. Authorization to Hold AMA--Sec. 955.2
    Section 955.2 of the proposed rule generally would authorize each 
Bank to hold AMA acquired from or through Bank System members or 
associates, either by a purchase or a funding transaction, subject to 
the procedural new business activity requirements contained in proposed 
part 980 (which was proposed as part of the Finance Board's recently-
adopted proposed rule on advances collateral and is described in more 
detail below). Proposed Sec. 955.2 would also set forth a three-pronged 
test to be used in determining which assets qualify as AMA.
    First, under proposed Sec. 955.2(a), whole loans that are eligible 
to secure advances to members under the Finance Board's proposed 
advances collateral regulation (proposed to be codified at Sec. 950.7), 
could qualify as AMA. These assets include: (1) Fully disbursed, whole 
first mortgage loans on improved residential real property not more 
than 90 days delinquent; (2) mortgages or other loans, regardless of 
delinquency status, to the extent that the mortgage or loan is insured 
or guaranteed by the U.S. or any agency thereof, or otherwise backed by 
the full faith and credit of the U.S.; (3) other real estate-related 
whole loans, provided that such loans have a readily ascertainable 
liquidation value and can be freely liquidated in due course and the 
Bank can perfect a security interest therein; and (4) when acquired 
from community financial institutions (CFIs) only, small business, 
small farm or small agri-business loans fully secured by collateral 
other than real estate, or securities representing a whole interest in 
such loans, provided that such loans have a readily ascertainable 
liquidation value and can be freely liquidated in due course and the 
Bank can perfect a security interest in such loans. Under this 
provision, single-family mortgages where the loan amounts exceed the 
conforming loan limits that apply to the Federal National Mortgage 
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation 
(Freddie Mac), see 12 U.S.C. 1717(b)(2), could not qualify as AMA. In 
addition, loans made to an entity, or secured by property, not located 
within a state of the United States, the District of Columbia, American 
Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto 
Rico, or the U.S. Virgin Islands could not qualify as AMA.
    In addition, under proposed Sec. Sec. 955.2(a)(2) and (3), whole 
loans secured by manufactured housing, regardless of whether such 
housing qualifies as residential real property, and state and local HFA 
bonds, respectively, could qualify as AMA. While manufactured housing 
loans may under some circumstances qualify as ``other real estate-
related'' collateral eligible to secure advances, the Finance Board has 
chosen to list such loans explicitly in proposed Sec. 955.2(a) in order 
to make clear that such loans could qualify as AMA.
    Second, under proposed Sec. 955.2(b), an asset must have some 
connection with a Bank System member or associate in order to qualify 
as AMA--i.e., there must be a member or associate nexus. Specifically, 
proposed Sec. 955.2(b)(1) would require that the asset be either: (i) 
Originated (if a loan) or issued (if a bond) by, through, or on behalf 
of a member or associate, or affiliate thereof; or (ii) held for a 
valid business purpose by the member or associate, or affiliate 
thereof, prior to acquisition by a Bank. The reference in the proposed 
rule to assets issued ``through, or on behalf of'' a member, associate 
or affiliate is intended to encompass HFA bonds issued by an 
underwriter for the member, associate or affiliate.
    The valid business purpose requirement is intended to account for 
the fact that a member may acquire loans from a nonmember during the 
normal course of business and then sell those loans to the Bank. The 
reference to a ``valid business purpose'' is intended to exclude any 
loans that are passed from a nonmember through a member to a Bank with 
the intent to extend the benefits of Bank membership to the nonmember.
    Under proposed Sec. 955.2(b)(2), the assets must be acquired from 
either: (i) A member or associate of the Bank acquiring the assets; 
(ii) a member or associate of another Bank, pursuant to an arrangement 
with that Bank; or (iii) another Bank. Under the proposed rule, a Bank 
could acquire initial-offering taxable HFA bonds from out-of-district 
associates, provided that the Bank has an agreement with the 
associate's district Bank granting permission to make such 
acquisitions.
    Third, under proposed Sec. 955.2(c), the member or associate must 
meet the credit risk-sharing sharing requirements that are detailed in 
proposed Sec. 955.3. As an exception to this requirement, the Finance 
Board would consider assets acquired under authorizations adopted by 
the Finance Board pursuant to section II.B.12. of the FMP to qualify as 
AMA, up to the total dollar cap contained in those authorizations, even 
if the transactions do not meet the credit risk-sharing requirements of 
proposed Sec. 955.3.
2. Required Credit Risk-Sharing Structure--Sec. 955.3
    Section 955.3 of the proposed rule would elaborate upon the credit 
risk-sharing requirement that is the third prong of the AMA test set 
forth in proposed Sec. 955.2. The risk-sharing requirements proposed in 
Sec. 955.3 are based on risk-sharing structures that have evolved over 
time and are currently in place at the Banks. Since the first approval 
of the Federal Home Loan Bank of Chicago's Mortgage Partnership Finance 
(MPF) pilot program in late 1996, the Banks have gained experience in 
the acquisition of single-family mortgage assets and the Finance Board 
has gained experience in monitoring such acquisitions. Commensurate 
with this increased expertise, the Finance Board authorized an expanded 
scope of mortgage purchase activity in Resolution No. 98-41 (Sept. 23, 
1998), which permitted all Banks to offer MPF, or substantially similar 
programs, to their members on a pilot basis. Later, to accommodate 
member needs concerning capital requirements, the Finance Board 
authorized an alternative risk-sharing structure in Resolution No. 99-
50 (Oct. 4, 1999). With this approval, members were able to share a 
portion of the credit risk associated with mortgage lenders, through 
the use of supplemental loan-level insurance. By purchasing mortgage 
insurance to cover a portion of the

[[Page 25682]]

credit risk, members receive more favorable capital treatment.
    Through the credit risk-sharing requirement, AMA activities would 
serve to promote and preserve the basic business relationship between 
the Banks and their members that has been established and maintained 
throughout the history of the Bank System through advance transactions. 
The Bank would manage the interest rate risk, while the member would 
manage a material portion of the credit risk. This requirement 
emphasizes the cooperative nature of the Bank System by ensuring that 
the member or associate shares with the Bank the financial benefits and 
responsibilities of the asset. Based on the totality of its experience 
in monitoring the Banks' mortgage purchase programs, the Finance Board 
is confident that the credit risk-sharing requirements set forth in 
proposed Sec. 955.3 would efficiently allocate risks so as to best use 
the core competencies of the entities involved and provide capital 
market funding and risk management alternatives, all to the ultimate 
benefit of the consumer.
    Under proposed Sec. 955.3(a)(1), a Bank would be required to 
determine, at the time of acquisition of member assets: (i) The 
expected credit losses on the asset or pool of assets; and (ii) the 
total credit enhancement that is necessary to raise the asset or pool 
of assets to at least the fourth highest credit rating category, or 
such higher credit rating as the Bank may require. At a minimum, at the 
time of acquisition, each asset or pool of assets would be required to 
have an estimated credit rating of at least the fourth highest rating 
category. However, the Bank may choose to require that individual pools 
of assets have a credit rating above the fourth highest rating 
category.
    Under proposed Sec. 955.3(a)(2), the Bank's estimates of the 
expected credit losses and total credit enhancements would be required 
to be calculated using a methodology that is confirmed in writing by a 
Nationally Recognized Statistical Rating Organization (NRSRO) to be 
comparable to a methodology that an NRSRO would use in conducting a 
formal rating review of the assets or pools of assets. Requiring that 
the methodology used to determine expected credit losses and credit 
enhancements be affirmed by an NRSRO would ensure that the Bank's 
estimates of credit ratings are reasonably accurate. The methodology 
used to estimate the expected credit losses and credit enhancements 
would be required to produce roughly the equivalent rating, or 
equivalent ratings on average, to a formal rating review of the assets 
or pools of assets. Given that an NRSRO conducting a formal rating of 
an asset or pool of assets may take into account qualitative factors 
that may not be considered by a theoretical model, the estimate of 
expected credit losses and credit enhancement by a Bank would not be 
required to be identical to that determined by an NRSRO. However, the 
estimate must produce approximately the equivalent rating.
    Second, under proposed Sec. 955.3(b), a Bank would be required to 
determine a credit risk-sharing structure to be entered into with its 
member or associate that both: (1) Enhances the asset or pool of assets 
to at least the fourth highest credit rating category, or such higher 
credit rating as required by the Bank; and (2) incorporates credit 
risk-sharing with the member or associate.
    When establishing an AMA program, the credit enhancement structure 
would be required to be designed in such a way that it at least 
supports the asset or pool of assets to the fourth highest credit 
rating category or such higher credit rating as required by the Bank. 
More specifically, if the Bank acquires a member asset and requires, 
for example, the second highest rating, the methodology used to assign 
financial responsibilities to support that rating would be required to 
conform to a structure that has been confirmed in writing by an NRSRO 
as sufficient to achieve the desired rating. For example, one factor 
that may be considered in determining the methodology used under a 
credit enhancement structure may be the order in which credit losses 
are allocated among entities. If a Bank makes modifications to a credit 
enhancement structure that is already in place, it would be required to 
obtain written confirmation from an NRSRO that the new structure is 
sufficient to achieve the desired rating.
    At the same time that a Bank determines a credit enhancement 
structure that supports the credit rating of an asset or pool of 
assets, the Bank would be required to implement a credit risk-sharing 
structure with the member or associate from which the Bank acquired the 
asset or pool of assets. The proposed rule would require that the risk-
sharing structure be established in one of two ways: (i) The member or 
associate from which the Bank acquired an asset or pool of assets 
directly bears the economic consequences of all credit losses in excess 
of expected losses up to the fourth highest credit rating or such 
higher credit rating as required by the Bank; or (ii) the member or 
associate from which the Bank acquired an asset or pool of assets 
directly bears the economic consequences of all credit losses up to the 
amount of expected losses, and the member or associate assumes 
responsibility for additional credit losses as is necessary to enhance 
the asset or pool of assets to the fourth highest credit rating 
category, or such higher rating as required by the Bank.
    Under either structure, expected losses would have to be estimated 
by a Bank as required pursuant to proposed Sec. 955.3(a). In other 
words, the Bank would need to determine the expected losses on an asset 
or pool of assets using a methodology that is confirmed in writing by 
an NRSRO to be comparable to a methodology that an NRSRO would use in 
conducting a formal rating review of an asset or pool of assets.
    Recognizing that advantages exist under each structure, the Finance 
Board is proposing that the Banks be given flexibility to offer 
products or programs under either of the structures. However, any 
combination of the requirements set forth in the two separate 
structures would be prohibited. Under both of these structures, members 
would directly bear the responsibility for a material portion of credit 
risk, whether it is borne as expected losses or in excess of expected 
losses. By allowing the flexibility to use either structure, members 
would be able to choose the program that best suits their needs. Under 
the first structure, the member would bear a larger portion of credit 
risk. Under the second structure, the member would be responsible for 
the first layer of losses, thereby linking the member's compensation to 
the credit quality of the asset.
    Under the first structure, the member or associate from which a 
Bank acquired an asset or pool of assets would be required to bear 
directly the economic consequences of all credit losses in excess of 
expected losses. The Bank could bear economic responsibility for the 
expected credit losses on an asset or pool of assets. In general, 
expected credit losses are roughly ten percent of the credit 
enhancement necessary to raise the asset or pool of assets to the 
second highest credit rating. Under this structure, the Bank would bear 
responsibility for a relatively small amount of credit losses and the 
member would take on the relatively larger amount of credit risk. Under 
the second structure, the member or associate would directly bear 
responsibility for the expected losses but the larger portion of credit 
risk may be allocated among different entities. Under the second 
structure, only the member or associate from which the Bank acquired an 
asset or pool of assets would be permitted to bear directly the 
economic

