[Federal Register Volume 65, Number 89 (Monday, May 8, 2000)]
[Proposed Rules]
[Pages 26518-26533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11078]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 65, No. 89 / Monday, May 8, 2000 / Proposed 
Rules  

[[Page 26518]]



FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 917, 926, 944, 950, 952, 961 and 980

[No. 2000-16]
RIN 3069-AA97


Federal Home Loan Bank Advances, Eligible Collateral, New 
Business Activities and Related Matters

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its Advances Regulation and other regulations to implement the 
requirements of the Federal Home Loan Bank System Modernization Act of 
1999 by: allowing the Federal Home Loan Banks (Banks) to accept from 
community financial institution members (CFI members) new categories of 
collateral to secure advances; expanding the purposes for which the 
Banks may make long-term advances to CFI members; and removing the 
limit on the amount of a member's advances that may be secured by other 
real estate-related collateral. The Finance Board also is proposing 
related and other technical changes to its regulations on General 
Definitions, Powers and Responsibilities of Bank Boards of Directors 
and Senior Management, Federal Home Loan Bank Associates, Community 
Support Requirements, Community Investment Cash Advance Programs and 
Standby Letters of Credit, and a new regulation on New Business 
Activities.

DATES: The Finance Board will accept comments on the proposed rule in 
writing on or before June 7, 2000.

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

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director, (202) 
408-2821, Scott L. Smith, Deputy Director, (202) 408-2991, or Julie 
Paller, Senior Financial Analyst, (202) 408-2842, Office of Policy, 
Research and Analysis; or Eric E. Berg, Senior Attorney-Advisor, (202) 
408-2589, Eric M. Radenbush, Senior Attorney-Advisor, (202) 408-2932, 
or Sharon B. Like, (202) 408-2930, Office of General Counsel, Federal 
Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background and Overview of Proposed Rule

A. Historical Benefits of Federal Home Loan Bank System

    The Federal Home Loan Bank System (Bank System) comprises twelve 
regional Banks that are instrumentalities of the United States 
organized under the authority of the Federal Home Loan Bank Act (Bank 
Act). See 12 U.S.C. 1423, 1432(a). The Banks are cooperatives; only 
members of a Bank may own the capital stock of a Bank and only members 
and certain eligible nonmember borrowers (associates) (such as state 
housing finance agencies) may obtain access to the products provided by 
a Bank. See 12 U.S.C. 1426, 1430(a), 1430b. Each Bank is managed by its 
own board of directors and serves the public by enhancing the 
availability of residential housing finance and community lending 
credit through its members and associates. See 12 U.S.C. 1427. Any 
eligible institution (typically, an insured depository institution) may 
become a member of a Bank by satisfying certain criteria and by 
purchasing a specified amount of a Bank's capital stock. See 12 U.S.C. 
1424, 1426; 12 CFR part 925.
    As government sponsored enterprises (GSEs), the Banks are granted 
certain privileges that enable them to borrow funds in the capital 
markets on terms more favorable than could be obtained by private 
entities, so that the Bank System generally can borrow funds at a 
modest spread over the rates on U.S. Treasury securities of comparable 
maturity. The Banks pass along their GSE funding advantage to their 
members, and ultimately to consumers, by providing secured loans, 
called advances, and other financial products and services at rates and 
terms that would not otherwise be available to their members.
    The Banks must fully secure advances with eligible collateral. See 
12 U.S.C. 1430(a). At the time of origination or renewal of an advance, 
a Bank must obtain a security interest in collateral eligible under one 
or more of the collateral categories set forth in the Bank Act. See 12 
U.S.C. 1430(a) (as amended).
    Under section 10 of the Bank Act and part 950 of the Finance 
Board's regulations, the Banks have broad authority to make advances in 
support of residential housing finance, which includes community 
lending, defined, in the proposed rule, as providing financing for 
economic development projects for targeted beneficiaries and, for CFIs, 
purchasing or funding small business loans, small farm loans or small 
agri-business loans. See 12 U.S.C. 1430(a), (i), (j); 12 CFR parts 900, 
950. The Banks also are required to offer two programs, the Affordable 
Housing Program (AHP) and the Community Investment Program (CIP), to 
provide subsidized or at-cost advances, respectively, in support of 
unmet housing finance or targeted economic development credit needs. 
See 12 U.S.C. 1430(i), (j); 12 CFR parts 951, 952. In addition, section 
10(j)(10) of the Bank Act authorizes the Banks to establish additional 
Community Investment Cash Advance (CICA) Programs for targeted 
community lending, defined as providing financing for economic 
development projects for targeted beneficiaries. See 12 U.S.C. 
1430(j)(10); 12 CFR part 952.

B. Expanded Access to Bank System Benefits

    On November 12, 1999, the President signed into law the Federal 
Home Loan Bank System Modernization Act of 1999 (Modernization Act) \1\ 
which, among other things, amended the Bank Act by providing smaller 
lenders with greater access to membership in the Bank System and 
greater access to Bank advances. The Modernization Act established a 
category of members consisting of FDIC-insured depository institutions 
with less than $500,000,000 in average total assets (based on an 
average of total assets over three years)

[[Page 26519]]

called community financial institutions, or CFIs, \2\ and authorized 
the Banks to make long-term advances to CFI members for the purposes of 
providing funds for small businesses, small farms and small agri-
businesses. See Modernization Act, sections 602, 604(a)(2), 605. The 
Modernization Act also authorized the Banks to accept from CFI members 
as security for advances secured loans for small business, agriculture, 
or securities representing a whole interest in such secured loans. See 
id., section 604(a)(5)(C).
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    \1\ The Modernization Act is Title VI of the Gramm-Leach-Bliley 
Act, Pub. L. No. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
    \2\ The Finance Board recently adopted an Interim Final Rule 
that amended the Finance Board's Membership Regulation to implement 
the Modernization Act amendments regarding membership in the Bank 
System. See 65 FR 13866 (March 15, 2000).
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    For all members, the Modernization Act removed the statutory limit 
on the amount of aggregate outstanding advances that could be secured 
by ``other real estate-related collateral,'' which had been capped at 
30 percent of a member's capital. See id., section 604(a)(5)(B). Banks, 
therefore, are now authorized to accept other real estate-related 
collateral as security for advances to any member as long as the 
collateral has a readily ascertainable value and the Bank is able to 
perfect a security interest in that collateral. See 12 U.S.C. 
1430(a)(3)(D) (as amended).
    The Finance Board is proposing to amend its regulations to 
implement the new statutory authorities described above. Because the 
primary duty of the Finance Board is to ensure that the Banks operate 
in a safe and sound manner, the proposed rule includes certain 
safeguards. The Finance Board believes that, because the Banks have had 
no experience with the new types of nonmortgage-related collateral 
authorized in the Modernization Act and in this proposed rule, and have 
made only limited use of ``other real estate-related'' collateral, the 
Banks will need to build capacity to evaluate the new types of 
collateral and must exercise caution even in accepting higher volumes 
of ``other real estate-related'' collateral. Banks will need to learn 
how to value small business loans and agriculture loans before 
accepting such loans from CFI members as security for advances. For 
these reasons, the Finance Board is proposing to treat these activities 
as new lines of business. Thus, part 980 of the proposed rule would 
require a Bank, prior to accepting for the first time the new 
categories of collateral from CFI members, or significantly higher 
volumes of ``other real estate-related'' collateral, to file a notice 
with the Finance Board containing information that demonstrates that 
the Bank has the capacity, sufficiency of experience, and expertise to 
safely value, discount and manage the risks associated with the 
particular types of collateral to be accepted. In evaluating a Bank's 
notice of new collateral activities, the Finance Board intends to 
encourage conservative discounting of new collateral until the Bank 
gains experience in valuing such collateral.
    Prior to the enactment of the Modernization Act, section 10(e) of 
the Bank Act restricted access to Bank advances to Bank members that 
did not meet the qualified thrift lender (QTL) test.\3\ These 
restrictions limited the purposes for which non-QTL members could 
obtain advances, limited Bank System-wide advances to non-QTL members 
to 30 percent of total Bank System advances outstanding, and gave QTL 
members a priority over non-QTL members in obtaining advances. See 12 
U.S.C. 1430(e)(1), (2) (1994). The Bank Act also established a 
statutory presumption, for the purpose of determining the minimum 
amount of Bank capital stock that a member must purchase pursuant to 
section 6(b) of the Bank Act, that each member has at least 30 percent 
of its assets in home mortgage loans. See 12 U.S.C. 1430(e)(3) (1994). 
Coupled with the section 6(b) requirement that all members must 
subscribe to Bank stock equaling at least one percent of the member's 
aggregate unpaid loan principal, this presumption effectively limited 
the dollar amount of advances that a non-QTL member could obtain in 
relation to the amount of Bank stock it had purchased. See id.
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    \3\ The ``qualified thrift lender'' test is set forth in section 
10(m) of the Home Owners' Loan Act, 12 U.S.C. 1467a(m), and applies 
directly only to savings associations. Originally enacted in 1987, 
the QTL test was intended to ensure that savings associations 
remained committed to the business of providing housing-related 
loans. Failure to meet the test subjected both the savings 
association and its holding company to certain statutory penalties, 
including reduced access to Bank advances for the association. In 
1989, Congress revised the QTL test and the penalties for failing to 
meet it, including more severe restrictions on access to Bank 
advances for savings associations, as well as for commercial banks, 
that did not meet the test.
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    The Modernization Act repealed section 10(e) of the Bank Act in its 
entirety, thereby providing access to Bank advances without regard to 
the percentage of housing-related assets a member holds. See 
Modernization Act, section 604(c). In a recently adopted Interim Final 
Rule, the Finance Board removed the provisions in its Membership and 
Advances Regulations containing the additional capital stock purchase 
requirements and limitations on advances applicable to non-QTL members. 
See 65 FR 13866 (March 15, 2000). The Finance Board is proposing in 
this rule to remove all remaining references to non-QTL status from its 
Advances Regulation. See 12 CFR 950.1, 950.21 (1999).

C. Related Amendments

    The Finance Board also is proposing to revise its regulations to: 
(1) Amend part 900 (General Definitions) to add a new, broader 
definition of ``community lending'' that would include, for CFI 
members, purchasing or funding small business loans, small farm loans 
and small agri-business loans; (2) add a new section in part 917 
(Powers and Responsibilities of Bank Boards of Directors and Senior 
Management) to set forth the responsibilities of a Bank's board of 
directors regarding member products policies; (3) add a new part 926 
(Federal Home Loan Bank Associates) to address separately the 
eligibility requirements for associates that currently are contained in 
part 950; (4) replace the term ``community lending'' with the term 
``targeted community lending'' in part 944 (Community Support 
Requirements) and part 952 (Community Investment Cash Advance Programs) 
to differentiate ``targeted community lending'' referred to in those 
parts from the broader definition of ``community lending'' proposed in 
part 900; (5) make technical and conforming changes to the collateral 
provisions in part 961 (Standby Letters of Credit); and (6) add a new 
part 980 (New Business Activities) setting forth the standards and 
procedures under which a Bank may engage in new business activities, 
including the acceptance of new types of collateral.

II. Analysis of Proposed Rule

A. Modernization Act Amendments Establishing Newly Eligible Collateral

1. New CFI-Eligible Collateral
    a. Collateral eligible as security for advances to CFI members or 
their affiliates. The Modernization Act amended the Bank Act to allow 
CFI members to pledge new types of collateral as security for advances, 
specifically, secured loans for small business or agriculture, or 
securities representing a whole interest in such secured loans. See 
Modernization Act, section 604(a)(5)(C). Proposed Sec. 950.7(b)(1) 
implements this amendment by authorizing the Banks to accept from CFI 
members or their affiliates as security for advances, small business 
loans, small farm loans or small agri-business loans fully secured by 
collateral other than real estate, or securities representing a whole 
interest in such loans, provided that (i) the loans

[[Page 26520]]

have a readily ascertainable liquidation value and can be freely 
liquidated in due course; and (ii) the Bank can perfect a security 
interest in such collateral (CFI-eligible collateral). Proposed 
Sec. 950.7(b)(1) also requires that, prior to accepting any such CFI-
eligible collateral, a Bank shall meet the new business activity 
requirements of part 980 of the proposed rule, described below. This 
requirement is intended to ensure that a Bank has the capacity to 
value, discount and manage the newly eligible collateral prior to 
making advances secured by such collateral.
    Proposed Sec. 950.7(b)(1) does not explicitly refer to secured 
loans for agriculture, as does the Modernization Act. See Modernization 
Act, section 604(a)(5)(C). Instead, the Finance Board has interpreted 
``agriculture loans'' to mean small farm loans and small agri-business 
loans, and substituted these terms, in the text of proposed 
Sec. 950.7(b)(1). These terms also appear in proposed Sec. 950.3, which 
sets forth the authorized purposes of long-term Bank advances, so their 
use in proposed Sec. 950.7(b)(1) is consistent with the Finance Board's 
general policy of employing uniform terminology in its regulations 
whenever possible.
    Although the Finance Board could authorize the Banks to accept all 
secured agriculture loans as collateral from CFI members, the Finance 
Board is proposing, by interpreting agriculture loans to mean small 
farm loans and small agri-business loans, to allow only secured 
``small'' agriculture loans to be included as eligible collateral. The 
Finance Board believes that permitting the Banks to accept as 
collateral only ``small'' agriculture loans is consistent with both the 
Banks' mission of assisting members with community lending and with the 
Modernization Act's emphasis on small institutions' lending to small 
enterprises. See Modernization Act, sections 602, 604(a)(3), 
604(a)(5)(C).
    Proposed Sec. 950.7(b)(1) excludes loans secured by real estate 
because these types of loans are included in proposed Sec. 950.7(a)(4).
    In view of the greater risks inherent in non-mortgage, CFI-eligible 
collateral, the Finance Board, for safety and soundness reasons, 
considered whether limits or restrictions should be established on the 
types of collateral that could secure such loans or securities pledged 
by a CFI member or affiliate to secure an advance. For example, small 
business loans secured by accounts receivable or inventory, or small 
farm loans secured by crops or livestock, which may present greater 
risks than other types of secured small business or small farm loans, 
could have been excluded from the forms of eligible collateral. 
However, the Finance Board has chosen not to impose limits or 
restrictions in the proposed rule, but instead to require the Banks to 
have policies and capacity to value the collateral, whatever it may be. 
The Finance Board believes that proposed Sec. 950.10(a), which requires 
that each Bank determine the value of collateral in accordance with the 
Bank's member products policy (established pursuant to proposed 
Sec. 917.4), should minimize the Banks' exposure to risk in accepting 
CFI-eligible collateral. The Finance Board expects such policies, if 
they are properly developed and implemented, to take the appropriate 
risk factors into account in their valuation and discounting 
procedures. Of course, the policies, and the Banks' activities in this 
regard, also would be subject to examination by the Finance Board and 
to the new activities requirements of proposed part 980, discussed 
below. Accordingly, the proposed rule does not establish limits on the 
types of collateral that may secure such loans or securities pledged by 
a CFI member or affiliate. The Finance Board specifically requests 
comment on whether certain types of CFI-eligible collateral should be 
prohibited as eligible collateral on the basis of risk.
    b. Types of collateral--Definitions of ``small business loans,'' 
``small farm loans'' and ``small agri-business loans''. To facilitate 
the safe and sound implementation of the Banks' authority to accept new 
types of collateral to secure advances to CFI members, the Finance 
Board is proposing to amend Sec. 950.1 by defining the terms ``small 
business loans,'' ``small farm loans'' and ``small agri-business 
loans.'' For loans below a prescribed aggregate amount, the proposed 
definitions use loan size as a proxy for business size. For loans above 
the ceiling amount, business data specific to the borrowing enterprise 
(such as annual gross receipts) would determine whether a loan fits 
within the definition.
    The business size approach provides greater accuracy, but may 
result in costs that deter CFI members from fully employing Banks as a 
funding source for loans to the small businesses and small farms in 
their communities. The loan size approach is less precise, but has the 
advantage of lower implementation costs, since it involves information 
already available to Federally regulated financial institutions in the 
reports they are required to file with their primary federal regulator.
    The Finance Board believes that the proposed definitions represent 
an appropriate compromise between these two approaches that will allow 
CFI members to use Bank System funding to finance the small businesses 
and small farms in their communities, as authorized by the 
Modernization Act. See Modernization Act, section 604(a)(5)(C).
(i) ``Small business loans''
    Proposed Sec. 950.1 defines ``small businesses loans'' as either: 
(1) Loans (including the aggregate of all loans to a particular 
borrower) with an original amount of not more than $1 million that are 
reported on either Schedule SB of the Thrift Financial Report filed by 
savings associations as ``permanent mortgage loans secured by nonfarm, 
nonresidential properties'' or ``nonmortgage, nonagricultural 
commercial loans,'' or Schedule RC-C, Part II of the Report of 
Condition and Income (Call Report) filed by insured commercial banks 
and FDIC-supervised savings banks as ``loans secured by nonfarm 
nonresidential properties'' or ``commercial and industrial loans to 
U.S. addresses''; or (2) loans for which the CFI, on a case-by-case 
basis, documents that the borrower meets the eligibility standards for 
a small business concern under the Small Business Administration's 
(SBA) regulations at 13 CFR part 121, or any successor provisions.
    The Finance Board considered several possible definitions of a 
small business loan. One possible definition is a loan to a business 
that meets the eligibility standards for a small business concern under 
the Small Business Act and SBA regulations.\4\ The Small Business Act 
defines an eligible small business as one that is independently owned 
and operated and not dominant in its field of operation. See 15 U.S.C. 
632. The Small Business Act also states that in determining what is a 
small business, the definition shall vary from industry to industry to 
adequately reflect industry differences. See id. Sec. 632(a)(3). The 
SBA developed size standards that define the maximum size of an 
eligible small business, based either on ``annual receipts'' or number 
of employees. 13 CFR 121.201. SBA regulations define ``annual 
receipts'' as total income plus