[[Page 25683]]

responsibility of all credit losses up to an amount at least equal to 
the expected credit losses on an asset or pool of assets. The Bank 
would not be permitted to bear the economic responsibility for the 
expected credit losses on a given asset or pool of assets. Also, 
neither affiliates of members or associates that may have originated or 
held for a valid business purpose an asset or pool of assets, nor any 
other member or associate in the Bank's district could bear the 
economic responsibility of expected credit losses on an asset or pool 
of assets. The member or associate itself would be required to bear the 
economic responsibility of the expected credit losses to ensure member 
or associate involvement and to ensure that the member or associate 
bears the consequences of the credit quality of the asset or pool of 
assets.
    The economic responsibility of the expected credit losses may be 
borne by the member or associate in a variety of ways. For instance, 
under the product developed by the Federal Home Loan Bank of Chicago 
known as MPF 100, a Bank establishes an account to absorb 
credit losses. As the Bank incurs losses, it is reimbursed by the 
member through the reduction of credit enhancement fees paid to the 
member by the Bank. Essentially, the fees paid to the member are 
contingent upon the performance of the asset.
    The Finance Board has determined that expected credit losses are 
typically of sufficient size that members or associates, when 
responsible for such losses, have incentive to seek ways to achieve 
better than expected performance. In the case of acquiring mortgage 
loans, by requiring that the member or associate bear economic 
responsibility for expected credit losses, a system of risk and reward 
is established that is based on the core competencies of the 
participating institutions. Since member financial institutions are 
most knowledgeable regarding their local housing markets, this 
structure allows members the opportunity to benefit from their 
expertise in underwriting mortgage loans in their communities. The 
credit risk sharing structure is based on the concept that different 
institutions have different capacities. The Banks are capital market 
specialists, with the ability to bear market risks well, while 
depository institutions are experts in credit risk evaluation since 
they know their communities best. Therefore, by establishing a 
structure where the member or associate from which the Bank acquired 
the asset or pool of assets bears economic responsibility for the 
amount of the expected credit losses, members or associates are 
rewarded for their credit risk management expertise.
    In addition to the member or associate from which the Bank acquired 
an asset or pool of assets bearing the economic responsibility of 
credit losses up to the amount of expected credit losses, the member or 
associate from which the Bank acquired an asset or pool of assets would 
be required to provide for additional credit loss coverage such that 
the member's or associate's total credit enhancement responsibility 
(i.e., expected credit losses plus additional credit loss coverage) is 
sufficient to achieve at least the fourth highest credit rating, or 
such higher rating as required by the Bank. The additional credit loss 
coverage would have to be provided by the member or associate from 
which the Bank acquired the asset or pools of assets, but under 
proposed Sec. 955.3(b)(2)(ii)(B), the member or associate may allocate 
the additional credit loss coverage responsibility in whole or in part, 
and in any combination, among: (1) The member or associate itself; (2) 
any other member or associate in the Bank's district; and (3) loan-
level insurance, including U.S. government insurance or guarantee.
    It would be the responsibility of the member or associate from 
which the Bank acquired the asset or pool of assets to determine the 
allocation of the additional credit loss coverage among itself, any 
other member or associate in the Bank's district and any insurer. If 
loan-level insurance is used, proposed Sec. 955.3(b)(2)(ii)(B)(3) would 
require that the insurer be rated not lower than the second highest 
rating category and the member or associate be legally obligated at all 
times to transfer or replace the equivalent insurance should the 
insurer be downgraded below the second highest rating category.
    The use of loan-level insurance is to provide the member or 
associate from which the Bank acquired the asset or pool of assets more 
favorable capital treatment. The member or associate may also allocate 
its additional credit loss coverage requirement to the U.S. government 
either through government insurance or guarantee.
    Regardless of how the additional credit loss coverage is allocated 
among the above-mentioned entities, the expected credit losses must be 
borne by the member or associate from which the Bank acquired the asset 
or pool of assets. In the case of an FHA-insured loan, the loan would 
meet the risk-sharing requirements since it is insured by the 
government; however, the member or associate would have to bear the 
economic responsibility of all unreimbursed servicing expenses, up to 
the amount of expected losses on the loan or loan pool. The same would 
be true of VA-guaranteed loans and RHS-insured loans. In the case of 
HFA bonds, the bonds would meet the proposed required credit risk-
sharing structure because any losses beyond the insurance or guarantee 
would be borne by the HFA, not the Bank. HFA bonds are usually rated in 
at least the third highest credit rating category based on the fact 
that the bonds are backed by FHA-insured, VA-guaranteed or private 
mortgage insurance (PMI)-insured whole loans. In many cases the bonds 
are backed by loans securitized by the Government National Mortgage 
Association (Ginnie Mae), Fannie Mae or Freddie Mac and are rated in 
the highest credit rating category. Additional bondholder protections 
frequently include mortgage reserve funds.
3. Reporting Requirements for AMA--Sec. 955.4
    Proposed Sec. 955.4 addresses the Banks' reporting requirements for 
AMA that are residential mortgages. The Finance Board is proposing to 
require Banks that acquire single-family and multifamily mortgage 
assets to submit to the Finance Board quarterly mortgage reports, which 
will include semi-annual loan-level reporting.
    Proposed Sec. 955.4(a)(1) would require that loan-level data be 
collected and maintained by each Bank acquiring AMA that are 
residential mortgages. The Finance Board has specified two lists of 
loan-level data elements: the first for single-family loans and the 
second for multifamily loans. These lists are included as appendices to 
the proposed rule. The data collected are intended to be used to create 
a data base and reporting infrastructure for monitoring the Banks' risk 
management and achievement of the public purpose of their residential 
mortgage purchase programs on a par with that now imposed on Fannie Mae 
and Freddie Mac. Thus, the information proposed to be collected by the 
Finance Board is largely similar to information required to be reported 
to HUD and the Office of Federal Housing Enterprise Oversight (OFHEO) 
by Fannie Mae and Freddie Mac.
    A few of the data items proposed to be collected are not regularly 
reported by Fannie Mae and Freddie Mac to either HUD or OFHEO. The 
Finance Board is proposing to collect originating lender name, city and 
state for both single-family and multifamily acquisitions. Fannie Mae 
and Freddie Mac are only required to report on the