[[Page 26521]]

the cost of goods sold. 13 CFR 121.104. The size standards are based on 
Standard Industrial Classification (SIC) code, and generally are as 
follows:
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    \4\ Under the Small Business Act, the size of a manufacturing 
concern is determined on the basis of average employment, the size 
of a business concern providing services is determined on the basis 
of annual gross receipts over a period of not less than 3 years, and 
the size of other business concerns is determined on the basis of 
business data over a period of not less than 3 years. See 15 U.S.C. 
632(b)(2)(C)(1996), The Small Business Administration implements 
these statutory standards with industry specific size regulations 
under 13 CFR part 121.

------------------------------------------------------------------------
                 Industry                               Size
------------------------------------------------------------------------
Retail and Service........................  $3.5 to $21.5 million
Construction..............................  $7.0 to $17.0 million
Agriculture...............................  $0.5 to $9.0 million
Wholesale.................................  No more than 100 employees
Manufacturing.............................  500 to 1,500 employees
------------------------------------------------------------------------

When affiliations exist with other companies, the primary business 
activity must be determined both for the applicant business as well as 
for the entire affiliated group. 13 CFR 121.103.
    The Finance Board recognizes that member institutions are not apt 
to compile the type of information necessary to determine whether a 
business borrower qualifies as a small business under the SBA 
definition, and that requiring that such information be collected would 
impose additional costs on CFI members. Thus, the Finance Board 
considered other alternatives, including a definition of a small 
business based on the reporting requirements for loans to small 
businesses and small farms promulgated by the Federal Financial 
Institutions Examination Council (FFIEC).\5\
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    \5\ FFIEC is a formal interagency body empowered to prescribe 
uniform principals, standards, and report forms for the federal 
examination of financial institutions by the Board of Governors of 
the Federal Reserve System, the Federal Deposit Insurance 
Coporation, the National Credit Union Adminstration, the Office of 
the Comptroller of the Currency, and the Office of Thrift 
Supervision and to make recommendations to promote uniformity in the 
supervision of financial institutions. See 12 U.S.C. 3301 et. seq.
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    Section 122 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA) requires the Federal banking agencies 
to annually collect from insured depository institutions such 
information on small business and small farm lending as the agencies 
may need to assess the availability of credit to these sectors of the 
economy.\6\ Section 122 of FDICIA does not specify the types of 
information that the agencies must collect on small business and small 
farm loans, but it does indicate that the reporting requirement may be 
implemented by collecting data on the total number and aggregate dollar 
amount of loans to small businesses and agricultural loans to small 
farms. Section 122 of FDICIA also suggests that information on charge-
offs and loan income be collected, but FFIEC determined that such 
information would not add sufficient value to the assessment of credit 
availability to justify the cost to institutions of reporting the 
information. See 57 FR 21410 (May 20, 1992).
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    \6\ Section 122 of FDICIA (Pub. L. No. 102-242, 105 Stat. 2251 
(12 U.S.C. 1817 note)).
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    On May 20, 1992, FFIEC published proposed reporting requirements on 
small business and small farm lending. See id. Because the terms 
``small business'' and ``small farm'' were not defined in FDICIA, FFIEC 
proposed to use annual sales as the basis upon which to identify small 
businesses and small farms. Businesses and farms with annual sales of 
less than $10 million and $500,000, respectively, were deemed to be 
``small.'' See id.
    Many of the comment letters received from institutions indicated 
that the implementation costs of the proposed FFIEC data collection 
would be excessive. See 57 FR 54235, 54237. A comparison of the 
expected costs with the expected benefits of the information led FFIEC 
to consider whether other reporting alternatives might be available 
that would allow institutions to report information of comparable value 
at a lower cost to the industry. See id.
    Based on these considerations, FFIEC decided to use loan size as a 
proxy for business and farm size. As a rationale for using this 
approach, FFIEC, in the Supplemental Information section of the 
adopting release, indicated that it had reviewed data reported in the 
1989 National Survey of Small Business Finances, a survey of firms with 
fewer than 500 employees, and concluded that the data indicated a 
strong correlation between size of business and loan size. In addition, 
several of the commentators had recommended that loan size be used as a 
proxy for business size. See id.
    FFIEC decided to use the original amount of the loan rather than 
the current balance because an institution's loans with balances below 
a certain amount would include loans of varying original amounts to all 
sizes of borrowers that have been partially repaid.
    As a rationale for the upper limit of $1 million for small business 
loans, FFIEC stated that more loans above this loan size category would 
tend to be made to larger businesses than in the category of loans of 
$1 million or less. In addition, FFIEC indicated that the more than 
9,500 institutions with less than $100 million in assets would 
generally be constrained by their lending limits from making loans to 
businesses that would be considered ``large.'' See id. at 54238.
    The final FFIEC rule also requires financial institutions to report 
business loans with original amounts of $100,000 or less, more than 
$100,000 through $250,000, and more than $250,000 through $1 million. 
See id.
    The Finance Board is proposing to define a small business loan 
based on the loan size standards established by the FFIEC agencies. 
Because this information on loan size is readily available to financial 
institutions, this approach will avoid burdensome costs to CFI members 
that might deter such members from using Banks as a funding source for 
loans to small businesses. The Finance Board also recognizes that 
applying only the FFIEC standard would exclude loans that exceed $1 
million to businesses that meet the eligibility standards for a small 
business concern under the SBA's regulations. 13 CFR 121.104. To allow 
such loans to be eligible to secure advances to CFI members, the 
proposed definition of ``small business loans'' includes a qualifying 
alternative that does not impose a loan size restriction if the CFI 
member can document on a case-by-case basis that the borrower meets the 
eligibility standards for a small business concern under the SBA's 
regulations.
    The Finance Board expects that CFI members initially will rely on 
the part of the proposed definition of small business loans that 
emphasizes loan size. However, over time, CFI members would have the 
opportunity to implement procedures to establish a borrower's size 
based on the SBA's regulatory standards, and thereby be in a position 
to rely on that part of the definition that does not restrict loan 
size. The Finance Board requests comment on whether there may be any 
other appropriate methods of categorizing or defining small business 
loans.
(ii) ``Small Farm Loans''
    Proposed Sec. 950.1 defines ``small farm loans'' as either: (1) 
Loans (including the aggregate of all loans to a particular borrower) 
with an original amount of not more than $500,000 that are reported on 
either Schedule SB of the Thrift Financial Report filed by savings 
associations as ``loans secured primarily by farms,'' or Schedule RC-C, 
Part II of the Report of Condition and Income filed by insured 
commercial banks and FDIC-supervised savings banks as ``loans secured 
by farmland (including farm residential and other improvements)''; or 
(2) loans for which the CFI, on a case-by-case basis, documents that 
the borrowers meet the eligibility standards for a small business 
concern under the SBA's regulations at 13 CFR part 121, or any 
successor provisions.
    As with the proposed definition of ``small business loans,'' the 
proposed

[[Page 26522]]

definition of ``small farm loans'' represents a compromise between the 
precision of the SBA's regulations, which include size parameters for 
farm enterprises,\7\ and the practicality of FFIEC's standards for 
small farm loans. Accordingly, the definition of ``small farm loans'' 
is identical to the definition of ``small business loans,'' except for 
the items referred to on Schedule SB and Schedule RC-C, and the upper 
limit of $500,000, which corresponds to the upper limit FFIEC applies 
to small farm loans. The particular schedule items referenced in the 
definition of ``small farm loans'' are the items in the schedules that 
most closely correlate to small farm activity and lending.
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    \7\ See 13 CFR 121.201.
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    As a rationale for the upper limit of $500,000 for small farm 
loans, the notice accompanying FFIEC's final rule stated that data from 
the Second Quarter 1992 Agricultural Finance Databook prepared by the 
Federal Reserve Board (Databook) indicates that less than five percent 
of all non-real estate loans to farmers in recent years are made in 
amounts of $100,000 or more. See 57 FR 54238. The Databook also 
estimated that, in 1991, the average size of non-real estate loans to 
farmers with original amounts of $100,000 or more was $540,000. See id. 
Thus, FFIEC determined that a $1 million loan size cutoff for small 
farm loans would likely capture an extremely high percentage of all 
farm loans. FFIEC concluded that a loan size cutoff of $500,000 would 
be appropriate in order to reduce the likelihood that loans that have 
been made to large farms are reported as part of an institution's loans 
to small farms. See id.
    The FFIEC final rule also requires financial institutions to report 
farm loans with original amounts of $100,000 or less, more than 
$100,000 through $250,000, and more than $250,000 through $500,000. See 
id. The Finance Board requests comment on whether there may be any 
other appropriate methods of categorizing or defining small farm loans.
(iii) ``Small agri-business loans''
    Proposed Sec. 950.1 defines ``small agri-businesses loans'' as 
either: (1) Loans (including the aggregate of all loans to a particular 
borrower) with an original amount of not more than $500,000 that are 
reported on either Schedule SB of the Thrift Financial Report filed by 
savings associations as ``nonmortgage, commercial loans to finance 
agricultural production and other nonmortgage commercial loans to 
farmers,'' or Schedule RC-C, Part II of the Report of Condition and 
Income filed by insured commercial banks and FDIC-supervised savings 
banks as ``loans to finance agricultural production and other loans to 
farmers''; or (2) loans for which the CFI, on a case-by-case basis, 
documents that the borrowers meet the eligibility standards for a small 
business concern under the SBA's regulations at 13 CFR part 121, or any 
successor provisions.
    The proposed definition of ``small agri-business loans'' is 
identical to the definition of ``small farm loans'' except for the 
items referred to on Schedule SB and Schedule RC-C, which more closely 
correlate to small agri-business activity and lending. As with the 
proposed definitions of ``small business loans'' and ``small farm 
loans'', the proposed definition of ``small agri-business loans'' 
represents a compromise between the SBA size standards for agricultural 
businesses,\8\ and FFIEC's standards for small agri-business loans, as 
identified by the schedule items referenced in the definition. The 
Finance Board requests comment on whether there may be any other 
appropriate methods of categorizing or defining small agri-business 
loans.
---------------------------------------------------------------------------

    \8\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    c. Change in CFI Status. Proposed Sec. 950.7(b)(2) addresses how a 
Bank should deal with a CFI member that has advances outstanding 
secured by CFI-eligible collateral that loses its CFI status. Proposed 
Sec. 950.7(b)(2) prohibits a Bank from accepting as security for new 
advances CFI-eligible collateral from a member that no longer qualifies 
as a CFI member. However, in order to prevent a situation where a 
member must quickly obtain alternative funding, proposed 
Sec. 950.7(b)(2) provides that a Bank shall not require a member that 
loses its CFI status and has outstanding advances secured by CFI-
eligible collateral to repay such advances prior to the stated 
maturities, or to provide substitute collateral, eligible under 
paragraphs (a)(1) through (5), based solely on the member's change in 
CFI status.
    Proposed Sec. 950.7(b)(2) also authorizes a Bank to allow such 
member to renew maturing advances secured by CFI-eligible collateral 
for up to 6 months. This is intended to provide the member with 
sufficient time to wind down advances and replace them with other 
funding in an orderly fashion. It is not uncommon for members to obtain 
short-term advances that frequently renew for additional terms. In that 
case, the member could have difficulty securing alternative funding if 
all or most of its advances mature within a short period of time. The 
Finance Board specifically requests comment on whether allowing 
renewals of such advances is appropriate and, if so, whether allowing 
renewals for up to 6 months would provide sufficient time for members 
to obtain alternative funding.
2. Cash or Deposits in a Bank
    Current Sec. 950.9 of the Advances Regulation (redesignated as 
Sec. 950.7 in the proposed rule) sets forth the types of eligible 
collateral that a Bank may accept to secure advances. The Modernization 
Act revised section 10(a)(3) of the Bank Act to add ``cash'' to the 
types of eligible collateral. See Modernization Act, section 
604(a)(5)(A). Proposed Sec. 950.7(a)(3) implements this change by 
adding cash as eligible collateral.
3. Other Real Estate-Related Collateral
    The Modernization Act amended section 10(a)(4) of the Bank Act by 
removing the limit on the dollar amount of advances that may be secured 
other real estate-related collateral, which had been set at 30 percent 
of the member's capital. See Modernization Act, section 604(a)(5)(B). 
Section 950.7(a)(4) of the proposed rule implements this change by 
removing the 30 percent limitation. Proposed Sec. 950.7(a)(4)(iii), 
however, provides that a Bank shall not make total advances to all 
members secured by other real estate-related collateral in an aggregate 
amount that would exceed 25% of the highest level of advances 
previously secured by such collateral, until the Bank has met the new 
business activity requirements of proposed part 980.
    The Finance Board specifically requests comment on what the 
appropriate threshold should be for triggering the new business 
activity requirement with respect to the use of other real estate-
related collateral, and whether there should be any other limits on the 
use of such collateral to ensure that the Banks' lending against this 
type of collateral is done in a safe and sound manner. The Finance 
Board also specifically requests comment on whether members should be 
required to pledge all available collateral under proposed 
Secs. 950.7(a)(1) through (3) prior to pledging other real estate-
related collateral under paragraph (4) in order to prevent members from 
using only their least liquid collateral to secure Bank advances. While 
each Bank has the discretion to include such a requirement in its 
member products policy, it may be appropriate for the Finance Board to 
require that such a provision be included in such policies, especially 
in light of the Modernization Act authorization for the Finance Board 
to review, and increase, the Banks'

[[Page 26523]]

standards for other real estate-related collateral. See Modernization 
Act, section 604(a)(7).
    Current Sec. 950.9(a)(4)(i)(A) of the Advances Regulation requires 
other real estate-related collateral to have a readily ascertainable 
value. The Finance Board believes that the liquidation value of 
collateral, and the ability to liquidate the collateral quickly, is a 
more appropriate measure of the value of other real estate-related 
collateral securing an advance, particularly given the lifting of the 
30 percent cap. Accordingly, proposed Sec. 950.7(a)(4)(i)(A) provides 
that other real estate-related collateral have a readily ascertainable 
liquidation value and be able to be freely liquidated in due course. 
This change also is proposed in Sec. 950.7(b)(1)(i).
4. Removal of Combination Business or Farm Property From Definition of 
``Residential Real Property''
    Under current Sec. 950.1, the term ``residential real property'' is 
defined to include combination business or farm property, where at 
least 50 percent of the total appraised value of the combined property 
is attributable to the residential portion of the property or, in the 
case of a CFI, combination business or farm property on which is 
located a permanent structure actually used as a residence (other than 
for temporary or seasonal housing), where the residence constitutes an 
integral part of the property. 12 CFR 950.1. This provision was 
intended to allow mortgage loans on such properties to qualify as 
eligible collateral and be included in a member's total residential 
housing assets for the purpose of qualifying for membership and 
obtaining long-term advances. The Modernization Act's removal of the 
statutory limit on the amount of advances that may be secured by other 
real estate-related collateral appears to have eliminated the necessity 
of allowing combination business or farm property to be counted under 
the mortgage loan category of eligible collateral. In addition, the 
Modernization Act's removal of the requirement that CFI members have 10 
percent of their assets in residential mortgage loans to qualify for 
membership and the expansion of the purposes for which advances may be 
made to CFI members also reduce the significance of counting such 
combination properties as residential mortgage loans. Accordingly, the 
Finance Board has proposed removing combination business or farm 
property from the definition of ``residential real property'' in 
Sec. 950.1. The Finance Board specifically requests comment on whether 
there are any reasons to retain combination business or farm property 
in the definition of ``residential real property.''