[[Page 25684]]

lender from which they acquired the loans. Under proposed 
Sec. 955.2(b)(1)(ii), the Banks are permitted to acquire loans held for 
a valid business purpose by a Bank System member or associate or 
affiliate. In order to monitor compliance with this provision, data on 
the originating lender are necessary.
    ``Front-end ratio'' and ``back-end ratio'' are two additional items 
that Fannie Mae and Freddie Mac do not regularly report to either HUD 
or OFHEO, but collect and maintain for underwriting and credit scoring 
purposes. HUD collected this information as part of its examination of 
the GSEs' automated underwriting processes. The Finance Board is 
proposing to collect this information to evaluate the risk of acquired 
loans, and possibly to examine the extent to which the Banks' programs 
are reaching borrowers not served by the conventional market. ``Self-
employment indicator'' is not provided by Fannie Mae and Freddie Mac to 
its regulators. However, the Finance Board is proposing to collect this 
information because the agency believes that it will be useful to 
assess risk and to examine the extent to which the Banks' programs are 
reaching borrowers not served by the conventional market. Lastly, 
``prepayment penalties'' for single-family loans is not reported by 
Fannie Mae and Freddie Mac, but is reported for multifamily loans to 
OFHEO. Prepayment penalties were rarely used by single-family lenders, 
but have begun to grow in popularity. The Finance Board is proposing to 
collect this information to examine prepayment speeds so that the 
market risk of the loans may be calculated.
    A number of the items on the lists are not applicable to current 
AMA programs. As proposed, the lists were compiled as broadly as 
possible to accommodate future programs. Under proposed 
Sec. 955.4(a)(2), the list of required loan-level elements may be 
revised by the Finance Board from time-to-time through the notice-and-
comment rulemaking process.
    Under proposed Sec. 955.4(b), within 60 days of the end of every 
quarter of every calendar year, the Banks that hold AMA that are 
residential mortgages would be required to submit a mortgage report, in 
a format to be determined by the Finance Board, that includes 
aggregations of the loan-level mortgages. The mortgage report would 
include year-to-date dollar volume, number of units, and number of 
mortgages on owner-occupied and rental properties acquired by the Bank. 
The mortgage report for the second and fourth quarters would be 
required to include, in addition to the aggregate mortgage report 
submitted every quarter, year-to-date loan-level data consisting of the 
data elements addressed in proposed Sec. 955.4(a). The Banks would be 
required to submit the mortgage reports to the Finance Board in a 
machine readable format, to be specified by the Finance Board. Under 
proposed Sec. 955.4(c), the Finance Board could, at any time, require 
reports in addition to those specified in proposed Sec. 955.5(b).
    The Finance Board is not at this time proposing the establishment 
of goals related to mortgage assets. To date, AMA mortgage asset volume 
is small relative to the mortgage market and, as discussed below, the 
Banks' balance sheets largely consist of loans that are regionally 
concentrated. Nonetheless, the Finance Board has begun to consider the 
establishment of goals. Since AMA programs, such as MPF, provide 
members with an alternative to selling loans in the secondary market, 
staff has reviewed the characteristics of MPF loans in the context of 
the GSE Housing Goals imposed on Fannie Mae and Freddie Mac as required 
under the Federal Housing Enterprises Financial Safety and Soundness 
Act of 1992 (FHEFSSA). 12 U.S.C. 4541 et seq.
    FHEFSSA directs HUD to establish the target levels for three 
separate goals for the GSEs' mortgage purchases. These three goals are: 
(1) A low- and moderate-income goal, intended to achieve increased 
purchases by the GSEs of mortgages on housing for low- and moderate-
income families; (2) a central cities, rural areas, and other 
underserved areas goal, intended to achieve increased purchases by the 
GSEs of mortgages financing housing in areas that are underserved in 
terms of mortgage credit; and (3) a special affordable housing goal, 
intended to achieve increased purchases by the GSEs of mortgages on 
owner-occupied and rental housing to meet the unaddressed need of, and 
be affordable to, low-income families in low-income areas and very low-
income families.
    FHEFSSA directs HUD to determine the target levels for the GSE 
Housing Goals after considering the following six factors: (1) National 
housing needs; (2) economic, housing and demographic conditions; (3) 
performance and effort of Fannie Mae and Freddie Mac toward achieving 
the Housing Goals in previous years; (4) the size of the conventional 
mortgage market serving the targeted population or areas relative to 
the size of the overall conventional mortgage market; (5) the ability 
of the GSEs to lead the industry in making mortgage credit available 
for the targeted population or areas; and (6) the need to maintain the 
sound financial condition of the GSEs.
    Currently, factors exist that impede a proper evaluation of MPF 
loans with respect to the GSE Housing Goals. One of these factors is 
the size of the MPF portfolio. MPF loans outstanding on the Banks' 
balance sheets are small relative to the size of the mortgage market 
and the size of Fannie Mae's and Freddie Mac's portfolios. Because MPF 
business has occurred only over a limited time period and with a 
relatively small number of member institutions, MPF is not yet 
representative of the broader market. Under MPF, the majority of the 
loans have been acquired on properties located in a single state 
(Wisconsin), while the GSE Housing Goals are established to reflect 
relevant criteria at the national level. Additionally, under MPF, the 
Banks are acquiring only single-family loans, while the GSE Housing 
Goals are established to reflect the inclusion of multifamily loans and 
a number of other types of loans that Fannie Mae and Freddie Mac 
currently purchase, and which are considered when HUD sets the targets 
for the GSE Housing Goals.
    Under the proposed rule, the Banks would be explicitly permitted to 
acquire multifamily mortgage assets, so long as the new business 
activity requirements of proposed part 980 (which is included in the 
Finance Board's recently-adopted proposed rule on advances collateral, 
and which is discussed in more detail below) are met. Prior to this 
proposed rule, the Banks have had only limited authority to acquire 
multifamily mortgage assets. This authority was not granted under 
Finance Board Resolution No. 99-50, which authorized only single-family 
mortgage programs.
    According to two recent HUD reports on rental housing,\3\ for 
various reasons, the supply of affordable rental housing has fallen 
short of the need. Moreover, absent concerted measures to address the 
problem, this trend will continue as the age of the existing affordable 
rental housing stock increases. In order to help address this need, the 
Finance Board is not only proposing to authorize the acquisition of 
multifamily member assets, but is encouraging the Banks to become 
active participants in this market. As GSEs, the Banks have a public 
purpose to provide liquidity to underserved markets. Given the demand 
for affordable rental housing, the Banks are encouraged to expand their

[[Page 25685]]

community partnerships and offer members competitive alternatives in 
the multifamily mortgage market.
---------------------------------------------------------------------------

    \3\ Department of Housing and Urban Development, Rental Housing 
Assistance--The Crisis Continues: The 1997 Report to Congress on 
Worst Case Housing Needs (April 1998) and Waiting in Vain--An Update 
on America's Rental Housing Crisis (March 1999).
---------------------------------------------------------------------------

    Although the factors mentioned above limit the validity of any 
comparison of MPF to the GSE Housing Goals, the Finance Board has 
sought to examine how well MPF loans compare to the GSE Housing Goals, 
controlling, to the extent possible, for the factors noted above. 
Overall, the data suggest that the distribution of MPF loans compares 
favorably to the GSE Housing Goals when single-family loans are 
isolated. The Finance Board's analysis has shown that, as of year-end 
1999, MPF has exceeded the special affordable housing goal and met the 
low-and moderate-income goal for 1999. However, the program has fallen 
short of the central cities, rural areas, and other underserved areas 
housing goal for 1999. Given that the underlying factors used in 
establishing the target for the central cities, rural areas, and other 
underserved areas housing goal assume a national program, it is not 
surprising that MPF loans did not achieve this goal. Because the 
majority of MPF loans are located in Wisconsin, a regional bias exists 
that particularly impacts the compliance of the MPF program with this 
goal.
    The Finance Board anticipates implementing demographic goals, as 
determined by the Finance Board in due consideration of the existing 
GSE Housing Goals, at such time as the conventional residential 
mortgage programs of the Banks, in the aggregate, have achieved a size 
and scope indicative of a mature program. For example, a mature program 
for the Banks' conventional residential mortgage programs might be 
deemed to exist beginning in the year that the annual aggregated 
acquisition volume for all conventional residential mortgage programs 
for the Bank System exceeds 100,000 loans or $10 billion. Once either 
100,000 loans or $10 billion in loans are acquired within a one-year 
period, such a program presumably would be national in scope. 
Similarly, a smaller set of programs, under which 75,000 loans are 
acquired within a one-year period, could also be considered national in 
scope if it were geographically dispersed among more than half of the 
Banks--for example, with seven different Banks accounting for at least 
ten percent of the loan acquisition volume.
    Ideally, any benchmark for the implementation of program goals will 
be empirically based. The possible 100,000 loan trigger is derived from 
the estimated number of loans acquired by Freddie Mac in 1992, the 
first year goals were imposed on the GSEs. The number of Freddie Mac 
loans may be an appropriate benchmark because Freddie Mac is the 
smaller of the two housing GSEs, yet its activity is national in scope.
    The alternative criteria would allow that a sufficient volume may 
occur at less than 100,000 loans but only if the program is clearly 
national in scope. The criterion that 7 different Banks account for at 
least 10 percent of the acquired conventional residential mortgage 
volume would ensure a geographically diverse pool at the lower loan 
total and ensure that no one Bank accounts for more than 40 percent of 
volume if the program is to be considered national in scope. The 
Finance Board specifically requests comment on the proposed measure of 
program maturity discussed above.
    The statutorily established GSE Housing Goals will eventually be 
used as a baseline in determining the goals and targets for AMA that 
are residential mortgages. However, in establishing goals, the Finance 
Board will conduct research and analysis beyond the GSE Housing Goals 
in order to establish the most suitable goals and targets given the 
factors surrounding AMA residential mortgage programs. Until goals for 
the Banks' residential mortgage AMA programs are established, the 
Finance Board will continue to monitor the Banks' AMA portfolios that 
consist of residential mortgages with reference to the GSE Housing 
Goals. Any housing goals that may be implemented will be subject to the 
notice-and-comment rulemaking process.
4. Administrative and Investment Transactions Between Banks--Sec. 955.5
    Proposed Sec. 955.5 addresses the delegation of administrative AMA 
program duties and terminability of AMA program agreements between 
Banks. Under proposed Sec. 955.5(a), a Bank would be permitted to 
delegate the administration of an AMA program, including the 
fulfillment of regulatory reporting requirements, to another Bank whose 
administrative office has been examined and approved by the Finance 
Board to process AMA transactions. Further, the proposed rule would 
require that the existence of such a delegation, or the possibility 
that such a delegation may be made, be disclosed to any potential 
participating member or associate before any AMA-related agreements are 
signed with that member or associate.
    Proposed Sec. 955.5(b) would require that any agreement made 
between two or more Banks in connection with any AMA program be made 
terminable by either party after a reasonable notice period. Under this 
provision, no Bank could be required to fund, purchase, sell, or 
process any new AMA after the termination of such an agreement.
5. Risk-Based Capital Requirement for AMA--Sec. 955.6
    Under proposed Sec. 955.6, each Bank must hold retained earnings 
plus specific loan loss reserves as support for the credit risk of all 
AMA estimated by the Bank to be below the second highest credit rating 
in an amount equal to or greater than: the outstanding balance of the 
assets or pools of assets, times a factor associated with the credit 
rating of the assets or pools of assets as determined by the Finance 
Board.
    The proposed rule would allow Banks to hold AMA that is of a credit 
quality that, though still of an investment grade, is less than what 
has typically been permitted by the Finance Board under the FMP for 
Bank investments. This provision is intended to ensure the safety and 
soundness of any exercise of the Banks' expanded authority prior to the 
implementation of a risk-based capital regulation. The credit risks and 
operational aspects of managing AMA assets are the same as those faced 
by regulated banking institutions, and such institutions are required 
to maintain risk-based capital to offset these risk factors. The ratio 
of retained earnings plus loan loss reserves should reflect losses 
based on the default rates of similarly rated securities (based on the 
credit rating achieved by the AMA assets once acquired by the Bank and 
including all loss accounts and credit enhancements). The methodology 
to determine the long-term default rate factor associated with the 
credit rating will be discussed in the upcoming risk-based capital 
rulemaking.