B. New Business Activity Requirement

    As discussed above, the proposed changes in types and amounts of 
collateral that may be pledged to secure advances will present new 
management challenges for the Banks. In order to ensure that entering 
into these and other new types of business activities will not create 
safety and soundness concerns, the Finance Board is proposing to add a 
new part 980 to its regulations. Proposed Sec. 980.3 requires a Bank 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 
the acceptance of increased volumes of other real estate-related 
collateral and of new CFI-eligible collateral for the first time--so 
that the Finance Board may disapprove, examine or impose restrictions 
on such activities, as necessary, on a case-by-case basis. In addition 
to the acceptance of new or increased volumes of collateral, proposed 
Sec. 980.1 defines a ``new business activity'' as any business activity 
undertaken, transacted, conducted or engaged in by a Bank that has not 
been previously approved by the Finance Board, including: (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 test of what constitutes a new 
business activity for a particular Bank is intended to focus attention 
on worthy new activities. 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. With respect to accepting either 
newly eligible collateral or significantly higher volumes of other real 
estate-related collateral, the written notice required by proposed 
Sec. 980.3(b) must include: a description of the classes or amounts of 
collateral proposed to be accepted by the Bank; a copy of the Bank's 
member products policy; a copy of the Bank's procedures for determining 
the value of the collateral in question; and a demonstration of the 
Bank's capacity, personnel, technology, experience and expertise to 
value, discount and manage the risks associated with the collateral in 
question. This requirement is intended to ensure that a Bank has the 
capacity to value, discount and manage the additional collateral prior 
to making advances secured by such collateral.

C. Clarification of Other Collateral Provisions in Existing Regulation

1. Securities Representing Equity Interests in Eligible Collateral
    Current Sec. 950.9(a)(5) of the Advances Regulation provides that a 
Bank may accept as collateral any security, such as mutual fund shares, 
the ownership of which represents an undivided equity interest in 
underlying assets, all of which qualify either as: (i) eligible 
collateral under paragraph (a)(1) (mortgage loans and privately issued 
mortgage-backed securities) or paragraph (a)(2) (agency securities); or 
(ii) cash or cash equivalents. As discussed above, cash is now included 
as eligible collateral under paragraph (a)(3). Accordingly, for greater 
clarity, a reference to paragraph (a)(3) is included in proposed 
Sec. 950.7(a)(5)(i) and the reference to cash in paragraph (a)(5)(ii) 
is removed.
    The current Advances Regulation does not include a definition of 
``cash equivalents.'' Proposed Sec. 950.1 defines ``cash equivalents'' 
as investments that: (1) Are readily convertible into known amounts of 
cash; (2) have a remaining maturity of 90 days or less at the 
acquisition date; and (3) are held for liquidity purposes. This 
definition would codify a Finance Board regulatory interpretation 
(Regulatory Interpretation 2000-RI-1 (March 6, 2000)) that allowed a 
Bank to accept as collateral under Sec. 950.7(a)(5), shares of mutual 
funds that enter into certain limited types of repurchase agreements. 
For cash management purposes, mutual funds typically hold securities, 
pursuant to repurchase agreements, that represent short-term 
investments as part of their daily cash management activities. A mutual 
fund's ability to enter into such repurchase agreements, typically with 
a maturity of less than 90 days, allows the excess cash in the fund to 
be invested without losing liquidity or incurring price risk. Even 
mutual funds with particularly restrictive investment limitations, such 
as those limited to mortgage loans, government securities, and agency 
securities, typically use repurchase agreements to maintain a liquidity 
position and manage the fund.
    The Financial Accounting Standards Board (FASB) defines ``cash 
equivalents'' for financial reporting purposes as short-term, highly 
liquid investments that are both: (a) readily convertible into cash; 
and (b) so near their maturity that they present

[[Page 26524]]

insignificant risk of changes in value because of changes in interest 
rates. See FAS 95 Paragraphs 8-10. FASB also states that, generally, 
only investments with original maturities of three months or less 
qualify under that definition. See id.
    The proposed definition of ``cash equivalents'' is derived from the 
FASB definition, but would adapt it by requiring that investments have 
a remaining maturity of 90 days or less at the acquisition date, 
because this standard is more practical to implement than a requirement 
that investments be so near their maturity that they present 
insignificant risk of changes in value because of changes in interest 
rates. In addition, a requirement that the investments be held for 
liquidity purposes is being included in the proposed definition. The 
Banks will be required to determine on a case-by-case basis whether 
this requirement has been met.
    Other real estate-related collateral under current Sec. 950.9(a)(4) 
was not originally included in current Sec. 950.9(a)(5)(i) because the 
dollar amount of advances that could be secured by other real estate-
related collateral was limited to 30 percent of the member's capital 
and the Finance Board believed this limitation would result in 
monitoring complexities that would make the inclusion of other real 
estate-related collateral in Sec. 950.9(a)(5)(i) impractical. See 64 FR 
16618 (April 6, 1999). As discussed above, the Modernization Act 
amended section 10(a)(4) of the Bank Act by removing the 30 percent cap 
on other real estate-related collateral. See Modernization Act, section 
604(a)(5)(B). Since this impediment has been eliminated, proposed 
Sec. 970.7(a)(5)(i) includes a reference to other real estate-related 
collateral under proposed Sec. 950.7(a)(4).
2. Bank Restrictions on Eligible Collateral
    Section 9 of the Bank Act provides that the Banks have discretion 
to deny, or to approve with conditions, a request for an advance, and 
section 10(a)(1) confers on the Banks the authority to determine 
whether collateral is sufficient to fully secure an advance. See 12 
U.S.C. 1429, 1430(a)(1). Current Sec. 950.9(b) of the Advances 
Regulation grants a Bank the discretion to further restrict the types 
of eligible collateral it will accept as security for advances based on 
the creditworthiness or operations of the borrower, the quality of the 
collateral, or other reasonable criteria. 12 CFR 950.9(b). The Finance 
Board believes that the discretionary authority conferred on the Banks 
by current Sec. 950.9(b) is unnecessary in light of the Banks' 
statutory authority, and because the factors listed in current 
Sec. 950.9(b) are ordinarily considered in valuing collateral. 
Accordingly, the Finance Board proposes to remove current 
Sec. 950.9(b).
3. Pledge of Advances Collateral by Affiliates
    The Bank Act does not directly address the acceptance of eligible 
collateral from an affiliate, apart from section 10(e) of the Bank Act, 
which gives a priority to any security interest granted by a member or 
its affiliates, subject to certain exceptions. See 12 U.S.C. 1430(e). 
Implicit in Congress' inclusion of collateral pledged by an affiliate 
in the so-called ``superlien provision'' is the authority for the Banks 
to accept collateral from members' affiliates. Accordingly, the Finance 
Board has determined that Congress has authorized the Banks to accept 
collateral not only from a wholly-owned subsidiary, but from any 
affiliate of a member, and is proposing to state that expressly in 
proposed Sec. 950.7(f).
    Proposed Sec. 950.7(f)(1) requires that the pledge of collateral by 
an affiliate of a member used to secure advances to the member shall 
either directly secure the member's obligation to repay the advances, 
or secure a surety or other agreement under which the affiliate has 
assumed, along with the member, a primary co-obligation to repay the 
advances made to the member. Because the Bank Act requires that each 
advance be fully secured, see 12 U.S.C. 1430(a), a guaranty by an 
affiliate of a member's obligation, backed by the eligible assets held 
by the affiliate, would not meet the requirements of the Bank Act or 
the proposed rule, as the collateral would then be securing the 
affiliate's secondary obligation and not the advance itself. As 
provided by proposed Sec. 950.7(f)(1), however, where the affiliate 
enters into a surety arrangement under which it assumes a primary joint 
and several co-obligation to repay the advance made to the member, and 
fully secures this primary surety obligation with eligible collateral, 
such collateral would be considered as securing the advance itself, as 
required by the statute.
    Proposed Sec. 950.7(f)(2) requires the Bank to obtain from an 
affiliate, and maintain, a legally enforceable security interest 
pursuant to which the Bank's legal rights and privileges with respect 
to the collateral are functionally equivalent in all material respects 
to those that the Bank would possess if the member were to pledge the 
same collateral directly. The Bank would be required to have on file 
adequate documentation demonstrating this functional equivalence. The 
Finance Board anticipates that Banks that decide to accept collateral 
from affiliates of members will need to make this determination on a 
case-by-case basis, after careful legal review and analysis, taking 
into consideration the structure of the transaction and the law of the 
state that governs the transaction.
    These proposed regulatory additions represent a modification of an 
earlier proposal on third-party collateral that was published for 
comment by the Finance Board, but that was subsequently withdrawn. In 
December 1998, the Finance Board published a proposed rule to amend the 
Advances Regulation (at that time designated as 12 CFR part 935), that, 
among other things, would have permitted the Banks to accept pledges of 
eligible collateral from a member's ``qualifying investment 
subsidiary'' (QIS) if the Bank were able to obtain and maintain a 
security interest in the collateral pursuant to which its rights and 
privileges were functionally equivalent to those that the Bank would 
possess if the member were to pledge the collateral directly. Under the 
December 1998 proposed rule, the term ``qualifying investment 
subsidiary'' would have included business entities that: (1) Are wholly 
owned by a member; (2) are operated solely as passive investment 
vehicles on behalf of that member; and (3) hold only cash equivalents 
and assets that are eligible collateral under Secs. 935.9(a)(1) and (2) 
of the Advances Regulation. See 63 FR 67625 (Dec. 8, 1998).
    In proposing the December 1998 amendments, the Finance Board 
intended to codify into regulation a series of Finance Board regulatory 
interpretations regarding the acceptance of eligible collateral held by 
a real estate investment trust and state security corporation 
subsidiaries. However, in response to the proposed rule, a large number 
of commenters questioned the Finance Board's proposal to address only 
pledges of collateral from a narrow class of wholly-owned subsidiaries, 
while ignoring collateral arrangements with other types of affiliates 
that may be permissible under the Bank Act. In light of these comments, 
the Finance Board removed the QIS provisions from the text of the final 
rule pending further analysis of the issue. See 64 FR 16618 (April 6, 
1999).
    In conjunction with new Sec. 950.7(f), the proposed rule would 
amend Sec. 950.1 by defining an ``affiliate'' as any business entity 
that controls, is controlled by, or is under common