D. Amendments to Part 956--Investments

    The proposed rule would replace in its entirety existing part 956 
of the Finance Board's regulations, which governs Bank investments 
(prior to the recent reorganization of the Finance Board's regulations, 
see 65 FR 8253 (Feb. 18, 2000), the investment regulations were 
contained in 12 CFR 934.1, 934.2 and 934.13).
    Under sections 11(g), 11(h) and 16(a) of the Bank Act, 12 U.S.C. 
1431(g), 1431(h), 1436(a), a Bank may, subject to the rules and 
regulations of the Finance Board, invest in: (1) Obligations of the 
United States, see id. Secs. 1431(g), 1431(h) and 1436(a); (2) deposits 
in banks or trust companies, see id. Sec. 1431(g); (3) obligations, 
participations or other instruments of, or issued by, Fannie

[[Page 25686]]

Mae or Ginnie Mae, see id. Secs. 1431(h), 1436(a); (4) mortgages, 
obligations, or other securities that are, or ever have been sold by 
Freddie Mac, see id. Secs. 1431(h), 1436(a); (5) stock of Fannie Mae, 
see id. Sec. 1431(h); (6) stock, obligations, or other securities of 
any SBIC formed pursuant to 15 U.S.C. 681(d) (to the extent the 
investment is made for purposes of aiding Bank members), see 12 U.S.C. 
1431(h); and (7) instruments that the Bank has determined are 
permissible investments for fiduciary and trust funds under the laws of 
the state in which the Bank is located, see id. Secs. 1431(h), 1436(a).
    Currently, Sec. 956.2 of the regulations (formerly Sec. 934.1) 
limits the Banks' statutory investment authority by permitting a Bank 
to make investments only pursuant to specific authorizations of the 
Finance Board, or in conformity with ``stated [Finance] Board policy.'' 
12 CFR 956.2(a). Since 1991, the ``stated policy'' referred to in the 
regulation has been the FMP, which, among other things, sets forth a 
list of permissible Bank investments that is narrower than that which 
could be permitted under the statute.
    The investments authorized under section II.B. of the FMP are: (1) 
Overnight and term federal funds with a remaining term to maturity not 
exceeding nine months; (2) overnight and term resale agreements with a 
remaining term to maturity not exceeding nine months; (3) United States 
dollar deposits with a remaining term to maturity not exceeding nine 
months; (4) commercial paper, bank notes and thrift notes traded in 
U.S. financial markets and rated P-1 (by Moody's) or A-1 (by Standard & 
Poor's) with a remaining term to maturity not exceeding nine months; 
(5) banker's acceptances with a remaining term to maturity not 
exceeding nine months; (6) marketable obligations issued or guaranteed 
by the United States; (7) marketable direct obligations of United 
States government-sponsored agencies and instrumentalities, for which 
the credit of such institutions is pledged for the repayment of both 
principal and interest; (8) MBS issued, guaranteed or fully insured by 
Ginnie Mae, Fannie Mae, or Freddie Mac, or collateralized mortgage 
obligations (CMOs) or real estate mortgage investment conduits (REMICs) 
backed by such MBS; (9) other MBS, CMOs and REMICs rated Aaa (by 
Moody's) or AAA (by Standard & Poor's); (10) asset-backed securities 
collateralized by manufactured housing loans or home equity loans and 
rated Aaa (by Moody's) or AAA (by Standard & Poor's); (11) marketable 
direct obligations of state or local government units or agencies, 
rated at least Aa (by Moody's) or AA (by Standard & Poor's), where the 
purchase of such obligations by a Bank provides to the issuer the 
customized terms, necessary liquidity, or favorable pricing required to 
generate needed funding for housing or community development; and (12) 
upon the fulfillment of certain conditions, and with the prior approval 
of the Finance Board, other investments that support housing and 
community development.
    Under proposed part 956, the Banks would no longer be limited to a 
list of specific, approved investments. Instead, proposed Sec. 956.2 
would permit the Banks to hold all of the investments that are 
authorized under the Bank Act (with the exception of Fannie Mae common 
stock), subject to the safety and soundness restrictions set forth in 
proposed Sec. 955.3, and subject to the procedural requirements 
contained in proposed part 980 (which was proposed as part of the 
Finance Board's recently-adopted proposed rule on advances collateral 
and is described in more detail below).
    The only investment that is explicitly enumerated in the Bank Act 
that would not be permitted under proposed Sec. 956.2 is investment in 
the stock of Fannie Mae. As discussed below, proposed Sec. 956.3(a)(1) 
would prohibit Banks from investing in instruments that provide an 
ownership interest in an entity, with an exception for equity 
investments that qualify as core mission activities under proposed part 
940. Because the Finance Board does not believe that Fannie Mae stock 
could under any circumstances qualify as a core mission activity, and 
because Fannie Mae stock is not an authorized investment under the FMP 
and is not currently held as an investment by any Bank, it has been 
omitted from the list of authorized investments in proposed Sec. 956.2.
    Both sections 11(h) and 16(a) of the Bank Act state that the Banks 
may be authorized to invest in ``such securities as fiduciary and trust 
funds may be invested in under the laws of the state in which the * * * 
Bank is located.'' See 12 U.S.C. 1431(h), 1436(a). In implementing this 
authority through Sec. 956.2(f) of the proposed rule, the word 
``instruments'' has been substituted for the word ``securities'' to 
reflect in the proposed rule the Finance Board's construction of the 
term ``securities,'' as used in sections 11(h) and 16(a) of the Bank 
Act, to encompass the broad range of financial investment instruments 
and not merely those instruments that are within the technical 
definition of ``securities'' set forth in the federal securities laws. 
See 15 U.S.C 77b(1).
    The broad investment authority established under proposed 
Sec. 956.2 would be limited by a number of safety and soundness-related 
restrictions set forth in proposed Sec. 956.3. For reasons of safety 
and soundness, proposed Sec. 956.3(a)(1) generally would prohibit the 
Banks from making any investment in instruments that would provide an 
ownership interest in an entity (e.g., common or preferred stock, 
rights, warrants or convertible bonds). However, in order to permit 
Banks to make the types of targeted equity investments that qualify as 
core mission activities, the proposed rule would except from this 
prohibition equity investments that would qualify as CMA under proposed 
Sec. Sec. 940.3(a)(5) and (6). The Finance Board anticipates that such 
targeted equity investments would represent only a small portion of a 
Bank's balance sheet and that the additional risk associated with such 
investments would be mitigated by requiring the Bank to hold adequate 
capital against these investments. Although the proposed equity 
investment authority is narrow, this authorization would be less 
restrictive than what is currently permitted under the FMP, which 
permits equity investments only in the stock of SBICs.
    Proposed Sec. 956.3(a)(2) would prohibit the Banks from investing 
in instruments issued by foreign entities, except United States 
branches and agency offices of foreign commercial banks. Such 
instruments conceivably could qualify as permissible investments for 
fiduciary and trust funds and, therefore, would be permissible Bank 
investments unless specifically prohibited. This is consistent with the 
current prohibition in the FMP. See Finance Board Res. No. 97-05 (Jan. 
14, 1997).
    Proposed Sec. 956.3(a)(3) generally would prohibit the Banks from 
investing in debt instruments that are not rated as investment grade 
(i.e., one of the four highest credit rating categories given by an 
NRSRO). In order to permit Banks to invest in CMA that may be below 
investment grade, proposed Sec. 956.3(a)(3)(i) would except such CMA 
from the prohibition on below-investment grade debt securities. As is 
the case with CMA-related equity investments, it is anticipated that 
below-investment grade CMA debt investments would represent only a 
small portion of a Bank's balance sheet and that the additional risk 
associated with such investments would be mitigated by requiring the 
Bank to hold adequate capital against these investments. Under proposed 
Sec. 956.3(a)(3)(ii), the Banks would not be required to divest 
themselves of debt