[[Page 26525]]

control with, a member. The proposed definition of ``affiliate'' is 
intended to limit the scope of eligible third-party collateral to 
assets over which the member exercises control or shares control.
4. Bank Advances Policy
    The proposed rule removes existing Sec. 950.3 of the Finance 
Board's Advances Regulation. That section requires each Bank's board of 
directors to adopt and review a policy on advances and outlines some 
basic criteria for the content of the advances policy. The Finance 
Board is proposing to move the requirement for the Bank's board of 
directors to adopt and periodically re-adopt an advances or credit 
policy to new Sec. 917.4, ``Bank Member Products Policy.'' The Finance 
Board believes it would make for a more logical presentation in its 
regulations to have all of the requirements for Bank policies contained 
in one regulatory part (part 917), rather than to have such 
requirements scattered throughout its regulations. The proposed 
requirements for Bank member products policies are discussed in section 
F. 2., below.
5. Removal of Non-QTL Definitions
    Proposed Sec. 950.1 deletes the following qualified thrift lender 
(QTL)-related definitions from the Advances Regulation: definitions of 
the terms ``Actual thrift investment percentage'' or ``ATIP''; ``Non-
Qualified Thrift Lender Member''; ``Qualified Thrift Lender'' or 
``QTL''; and ``Qualified Thrift Lender test'' or ``QTL test.'' 12 CFR 
950.1. These terms are being removed to conform the Advances Regulation 
to the Modernization Act, which repealed all non-QTL advances 
provisions in the Bank Act. See Modernization Act, section 604(c).

D. Modernization Act Amendment to Long-term Advances Purpose Provision 
for CFI Members

    Section 10(a) of the Bank Act formerly provided that all long-term 
advances shall be made only for the purpose of providing funds for 
residential housing finance. See 12 U.S.C. 1430(a) (1994). This purpose 
is set forth in current Sec. 950.14(a), and is implemented by use of a 
proxy test set forth in current Sec. 950.14(b). 12 CFR 950.14(a), (b). 
Specifically, current Sec. 950.14(b)(1) provides that, before funding a 
long-term advance (i.e., an advance with a maturity greater than five 
years), a Bank shall determine that the principal amount of all long-
term advances currently held by the member does not exceed the total 
book value of the member's ``residential housing finance assets.'' 12 
CFR 950.1, 950.14(b)(1). ``Residential housing finance assets'' are 
defined in current Sec. 950.1 to mean any of the following: (1) Loans 
secured by residential real property; (2) mortgage-backed securities; 
(3) participations in loans secured by residential real property; (4) 
loans or investments financed by advances made pursuant to a CICA 
program; (5) loans secured by manufactured housing, regardless of 
whether such housing qualifies as residential real property; or (6) any 
loans or investments which the Finance Board, in its discretion, 
otherwise determines to be residential housing finance assets. 12 CFR 
950.1. Current Sec. 950.14(b)(1) requires a Bank to determine the total 
book value of the member's residential housing finance assets using the 
most recent Thrift Financial Report, Report of Condition and Income, or 
financial statement made available by the member. 12 CFR 950.14(b)(1). 
This proxy test was determined by the Finance Board to be an 
operationally feasible compliance monitoring mechanism for residential 
housing finance assets to implement the statutory requirement that 
long-term advances be only for residential housing finance purposes. 
See 57 FR 45338 (Oct. 1, 1992).
    The Modernization Act amended section 10(a) of the Bank Act to 
provide that a Bank may make long-term advances not only for the 
purpose of providing funds for residential housing finance, but also 
for the purpose of providing funds to any CFI for small businesses, 
small farms and small agri-businesses. See Modernization Act, section 
604(a)(3). Accordingly, the proposed rule amends current Sec. 950.14 by 
adding this new purpose in redesignated Sec. 950.3. Proposed 
Sec. 950.3(a) provides that a Bank shall make long-term advances only 
for the purpose of enabling any member to purchase or fund new or 
existing residential housing finance assets, which include, for CFI 
members, small business loans, small farm loans and small agri-business 
loans.
    Instead of the statutory terms ``small businesses,'' ``small 
farms'' and ``small agri-businesses,'' proposed Sec. 950.3 utilizes the 
terms ``small business loans,'' ``small farm loans'' and ``small agri-
business loans,'' which the Finance Board is proposing to define for 
purposes of identifying the new types of collateral that Banks are 
authorized to accept from CFI members. See Modernization Act, section 
604(a)(5)(C). The Finance Board believes that a single set of terms 
that would apply to both CFI-eligible collateral and the new purposes 
for which Banks may make advances to CFI members will reduce confusion 
and otherwise provide an efficient means of implementing the new 
authorities conferred on the Banks in regard to their CFI members. 
Further, the Modernization Act provides that the terms ``small 
business,'' ``small farm'' and ``small agri-business'' shall have the 
meanings given to those terms by regulation of the Finance Board. See 
Modernization Act, section 604(a)(7). Accordingly, the Finance Board is 
interpreting the statutory phrase ``providing funds to any community 
financial institution for small businesses, small farms, and small 
agri-businesses'' to mean making advances to CFI members for small 
business loans, small farm loans and small agri-business loans. 
Proposed Sec. 950.3(b)(1) maintains the proxy test in its current form. 
However, proposed revisions to certain definitions will have the effect 
of including small business loans, small farm loans and small agri-
business loans in the denominator of the proxy test for CFI members.
    Specifically, the proposed rule would amend Sec. 900.1 by adding a 
new definition of ``community lending,'' which would apply, wherever it 
appears, in all of the Finance Board's regulations. The term 
``community lending'' currently is defined in Sec. 952.3 of the CICA 
Regulation as ``providing financing for economic development projects 
for targeted beneficiaries.'' 12 CFR 952.3. The definition of 
``community lending'' proposed for Sec. 900.1 would add to that 
definition, ``and, for community financial institutions, purchasing or 
funding small business loans, small farm loans or small agri-business 
loans, as defined in Sec. 950.1 of this chapter.'' This addition to the 
definition implements changes made by the Modernization Act and 
supports the Finance Board's belief that CFI lending to small 
businesses, small farms and small agri-businesses is community lending. 
For purposes of the CICA and Community Support Regulations, the current 
definition of ``community lending,'' redesignated in this proposed rule 
as ``targeted community lending,'' would continue to apply.
    Concurrently, the Finance Board is proposing to amend the 
definition of ``residential housing finance assets'' to change the 
element that currently reads ``Loans or investments financed by 
advances made pursuant to a CICA program'' to ``Loans or investments 
qualifying under the definition of community lending in Sec. 900.1 of 
this chapter.''
    Thus, by operation of the revised definitions of ``residential 
housing

[[Page 26526]]

finance assets'' and ``community lending,'' the proxy test calculation 
of the total book value of residential housing assets will include, for 
CFI members, small business loans, small farm loans and small agri-
business loans. This result implements section 604(a)(5)(C) of the 
Modernization Act, which authorizes a Bank to make long-term advances 
to CFIs for the purpose of providing financing for small businesses, 
small farms and small agri-businesses. See Modernization Act, section 
604(a)(5)(C).
    Current Sec. 950.14(b)(1) allows a Bank to determine the total book 
value of residential housing financial assets using the most recent 
Thrift Financial Report, Report of Condition and Income, or financial 
statement made available by the member. 12 CFR 950.14(b)(1). Proposed 
Sec. 950.3(b)(1) adds to this list ``other reliable documentation'' 
made available by the member. This revision is intended to give the 
Banks more flexibility in the form of documentation they use in 
administering the proxy test, as long as the data supplied by the 
member is reliable.

E. Clarification of Other Advances Provisions in Current Regulation

1. Pricing
    The Finance Board is taking this opportunity to clarify a provision 
of the Advances Regulation dealing with the pricing of advances. 
Current Sec. 950.6(b)(1) requires each Bank to price its advances to 
members taking into account two factors: (1) The marginal cost to the 
Bank of raising matching maturity funds in the marketplace; and (2) the 
administrative and operating costs associated with making such advances 
to members. 12 CFR 950.6(b)(1). A separate provision, current 
Sec. 950.8(b)(1), provides that each Bank shall establish and charge a 
prepayment fee pursuant to a specified formula which sufficiently 
compensates the Bank for providing a prepayment option on an advance, 
and which acts to make the Bank financially indifferent to the 
borrower's decision to repay the advance prior to its maturity date. 12 
CFR 950.8(b)(1). These provisions do not clearly indicate whether Banks 
must consider the costs of associated options and the administrative 
costs of funding advances with such options in pricing an advance. 
Further, because current Sec. 950.6(b)(1) merely requires the Bank ``to 
take into account'' the marginal cost to the Bank of raising matching 
maturity funds in the marketplace, and the administrative and operating 
costs associated with making such advances to members, the current rule 
allows a Bank to price an advance below its marginal cost of funds, a 
practice the Finance Board could find to be an unsafe and unsound 
practice in some circumstances and one the Finance Board wishes to 
discourage.
    Therefore, redesignated Sec. 950.5(b)(1) of the proposed rule 
prohibits a Bank from pricing an advance below the Bank's marginal cost 
of funds, which is to include the cost of any embedded options, plus 
the administrative and operating costs associated with making the 
advance when funding an advance with similar maturity and options 
characteristics.
    Proposed Sec. 950.5(b)(3)(i) provides that the aforementioned 
prohibition would not apply to a Bank's CICA programs. This is intended 
to provide the Banks with maximum flexibility in designing and offering 
AHP and other CICA programs. Proposed Sec. 950.5(b)(3)(ii) provides 
that the proposed prohibition also would not apply to any other 
advances that are volume limited and specifically approved by a Bank's 
board of directors. This exception is intended to allow a Bank to price 
targeted advances at below the cost of funds for some special purpose 
that does not meet all of the criteria for CICA advances. It is 
intended that the special purpose involve some social benefit, such as 
providing relief from a natural disaster. The proposed exception would 
also allow a Bank to conduct market testing of alternative pricing 
strategies for advances.
2. Convertible Advances Disclosure
    Current Sec. 950.6(d)(1) of the Advances Regulation provides that a 
Bank that offers a putable advance to a member shall disclose in 
writing to such member the type and nature of the risks associated with 
putable advance funding, and that such disclosure should include detail 
sufficient to describe such risks. 12 CFR 950.6(d)(1). A convertible 
advance is similar to a putable advance in that it carries risks 
associated with a triggering event, usually a shift in a designated 
interest rate index. Accordingly, redesignated Sec. 950.5(d)(1) of the 
proposed rule makes the current disclosure requirements for putable 
advances applicable to convertible advances as well. Current 
Sec. 950.6(d)(2) is not proposed to be revised because replacement 
funding is not an issue for convertible advances, as convertible 
advances involve only a change in the stated interest rate, not the 
repayment of funds. The Finance Board requests comment on whether there 
are other appropriate requirements for putable or convertible advances.

F. Other Technical Changes

1. Federal Home Loan Bank Associates--Part 926
    Eligibility requirements for associates (nonmember borrowers), 
including application procedures and requirements for advances to 
associates, currently are contained in the Advances Regulation. See 12 
CFR 950.22, 950.23. For the sake of greater organizational clarity, the 
proposed rule sets forth the associate eligibility requirements and 
advances requirements in separate regulations, by moving the associate 
eligibility requirements to a new part 926 under subpart B. No 
substantive changes are being proposed for subpart B.
    As part of a continuing effort to revise and achieve consistency in 
regulatory nomenclature regarding nonmember borrowers, the proposed 
rule would amend the text, where appropriate, to refer to nonmember 
borrowers who are eligible under 10b of the Bank Act, 12 U.S.C. 1430b, 
to obtain advances from the Banks, as associates. The definition of 
``associate'' was recently added to 12 CFR 900.1, which contains 
definitions of terms that apply to all parts of the Finance Board's 
regulations. Accordingly, the proposed rule would change the title of 
subpart B to ``Advances to Associates.'' Since the term ``associates'' 
is defined in Sec. 900.1, the Finance Board is not proposing that it be 
defined in any of the individual parts addressed by this rulemaking.
2. Bank Member Products Policy--Section 917.4
    In its recently adopted final rule, Powers and Responsibilities of 
Bank Boards of Directors and Senior Management, the Finance Board 
consolidated all of the requirements for the Bank's board of directors' 
operational policies into one regulatory part, part 917, rather than 
have such requirements scattered throughout its regulations.\9\ 
Proposed Sec. 917.4 would add to that part a new requirement for 
adoption by a Bank's board of directors of a member products policy 
that would combine the requirements for an advances policy from current 
Sec. 950.3(a), with the requirements for a standby letter of credit 
policy from current Sec. 961.5(a), into one policy. The proposed member 
products policy also would address other products that the Banks may 
offer, such as acquired member assets.
---------------------------------------------------------------------------

    \9\ The Finance Board adopted part 917, ``Powers and 
Responsibilities of Bank Boards of Directors and Senior 
Management,'' as a final rule at its March 22, 2000 Board of 
Directors meeting.

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

[[Page 26527]]

    Under proposed Sec. 917.4(b), a Bank's member products policy would 
be required to address the following items: the credit underwriting 
criteria to be applied to advances (including renewals) and standby 
letters of credit; collateralization (including levels, valuation and 
discounts) for advances and standby letters of credit; advances-related 
fees (including any schedules or formulas pertaining to such fees); 
standards and criteria for pricing member products (including 
differential pricing of advances pursuant to Sec. 950.4(b)(2)); 
criteria regarding the pricing of standby letters of credit (including 
any special pricing provisions for standby letters of credit that 
facilitate the financing of projects that are eligible for any CICA 
programs under part 952); the maintenance of appropriate systems, 
procedures and internal controls; and the maintenance of appropriate 
operational and personnel capacity.
    A Bank's member products policy also must provide that, for any 
draw made by a beneficiary under a standby letter of credit, the member 
will be charged a processing fee calculated in accordance with 
Sec. 975.6(b).
    Under proposed Sec. 917.4(a)(2), each Bank's board of directors 
would be required to review the Bank's member products policy annually, 
amend the policy as appropriate, and re-adopt the policy, including 
interim amendments, not less often than every three years.
    References to the ``advances policy'' in other sections of the 
Finance Board's current regulations are proposed to be changed to 
references to the ``member products policy.''
3. Bank Credit Mission--Removal of Section 950.2
    In the Finance Board's recently adopted final rule on parts 900, 
917 and 940, the Finance Board revised part 940 to add a new definition 
of the mission of the Banks.\10\ Accordingly, the proposed rule removes 
existing Sec. 950.2 of the Finance Board's Advances Regulation, which 
states the primary credit mission of the Banks and how the Banks must 
fulfill such mission, as no longer necessary.
---------------------------------------------------------------------------

    \10\ Section 940.2 was adopted as a final rule by the Finance 
Board at its March 22, 2000 Board of Directors meeting as part of 
the rulemaking for part 917, ``Powers and Responsibilities of 
Federal Home Loan Bank Boards of Directors and Senior Management.''
---------------------------------------------------------------------------

4. Community Support Requirements and Community Investments Cash 
Advance Programs--Parts 944 and 952
    As discussed previously, the proposed rule would amend part 944 and 
Sec. 952.3 by re-designating the term ``community lending'' as 
``targeted community lending,'' with no substantive change to the 
corresponding definition. This revision is intended to differentiate 
CICA community lending, which is targeted, from the broader term 
``community lending'' that the Finance Board proposes to add to 
Sec. 900.1. The broader definition of ``community lending'' in 
Sec. 900.1 would include, for CFIs, purchasing or funding small 
business loans, small farm loans and small agri-business loans, as 
defined in Sec. 950.1 of this chapter.
5. Standby Letters of Credit--Part 961
    The proposed rule would amend part 961 to update cross-references 
to reflect the reorganization of Finance Board regulations, change 
references from nonmember mortgagees to associates and make other 
technical and conforming changes.