[[Page 25687]]

instruments that are downgraded to below-investment grade after the 
instruments already have been acquired by the Bank.
    Under the FMP, the Banks are permitted to invest in debt 
instruments that are rated in the third highest credit rating category 
or higher, although debt investments that are in the third highest 
credit rating category may be held only for a term of one day. Thus, 
the authorization set forth in the proposed rule is somewhat broader 
than that which is permitted under the FMP.
    Finally, proposed Sec. 956.3(a)(4) would prohibit the Banks from 
acquiring whole mortgages or other whole loans, or interests in 
mortgages or loans, except: (i) AMA acquired under part 955 of the 
proposed rule; (ii) marketable direct obligations of state or local 
government units or agencies, particularly state or local HFA bonds 
that do not qualify as AMA, having at least the second highest credit 
rating from a NRSRO, where the purchase of such obligations by the Bank 
provides to the issuer the customized terms, necessary liquidity, or 
favorable pricing required to generate needed funding for housing or 
community lending; (iii) MBS, or asset-backed securities collateralized 
by manufactured housing loans or home equity loans, that are 
``securities'' under the Securities Act of 1933, 15 U.S.C. 77b(a)(1); 
and (iv) loans held or acquired pursuant to section 12(b) of the Bank 
Act, 12 U.S.C. 1432(b). As described in detail above, proposed part 955 
establishes parameters regarding the types of whole loans that the 
Banks may acquire from members and associates and the nature of the 
transactions through which such assets may be acquired. Proposed 
Sec. 956.3(a)(4)(i) is intended to make clear that part 955 of the 
regulations is the sole source of regulatory authority regarding the 
Banks' acquisition of whole loans and that any whole loan acquisitions 
must meet the requirements of part 955 in order to be permissible.
    Under proposed Sec. 956.3(a)(4)(ii), the Banks could continue to 
invest in state or local HFA bonds that do not qualify as AMA (i.e., 
those not issued by, through, or on behalf of a Bank System member or 
associate). However, HFA bonds not qualifying as AMA also would not 
qualify as CMA.
    The reference in proposed Sec. 956.3(a)(4)(iii) to MBS and asset-
backed securities that meet the definition of the term ``securities'' 
in the Securities Act of 1933 is intended to make clear that Banks may 
continue to invest in the types of MBS and asset-backed securities that 
are commonly available in the securities marketplace, but may not 
attempt to circumvent the AMA requirements of proposed part 955 by 
deeming unsecuritized pools of mortgages or other loans to be MBS or 
asset-backed securities.
    Proposed Sec. 956.3(a)(4)(iii) would also except from the loan 
investment restriction, housing project loans guaranteed under the 
Foreign Assistance Act of 1961, as amended, 22 U.S.C. 2181, 2182, 2184, 
which are expressly authorized by Congress as Bank investments under 
section 12(b) of the Bank Act. 12 U.S.C. 1432(b).
    Proposed Sec. 956.3(b) would prohibit a Bank from taking a position 
in any commodity or foreign currency. Proposed Sec. 956.3(b) also 
provides that, in the event that a Bank becomes exposed to currency, 
commodity or equity risks through participation in COs that are linked 
to a foreign currency or to equity or commodity prices, such risks must 
be hedged. The Banks currently do not have expertise in these areas and 
the Finance Board can discern no reason for the Banks to have or 
develop expertise in managing the risks associated with foreign 
exchange rates or commodities.
    Under proposed Sec. 956.4, the Banks must hold retained earnings 
plus specific loan loss reserves as support for the credit risk of all 
investments that are not rated by an NRSRO, or are rated below the 
second highest credit rating, in an amount equal to or greater than the 
outstanding balance of the investments times a factor associated with 
the credit rating of the investments as determined by the Finance 
Board. It is expected that this specific provision will be superseded 
at the time that a final capital rule is promulgated, to be replaced by 
specific capital requirements relating to each credit rating category.
    Except for those provisions in the FMP that are directly overridden 
by this proposed rule, all provisions of the FMP would remain in effect 
until expressly repealed by the Finance Board. Accordingly, Bank 
investment in agency and private MBS, CMOs and REMICs and in asset-
backed securities secured by manufactured housing or home equity loans 
would continue to be limited to a total amount equal to 300 percent of 
a Bank's capital. It is anticipated that the remaining provisions of 
the FMP will be repealed, or at least codified as regulations, at such 
time as the Finance Board promulgates a final rule on capital and risk 
management.

E. Effect of Proposed Part 980 of the Recently-Adopted Proposed Rule on 
Advances Collateral

    As mentioned several times above, under this proposed rule, the 
Banks' exercise of their AMA and investment authorities would be 
subject to the new business activity procedural requirements set forth 
in proposed part 980, which was recently adopted as part of the Finance 
Board's proposed rule on advances collateral. Under proposed part 980, 
each Bank would be required to provide at least 60 days' prior written 
notice to the Finance Board of any new business activity that the Bank 
wishes to undertake--including new types of AMA transactions and new 
types of investments. While a Bank could proceed with a new business 
activity after 60 days if not expressly prevented from doing so by the 
Finance Board, proposed part 980 would give the Finance Board the 
opportunity to disapprove or restrict such activities, as necessary, on 
a case-by-case basis. A ``new business activity'' would include: (1) A 
business activity that has not been undertaken previously by that Bank, 
or was undertaken previously under materially different terms and 
conditions; (2) a business activity that entails risks not previously 
and regularly managed by that Bank, its members, or both, as 
appropriate; or (3) a business activity that involves operations not 
previously undertaken by that Bank. The prior notice requirement would 
apply to any Bank desiring to pursue a new activity, even if another 
Bank has already undertaken the same activity.
    As discussed above, the proposed expansion of the Banks' member 
asset and investment authorities would present new management 
challenges for the Banks. By making the Banks' exercise of their 
authorities under proposed parts 955 and 956 subject to the new 
business activity review procedure, the Finance Board would, among 
other things, explicitly reserve the right to conduct pre-
implementation safety and soundness examinations of new Bank business 
activities and to apply safety and soundness restrictions to such 
activities, where necessary.

III. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance 
with section 605(b) of the RFA, see id. at 605(b), the Finance Board 
hereby certifies that this proposed rule, if promulgated as a final 
rule, will

[[Page 25688]]

not have a significant economic impact on a substantial number of small 
entities.

List of Subjects in 12 CFR Parts 900, 940, 950, 955 and 956

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

    Accordingly, the Finance Board hereby proposes to amend title 12, 
chapter IX, Code of Federal Regulations, as follows:

PART 900--GENERAL DEFINITION

    1. The authority citation for part 900 is revised to read as 
follows:

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

    2. Amend Sec. 900.1 by adding, in alphabetical order, a definition 
of the term ``acquired member assets or AMA,'' to read as follows:


Sec. 900.1  Definitions applying to all regulations.

* * * * *
    Acquired member assets or AMA means those assets that may be 
acquired by a Bank under part 955 of this chapter.
* * * * *
    3. The heading for part 940 is revised to read as follows:

PART 940--CORE MISSION ACTIVITIES

    4. The authority citation for part 940 continues to read as 
follows:

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

    5. In part 940, amend Sec. 940.1 by adding, in alphabetical order, 
definitions of the terms ``Financial Management Policy'', ``low- or 
moderate-income household'', and ``SBIC'', to read as follows:


Sec. 940.1  Definitions.

* * * * *
    Financial Management Policy (FMP) has the meaning set forth in 
Sec. 956.1 of this chapter.
    Low- or moderate-income household means a household with an income 
that is at or below 115 percent of the area median household income, as 
published by the Department of Housing and Urban Development.
    SBIC means a small business investment company formed pursuant to 
15 U.S.C. 681(d).
    6. Amend part 940 by adding a new Sec. 940.3, to read as follows:


Sec. 940.3  Core mission activities.

    (a) General. The following Bank activities qualify as core mission 
activities:
    (1) Advances;
    (2) Acquired member assets (AMA), except that United States 
government-insured or guaranteed whole single-family residential 
mortgage loans acquired under a commitment entered into after April 12, 
2000 shall qualify based on the following calculations, which, at the 
discretion of two or more Banks, may be made based on aggregate 
transactions among those Banks:
    (i) For calendar year 2000, such loans shall qualify in a dollar 
amount up to 33 percent of: the total dollar amount of AMA acquired by 
a Bank after April 12, 2000, less the dollar amount of United States 
government-insured or guaranteed whole single-family residential 
mortgage loans acquired after April 12, 2000 under commitments entered 
into on or before April 12, 2000; and
    (ii) For calendar year 2001 and subsequent years, such loans shall 
qualify in a dollar amount up to 33 percent of: the total dollar amount 
of AMA acquired by a Bank during that year, less the dollar amount of 
United States government-insured or guaranteed whole single-family 
residential mortgage loans acquired under commitments entered into on 
or before April 12, 2000.
    (3) Standby letters of credit;
    (4) Intermediary derivative contracts;
    (5) Non-securitized debt investments or equity investments that:
    (i) Primarily benefit low- or moderate-income households, or areas 
targeted for redevelopment by local, state, tribal or Federal 
government (including Federal empowerment zones and enterprise and 
champion communities) by providing or supporting one or more of the 
following activities:
    (A) Affordable housing;
    (B) Economic development;
    (C) Community services;
    (D) Permanent jobs for members of low- or moderate-income 
households; or
    (E) Area revitalization or stabilization; and
    (ii) Involve one or more members or associates in a manner, 
financial or otherwise, and to a degree to be determined by the Bank;
    (6) Investments in SBICs, to the extent that a Bank's investment is 
structured to be matched by an investment in the same activity by 
members or associates of the Bank making the investment;
    (7) The short-term tranche of SBIC securities guaranteed by the 
Small Business Administration;
    (8) Section 108 Interim Notes and Participation Certificates 
guaranteed by the Department of Housing and Urban Development under 
section 108 of the Housing and Community Development Act of 1974, as 
amended (42 U.S.C. 5308);
    (9) Investments and obligations issued or guaranteed under Title VI 
of the Native American Housing Assistance and Self-Determination Act of 
1996 (25 U.S.C. 4191 through 4195).
    (b) Status of certain investments made under the FMP. 
Notwithstanding that certain investments made by a Bank pursuant to 
sections II.B.8. through 11. of the FMP do not qualify as core mission 
activities, any limit on such assets that may be promulgated by the 
Finance Board shall not limit the authority of a Bank to hold to 
maturity, or to fund using the proceeds of consolidated obligations, 
such assets held by the Bank as of April 12, 2000, except as may be 
necessary to ensure the safety and soundness of the Banks.

PART 950--ADVANCES

    7. The authority citation for part 950 continues to read as 
follows:

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

    8. Amend part 950 by adding a new subpart C to read as follows:

Subpart C--Advances to Out-of-District Members and Associates


Sec. 950.18  Advances to out-of-district members and associates.

    (a) Establishment of creditor/debtor relationship. Any Bank may 
become a creditor to a member or associate of another Bank through the 
purchase of an outstanding advance, or a participation interest 
therein, from the other Bank, or through an arrangement with the other 
Bank that provides for the establishment of such a creditor/debtor 
relationship at the time an advance is made.
    (b) Applicability of advances requirements. Any debtor/creditor 
relationship established pursuant to paragraph (a) of this section 
shall be subject to all of the provisions of this part that would apply 
to an advance made by a Bank to its own members or associates.
    9. In subchapter G, add a new part 955 to read as follows:

PART 955--ACQUIRED MEMBER ASSETS

Sec.
955.1   Definitions.
955.2   Authorization to hold acquired member assets.
955.3   Required credit-risk sharing structure.

[[Page 25689]]

955.4   Reporting requirements for acquired member assets.
955.5   Administrative and investment transactions between Banks.
955.6   Risk-based capital requirement for acquired member assets.
Appendix A to Part 955--Reporting requirements for single-family 
acquired member assets that are residential mortgages: loan-level 
data elements
Appendix B to Part 955--Reporting requirements for multi-family 
acquired member assets that are residential mortgages: loan-level 
data elements

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


Sec. 955.1  Definitions.

    As used in this section:
    Affiliate has the meaning set forth in Sec. 950.1 of this chapter.
    Financial Management Policy (FMP) has the meaning set forth in 
Sec. 956.1 of this chapter.
    NRSRO has the meaning set forth in Sec. 966.1 of this chapter.
    Residential real property has the meaning set forth in Sec. 950.1 
of this chapter.
    State has the meaning set forth in Sec. 925.1 of this chapter


Sec. 955.2  Authorization to hold acquired member assets.

    Subject to the requirements of part 980 of this chapter, each Bank 
may hold assets acquired from or through Bank System members or 
associates by means of either a purchase or a funding transaction, 
subject to each of the following requirements:
    (a) Loan type requirement. The assets are either:
    (1) Whole loans that are eligible to secure advances under 
Sec. Sec. 950.7(a)(1)(i), (a)(2)(ii), (a)(4), or (b)(1) of this 
chapter, excluding:
    (i) Single-family mortgages where the loan amount exceeds the 
limits established pursuant to 12 U.S.C. 1717(b)(2); and (ii) Loans 
made to an entity, or secured by property, not located in a state;
    (2) Whole loans secured by manufactured housing, regardless of 
whether such housing qualifies as residential real property; or (3) 
State and local housing finance agency bonds;
    (b) Member or associate nexus requirement. The assets are:
    (1) Either:
    (i) Originated or issued by, through, or on behalf of a Bank System 
member or associate, or an affiliate thereof; or (ii) Held for a valid 
business purpose by a Bank System member or associate, or an affiliate 
thereof, prior to acquisition by a Bank; and
    (2) Are acquired either:
    (i) From a member or associate of the acquiring Bank;
    (ii) From a member or associate of another Bank, pursuant to an 
arrangement with that Bank; or
    (iii) From another Bank; and
    (c) Credit risk-sharing requirement. The transactions through which 
the Bank acquires the assets either:
    (1) Meet the credit risk-sharing requirements of Sec. 955.3 of this 
part; or
    (2) Were authorized by the Finance Board under section II.B.12. of 
the FMP and are within any total dollar cap established by the Finance 
Board at the time of such authorization.


Sec. 955.3  Required credit risk-sharing structure.

    (a) Determination of necessary credit enhancement. (1) At the time 
of acquisition of acquired member assets (AMA), a Bank shall determine:
    (i) The expected credit losses on each asset or pool of assets; and
    (ii) The total credit enhancement necessary to enhance the asset or 
pool of assets to at least the fourth highest credit rating category, 
or such higher credit rating as the Bank may require.
    (2) The Bank's estimates of expected losses and total credit 
enhancement required under paragraph (a)(1) of this section shall be 
determined using a methodology that is confirmed in writing by an NRSRO 
to be comparable to a methodology that the NRSRO would use in 
conducting a formal rating review of the asset or pool of assets.
    (b) Credit risk-sharing structure. Based on the determinations 
required under paragraph (a) of this section, a Bank shall implement a 
credit enhancement structure that:
    (1) As evidenced by a written confirmation from an NRSRO, enhances 
the asset or pool of assets to at least the fourth highest credit 
rating category, or such higher credit rating as the Bank may require; 
and
    (2) Incorporates credit risk-sharing with the member or associate 
such that either:
    (i) The member or associate from which a Bank acquired an asset or 
pool of assets directly bears the economic consequences of all credit 
losses in excess of expected losses, as estimated by the Bank using the 
methodology described in paragraph (a) of this section, up to the 
amount necessary to enhance the asset or pool of assets to the fourth 
highest credit rating category, or such higher rating as required by 
the Bank; or
    (ii)(A) The member or associate from which the Bank acquired an 
asset or pool of assets directly bears the economic consequences of all 
credit losses up to the amount of expected losses on the asset or pool 
of assets, as estimated by the Bank using the methodology described in 
paragraph (a) of this section; and
    (B) The member or associate assumes responsibility for such 
additional credit loss coverage as is necessary to enhance the asset or 
pool of assets to the fourth highest credit rating category, or such 
higher rating as required by the Bank, which coverage may be provided 
by, or allocated among:
    (1) The member or associate;
    (2) Any other member or associate in the Bank's district;
    (3) Loan-level insurance, including United States government 
insurance or guarantee, where the member or associate is legally 
obligated at all times to maintain such insurance with an insurer rated 
not lower than the second highest credit rating category.


Sec. 955.4  Reporting requirements for acquired member assets.

    (a) Loan-level data elements. (1) Each Bank that acquires AMA that 
are residential mortgages shall collect and maintain loan-level data on 
each mortgage held, as specified in appendix A (for single-family 
mortgage assets) or appendix B (for multifamily mortgage assets) to 
this part.
    (2) The Finance Board may, from time-to-time, amend the lists of 
required loan-level data elements set forth in appendices A and B of 
this part by publication of a document in the Federal Register.
    (b) Quarterly mortgage reports. Within 60 days of the end of every 
quarter of every calendar year, each Bank that acquires AMA that are 
residential mortgages shall submit to the Finance Board a Mortgage 
Report, which shall include:
    (1) Aggregations of the loan-level mortgage data compiled by the 
Bank pursuant to paragraph (a) of this section for year-to-date 
mortgage acquisitions, in a format specified by the Finance Board;
    (2) Year-to-date dollar volume, number of units and number of 
mortgages on owner-occupied and rental properties relating to AMA 
acquired by the Bank; and
    (3) For the second and fourth quarter Mortgage Reports only, year-
to-date loan-level data that:
    (i) Comprises the data elements required to be collected and 
maintained by the Bank under paragraph (a) of this section; and
    (ii) Appears in a machine-readable format specified by the Finance 
Board.
    (c) Additional reports. The Finance Board may at any time require a 
Bank to submit reports in addition to those required under paragraph 
(b) of this section.

[[Page 25690]]

Sec. 955.5  Administrative and investment transactions between Banks.

    (a) Delegation of administrative duties. A Bank may delegate the 
administration of an AMA program to another Bank whose administrative 
office has been examined and approved by the Finance Board to process 
AMA transactions. The existence of such a delegation, or the 
possibility that such a delegation may be made, must be disclosed to 
any potential participating member or associate before any AMA-related 
agreements are signed with that member or associate.
    (b) Terminability of agreements. Any agreement made between two or 
more Banks in connection with any AMA program shall be made terminable 
by either party after a reasonable notice period.
    (c) Delegation of pricing authority. A Bank that has delegated its 
AMA pricing function to another Bank shall retain a right to refuse to 
acquire AMA at prices it does not consider appropriate.


Sec. 955.6  Risk-based capital requirement for acquired member assets.

    Each Bank shall hold retained earnings plus specific loan loss 
reserves as support for the credit risk of all AMA estimated by the 
Bank to be below the second highest credit rating in an amount equal to 
or greater than: the outstanding balance of the assets or pools of 
assets times a factor associated with the credit rating of the assets 
or pools of assets as determined by the Finance Board.

Appendix A to Part 955--Reporting Requirements For Single-Family 
Acquired Member Assets That Are Residential Mortgages: Loan-Level Data 
Elements

    1. FHLBank District Flag--Two-digit numeric code designating the 
District FHLBank that originally acquired the loan.
    2. Participating FHLBank District Flag--Two-digit numeric code 
designating the District FHLBank that purchased a participation in 
the loan.
    3. Loan Number--Unique numeric identifier used by the FHLBanks 
for each mortgage acquisition.
    4. US Postal State--Two-digit numeric Federal Information 
Processing Standard (FIPS) code.
    5. US Postal Zip Code--Five-digit zip code for the property.
    6. MSA Code--Four-digit numeric code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA.
    7. Place Code--Five-digit numeric FIPS code.
    8. County--County, as designated in the most recent decennial 
census by the Bureau of the Census.
    9. Census Tract/Block Numbering Area (BNA)--Tract/BNA number as 
used in the most recent decennial census by the Bureau of the 
Census.
    10. 1990 Census Tract-Percent Minority--Percentage of a census 
tract's population that is minority based on the most recent 
decennial census by the Bureau of the Census.
    11. 1990 Census Tract-Median Income--Median family income for 
the census tract.
    12. 1990 Local Area Median Income--Median income for the area.
    13. Tract Income Ratio--Ratio of the 1990 census tract median 
income to the 1990 local area median income (i.e., loan-level data 
element number 11 divided by loan-level data element number 12).
    14. Borrower(s) Annual Income--Combined income of all borrowers.
    15. Area Median Family Income--Current median family income for 
a family of four for the area as established by HUD.
    16. Borrower Income Ratio--Ratio of Borrower(s) annual income to 
area median family income.
    17. Acquisition Unpaid Principal Balance (UPB)--UPB in whole 
dollars of the mortgage when acquired by the FHLBank.
    18. Loan-to-Value (LTV) Ratio at Origination--LTV ratio of the 
mortgage at the time of origination.
    19. Participation Percentage--Where the mortgage acquisition is 
a participation, the percentage of the mortgage for each FHLBank 
listed in loan-level data element number 2.
    20. Date of Mortgage Note--Date the mortgage note was created.
    21. Date of Acquisition--Date the FHLBank acquired the mortgage.
    22. Purpose of Loan--Indicates whether the mortgage was a 
purchase money mortgage, a refinancing, a construction mortgage, or 
a financing of property rehabilitation.
    23. Cooperative Unit Mortgage--Indicates whether the mortgage is 
on a dwelling unit in a cooperative housing building.
    24. Product Type--Indicates the product type of the mortgage, 
i.e., fixed rate, adjustable rate mortgage (ARM), balloon, graduated 
payment mortgage (GPM) or growing equity mortgages (GEM), reverse 
annuity mortgage, or other.
    25. Federal Guarantee--Numeric code that indicates whether the 
mortgage has a Federal guarantee, and from which agency.
    26. Term of Mortgage at Origination--Term of the mortgage at the 
time of origination in months.
    27. Amortization Term--For amortizing mortgages, the 
amortization term of the mortgage in months.
    28. Originating Lender Institution--Name of the institution that 
originated the loan.
    29. Originating Lender City--City location of the institution 
that originated the loan.
    30. Originating Lender State--State location of the institution 
that originated the loan.
    31. Acquiring Lender Institution--Name of the institution from 
which the FHLBank acquired the mortgage.
    32. Acquiring Lender City--City location of the institution from 
which the FHLBank acquired the mortgage.
    33. Acquiring Lender State--State location of the institution 
from which the FHLBank acquired the mortgage.
    34. Type of Seller Institution--Type of institution that sold 
the mortgage to the GSE, i.e., mortgage company, Savings Association 
Insurance Fund (SAIF) insured depositary institution, Bank Insurance 
Fund (BIF) insured depositary institution, National Credit Union 
Association (NCUA) insured credit union, or other seller.
    35. Number of Borrowers--Number of borrowers.
    36. First-Time Home Buyer--Numeric code indicating whether the 
mortgagor(s) are first-time homebuyers; second mortgages and 
refinancings are not treated as first-time homebuyers.
    37. Mortgage Purchased under the Banks' Community Investment 
Cash Advances (CICA) Programs--Indicates whether the Bank purchased 
the mortgage under an AHP or CIP program.
    38. Acquisition Type--Indicates whether the FHLBank acquired the 
mortgage with cash, by swap, with a credit enhancement, a bond or 
debt purchase, reinsurance, risk-sharing, real estate investment 
trust (REIT), or a real estate mortgage investment conduit (REMIC), 
or other.
    39. FHLBank Real Estate Owned--Indicates whether the mortgage is 
on a property that was in the FHLBank's real estate owned (REO) 
inventory.
    40. Borrower Race or National Origin--Numeric code indicating 
the race or national origin of the borrower.
    41. Co-Borrower Race or National Origin--Numeric code indicating 
the race or national origin of the co-borrower.
    42. Borrower Gender--Numeric code that indicates whether the 
borrower is male or female.
    43. Co-Borrower Gender--Numeric code that indicates whether the 
co-borrower is male or female.
    44. Age of Borrower--Age of borrower in years.
    45. Age of Co-Borrower--Age of co-borrower in years.
    46. Occupancy Code--Indicates whether the mortgaged property is 
an owner-occupied principal residence, a second home, or a rental 
investment property.
    47. Number of Units--Indicates the number of units in the 
mortgaged property.
    48. Unit--Number of Bedrooms--Where the property contains non-
owner-occupied dwelling units, the number of bedrooms in each of 
those units.
    49. Unit--Affordable Category--Where the property contains non-
owner-occupied dwelling units, indicates under which, if any, of the 
special affordable goals the units qualified.
    50. Unit--Reported Rent Level--Where the property contains non-
owner-occupied dwelling units, the rent level for each unit in whole 
dollars.
    51. Unit--Reported Rent Plus Utilities--Where the property 
contains non-owner-occupied dwelling units, the rent level plus the 
utility cost for each unit in whole dollars.
    52. Geographically Targeted Indicator--Numeric code that 
indicates loans made in census tracts classified as underserved by 
HUD.
    53. Interest Rate--Note rate on the loan.
    54. Loan Amount--Loan balance at origination.

[[Page 25691]]

    55. Front-end Ratio--Ratio of principal, interest, taxes, and 
insurance to borrower(s) income.
    56. Back-end Ratio--Ratio of all debt payments to borrower(s) 
income.
    57. Borrower FICO Score--Fair, Isaacs, Co. credit score of 
borrower.
    58. Co-Borrower FICO Score--Fair, Isaacs, Co. credit score of 
co-borrower.
    59. PMI Percent--Percent of original loan balance covered by 
private mortgage insurance.
    60. Credit Enhancement--Numeric code indicating type of credit 
enhancement.
    61. Self-Employed Indicator--Numeric indicator for whether the 
borrower is self-employed.
    62. Property Type--Numeric indicator for whether the property is 
single-family detached, condominium, townhouse, PUD, etc.
    63. Default Status--Numeric indicator for whether the loan is 
currently in default.
    64. Termination Date--Date on which the loan terminated.
    65. Termination Type--Numeric indicator for whether the loan 
terminated in a prepayment, foreclosure, or other types of 
termination.
    66. ARM Index--Index used for the calculation of interest on an 
ARM.
    67. ARM margin--Margin added to the index for calculation of the 
interest on an ARM.
    68. Prepayment Penalty Terms--Numeric indicator for types of 
prepayment penalties.

Appendix B to Part 955--Reporting Requirements for Multi-Family 
Acquired Member Assets That Are Residential Mortgages: Loan-Level Data 
Elements

    1. FHLBank District Flag--Two-digit numeric code designating the 
District FHLBank that originally acquired the loan.
    2. Participating FHLBank District Flag--Two-digit numeric code 
designating the District FHLBank that purchased a participation in 
the loan.
    3. Loan Number--Unique numeric identifier used by the FHLBanks 
for each mortgage acquisition.
    4. US Postal State--Two-digit numeric Federal Information 
Processing Standard (FIPS) code.
    5. US Postal Zip Code--Five-digit zip code for the property.
    6. MSA Code--Four-digit numeric code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA.
    7. Place Code--Five-digit numeric FIPS code.
    8. County--County, as designated in the most recent decennial 
census by the Bureau of the Census.
    9. Census Tract/Block Numbering Area (BNA)--Tract/BNA number as 
used in the most recent decennial census by the Bureau of the 
Census.
    10. 1990 Census Tract-Percent Minority--Percentage of a census 
tract's population that is minority based on the most recent 
decennial census by the Bureau of the Census.
    11. 1990 Census Tract-Median Income--Median family income for 
the census tract.
    12. 1990 Local Area Median Income--Median income for the area.
    13. Tract Income Ratio--Ratio of the 1990 census tract median 
income to the 1990 local area median income (i.e., loan-level data 
element number 11 divided by loan-level data element number 12).
    14. Area Median Family Income--Current median family income for 
a family of four for the area as established by HUD.
    15. Affordability Category--Indicates under which, if any, of 
the special affordable goals mandated by HUD for Fannie Mae and 
Freddie Mac, the property would qualify.
    16. Acquisition Unpaid Principal Balance (UPB)--UPB in whole 
dollars of the mortgage when purchased by the FHLBank.
    17. Loan-to-Value (LTV) Ratio at Origination--LTV ratio of the 
mortgage at the time of origination.
    18. Participation Percentage--Where the mortgage acquisition is 
a participation, the percentage of the mortgage when the note was 
created for each FHLBank listed in loan-level data element number 2.
    19. Date of Mortgage Note--Date the mortgage note was created.
    20. Date of Acquisition--Date the FHLBank acquired the mortgage.
    21. Purpose of Loan--Indicates whether the mortgage was a 
purchase money mortgage, a refinancing, a construction mortgage, or 
a financing of property rehabilitation.
    22. Cooperative Project Loan--Indicates whether the mortgage is 
a project loan on a cooperative housing building.
    23. Mortgagor Type--Indicates the type of mortgagor, i.e., an 
individual, a for-profit entity such as a corporation or 
partnership, a nonprofit entity such as a corporation or 
partnership, a public entity, or other type of entity.
    24. Product Type--Indicates the product type of the mortgage, 
i.e., fixed rate, adjustable rate mortgage (ARM), balloon, graduated 
payment mortgage (GPM) or growing equity mortgages (GEM), reverse 
annuity mortgage, or other.
    25. Government Insurance--Indicates whether any part of the 
mortgage has government insurance.
    26. FHA Risk Share Percent--The percentage of the risk assumed 
for the mortgage purchased under a risk-sharing arrangement with 
FHA.
    27. Mortgage Purchased under the Banks' Community Investment 
Cash Advances (CICA) Programs--Indicates whether the Bank purchased 
the mortgage under an AHP or CIP program.
    28. Acquisition Type--Indicates whether the FHLBank acquired the 
mortgage with cash, by swap, with a credit enhancement, a bond or 
debt purchase, reinsurance, risk-sharing, real estate investment 
trust (REIT), or a real estate mortgage investment conduit (REMIC), 
or other.
    29. Term of Mortgage at Origination--Term of the mortgage at the 
time of origination in months.
    30. Amortization Term--For amortizing mortgages, the 
amortization term of the mortgage in months.
    31. Originating Lender Institution--Name of the entity that 
originated the loan.
    32. Originating Lender City--City location of the entity that 
originated the loan.
    33. Originating Lender State--State location of the entity that 
originated the loan.
    34. Acquiring Lender Institution--Name of the entity from which 
the FHLBank acquired the mortgage.
    35. Acquiring Lender City--City location of the entity from 
which the FHLBank acquired the mortgage.
    36. Acquiring Lender State--State location of the institution 
from which the FHLBank acquired the mortgage.
    37. Type of Seller Institution--Type of institution that sold 
the mortgage to the GSE, i.e., mortgage company, Savings Association 
Insurance Fund (SAIF) insured depositary institution, Bank Insurance 
Fund (BIF) insured depositary institution, National Credit Union 
Association (NCUA) insured credit union, or other seller.
    38. FHLBank Real Estate Owned--Indicates whether the mortgage is 
on a property that was in the FHLBank's real estate owned (REO) 
inventory.
    39. Number of Units--Indicates the number of units in the 
mortgaged property.
    40. Geographically Targeted Indicator--Numeric code that 
indicates loans made in census tracts classified as underserved by 
HUD.
    41. Public Subsidy Program--Indicates whether the mortgage 
property is involved in a public subsidy program and which level(s) 
of government are involved in the subsidy program, i.e., Federal 
government only, other only, Federal government, etc.
    42. Unit Class Level--The following data apply to unit types in 
a particular mortgaged property. The unit types are defined by the 
Banks for each property and are differentiated based on the number 
of bedrooms in the units and on the average contract rent for the 
units. A unit type must be included for each bedroom size category 
in the property;
    A. Unit Type XX--Number of Bedroom(s)--the number of bedrooms in 
the unit type;
    B. Unit Type XX--Number of Units--the number of units in the 
property within the unit type;
    C. Unite Type XX--Average Reported Rent Level--the average rent 
level for the unit type in whole dollars; and
    D. Unit Type XX--Average Reported Rent Plus Utilities--the 
average reported rent level plus the utility cost for each unit in 
whole dollars; and
    E. Unit Type XX--Affordability Level--the ratio of the average 
reported rent plus utilities for the unit type to the adjusted area 
median income
    F. Unit Type XX--Tenant Income Indicator--indicates whether the 
tenant's income is less than 60 percent of area median income, 
greater than or equal to 60 percent but less than 80 percent of area 
median income, greater than or equal to 80 percent but less than 100 
percent of area median income, or greater than or equal to 100 
percent of area median income.
    43. Interest Rate--Note rate on the loan.
    44. Debt Service Coverage Ratio--Ratio of net operating income 
to debt service.
    45. Default Status--Numeric indicator for whether the loan is 
currently in default.
    46. Termination Date--Date on which the loan terminated.

[[Page 25692]]

    47. Termination Type--Numeric indicator for whether the loan 
terminated in a prepayment, foreclosure, or other types of 
termination.
    48. ARM Index--Index used for the calculation of interest on an 
ARM.
    49. ARM margin--Margin added to the index for calculation of the 
interest on an ARM.
    50. Prepayment Penalty Terms--Numeric indicator for types of 
prepayment penalties.
    10. In subchapter G, revise part 956 to read as follows:

PART 956--FEDERAL HOME LOAN BANK INVESTMENTS

Sec.
956.1   Definitions.
956.2   Authorized investments.
956.3   Prohibited investments and prudential rules.
956.4   Risk-based capital requirement for investments.

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1431, 1436.


Sec. 956.1  Definitions.

    As used in this part:
    Deposits in banks or trust companies has the meaning set forth in 
Sec. 969.3 of this chapter.
    Financial Management Policy means the Financial Management Policy 
For The Federal Home Loan Bank System approved by the Finance Board 
pursuant to Finance Board Resolution No. 96-45 (July 3, 1996), as 
amended by Finance Board Resolution No. 96-90 (Dec, 6, 1996), Finance 
Board Resolution No. 97-05 (Jan. 14, 1997), and Finance Board 
Resolution No. 97-86 (Dec. 17, 1997).
    GAAP means Generally Accepted Accounting Principles.
    Investment grade means:
    (1) A credit quality rating in one of the four highest credit 
rating categories by an NRSRO and not below the fourth highest credit 
rating category by any NRSRO; or
    (2) If there is no credit quality rating by an NRSRO, a 
determination by a Bank that the issuer, asset or instrument is the 
credit equivalent of investment grade using credit rating standards 
available from an NRSRO or other similar standards.
    NRSRO has the meaning set forth in Sec. 966.1 of this chapter.


Sec. 956.2  Authorized investments.

    In addition to assets enumerated in parts 950 and 955 of this 
chapter and subject to the applicable limitations set forth in this 
part and in part 980 of this chapter, each Bank may invest in:
    (a) Obligations of the United States;
    (b) Deposits in banks or trust companies;
    (c) Obligations, participations or other instruments of, or issued 
by, the Federal National Mortgage Association or the Government 
National Mortgage Association;
    (d) Mortgages, obligations, or other securities that are, or ever 
have been, sold by the Federal Home Loan Mortgage Corporation pursuant 
to 12 U.S.C. 1454 or 1455;
    (e) Stock, obligations, or other securities of any small business 
investment company formed pursuant to 15 U.S.C. 681(d), to the extent 
such investment is made for purposes of aiding members of the Bank; and
    (f) Instruments that the Bank has determined are permissible 
investments for fiduciary or trust funds under the laws of the state in 
which the Bank is located.


Sec. 956.3  Prohibited investments and prudential rules.

    (a) Prohibited investments. A Bank may not invest in:
    (1) Instruments that provide an ownership interest in an entity, 
except for investments described in Secs. 940.3(a)(5) and (6) of this 
chapter;
    (2) Instruments issued by non-United States entities, except United 
States branches and agency offices of foreign commercial banks;
    (3) Debt instruments that are not rated as investment grade, 
except:
    (i) Investments described in Sec. 940.3(a)(5) of this chapter; and
    (ii) Debt instruments that were downgraded to a below investment 
grade rating after acquisition by the Bank; or
    (4) Whole mortgages or other whole loans, or interests in mortgages 
or loans, except:
    (i) Acquired member assets;
    (ii) Marketable direct obligations of state or local government 
units or agencies, having at least the second highest credit rating 
from a NRSRO, where the purchase of such obligations by the Bank 
provides to the issuer the customized terms, necessary liquidity, or 
favorable pricing required to generate needed funding for housing or 
community lending;
    (iii) Mortgage-backed securities, or asset-backed securities 
collateralized by manufactured housing loans or home equity loans, that 
meet the definition of the term ``securities'' under 15 U.S.C. 
77b(a)(1); and
    (iv) Loans held or acquired pursuant to section 12(b) of the Act 
(12 U.S.C. 1432(b)).
    (b) Foreign currency or commodity positions prohibited. A Bank may 
not take a position in any commodity or foreign currency. If a Bank 
participates in consolidated obligations denominated in a currency 
other than U.S. Dollars or linked to equity or commodity prices, the 
currency, commodity and equity risks must be hedged.


Sec. 956.4  Risk-based capital requirement for investments.

    Each Bank shall hold retained earnings plus specific loan loss 
reserves as support for the credit risk of all investments that are not 
rated by a NRSRO, or are rated below the second highest credit rating, 
in an amount equal to or greater than the outstanding balance of the 
investments times a factor associated with the credit rating of the 
investments as determined by the Finance Board.

    Dated: April 12, 2000.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-10909 Filed 5-2-00; 8:45 am]
BILLING CODE 6725-01-P