III. Paperwork Reduction Act

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

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

List of Subjects in 12 CFR Parts 900, 917, 926, 944, 950, 952, 961 
and 980

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

    Accordingly, the Finance Board hereby proposes to amend title 12, 
chapter IX, parts 900, 917, 926, 944, 950, 952, 961 and 980, Code of 
Federal Regulations, as follows:

PART 900--GENERAL DEFINITIONS

    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, definitions 
of ``community financial institution'', ``community financial 
institution asset cap'', and ``community lending'', to read as follows:


Sec. 900.1  Definitions applying to all regulations.

* * * * *
    Community financial institution or CFI means an institution--
    (1) The deposits of which are insured under the Federal Deposit 
Insurance Act; and
    (2) That has, as of the date of the transaction at issue, less than 
the community financial institution asset cap in total assets, based on 
an average of total assets over the three years preceding that date.
    Community financial institution asset cap means, for 2000, $500 
million. Beginning in 2001 and for subsequent years, the cap shall be 
adjusted annually by the Finance Board to reflect any percentage 
increase in the preceding year's Consumer Price Index (CPI) for all 
urban consumers, as published by the U.S. Department of Labor. Each 
year, as soon as practicable after the publication of the previous 
year's CPI, the Finance Board shall publish notice by Federal Register, 
distribution of a memorandum, or otherwise, of the CPI-adjusted cap.
    Community lending means providing financing for economic 
development projects for targeted beneficiaries, and, for community 
financial institutions, purchasing or funding small business loans, 
small farm loans or small agri-business loans, as defined in Sec. 950.1 
of this chapter.
* * * * *

PART 917--POWERS AND RESPONSIBILITIES OF BANK BOARDS OF DIRECTORS 
AND SENIOR MANAGEMENT

    3. The authority citation for part 917 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1427, 1432(a), 
1436(a), 1440.

    4. Add Sec. 917.4 to read as follows:


Sec. 917.4  Bank member products policy.

    (a) Adoption and review of member products policy. (1) Adoption. 
Beginning 90 days after the effective date of this section, each Bank's 
board of directors shall have in effect at all times a policy that 
addresses the Bank's management of products offered by the Bank to 
members and associates, including but not limited to advances, letters 
of credit and acquired member assets, consistent with the requirements 
of the Act, paragraph (b) of this section, and all applicable Finance 
Board regulations and policies.

[[Page 26528]]

    (2) Review and compliance. Each Bank's board of directors shall:
    (i) Review the Bank's member products policy annually;
    (ii) Amend the member products policy as appropriate; and
    (iii) Re-adopt the member products policy, including interim 
amendments, not less often than every three years.
    (b) Member products policy requirements. In addition to meeting any 
other requirements set forth in this chapter, each Bank's member 
products policy shall:
    (1) Address credit underwriting criteria to be applied in 
evaluating applications for advances, standby letters of credit, and 
renewals;
    (2) Address appropriate levels of collateralization, valuation of 
collateral and discounts applied to collateral values for advances and 
standby letters of credit;
    (3) Address advances-related fees to be charged by each Bank, 
including any schedules or formulas pertaining to such fees;
    (4) Address standards and criteria for pricing member products, 
including differential pricing of advances pursuant to Sec. 950.4(b)(2) 
of this chapter, and criteria regarding the pricing of standby letters 
of credit, including any special pricing provisions for standby letters 
of credit that facilitate the financing of projects that are eligible 
for any of the Banks' CICA programs under part 952 of this chapter;
    (5) Provide that, for any draw made by a beneficiary under a 
standby letter of credit, the member will be charged a processing fee 
calculated in accordance with the requirements of Sec. 975.6(b) of this 
chapter;
    (6) Address the maintenance of appropriate systems, procedures and 
internal controls; and
    (7) Address the maintenance of appropriate operational and 
personnel capacity.
    5. Revise the heading of subchapter D to read as follows:

SUBCHAPTER D--FEDERAL HOME LOAN BANK MEMBERS AND ASSOCIATES

    6. In subchapter D, add a new part 926 to read as follows:

PART 926--FEDERAL HOME LOAN BANK ASSOCIATES

Sec.
926.1   Definitions.
926.2   Bank authority to make advances to associates.
926.3   Associate eligibility requirements.
926.4   Satisfaction of eligibility requirements.
926.5   Associate application process.
926.6   Appeals.

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


Sec. 926.1  Definitions.

    As used in this part:
    Advance has the meaning set forth in Sec. 950.1 of this chapter.
    Governmental agency means the governor, legislature, and any other 
component of a federal, state, local, tribal, or Alaskan native village 
government with authority to act for or on behalf of that government.
    HUD means the Department of Housing and Urban Development.
    State housing finance agency or SHFA means:
    (1) A public agency, authority, or publicly sponsored corporation 
that serves as an instrumentality of any state or political subdivision 
of any state, and functions as a source of residential mortgage loan 
financing in that state; or
    (2) A legally established agency, authority, corporation, or 
organization that serves as an instrumentality of any Indian tribe, 
band, group, nation, community, or Alaskan Native village recognized by 
the United States or any state, and functions as a source of 
residential mortgage loan financing for the Indian or Alaskan Native 
community.


Sec. 926.2  Bank authority to make advances to associates.

    Subject to the provisions of the Act and part 950 of this chapter, 
a Bank may make advances to an entity that is not a member of the Bank 
if the Bank has certified the entity as an associate under the 
provisions of this part.


Sec. 926.3  Associate eligibility requirements.

    (a) General. A Bank may certify as an associate any applicant that 
meets the following requirements, as determined using the criteria set 
forth in Sec. 926.4:
    (1) The applicant is approved under title II of the National 
Housing Act (12 U.S.C. 1707, et seq.);
    (2) The applicant is a chartered institution having succession;
    (3) The applicant is subject to the inspection and supervision of 
some governmental agency;
    (4) The principal activity of the applicant in the mortgage field 
consists of lending its own funds; and
    (5) The financial condition of the applicant is such that advances 
may be safely made to it.
    (b) State housing finance agencies. In addition to meeting the 
requirements in paragraph (a) of this section, any applicant seeking 
access to advances as a SHFA pursuant to Sec. 950.17(b)(2) of this 
chapter shall provide evidence satisfactory to the Bank, such as a copy 
of, or a citation to, the statutes and/or regulations describing the 
applicant's structure and responsibilities, that the applicant is a 
state housing finance agency as defined in Sec. 926.1.


Sec. 926.4  Satisfaction of eligibility requirements.

    (a) HUD approval requirement. An applicant shall be deemed to meet 
the requirement in section 10b(a) of the Act and Sec. 926.3(a)(1) that 
it be approved under title II of the National Housing Act if it submits 
a current HUD Yearly Verification Report or other documentation issued 
by HUD stating that the Federal Housing Administration of HUD has 
approved the applicant as a mortgagee.
    (b) Charter requirement. An applicant shall be deemed to meet the 
requirement in section 10b(a) of the Act and Sec. 926.3(a)(2) that it 
be a chartered institution having succession if it provides evidence 
satisfactory to the Bank, such as a copy of, or a citation to, the 
statutes and/or regulations under which the applicant was created, 
that:
    (1) The applicant is a government agency; or
    (2) The applicant is chartered under state, federal, local, tribal, 
or Alaskan Native village law as a corporation or other entity that has 
rights, characteristics, and powers under applicable law similar to 
those granted a corporation.
    (c) Inspection and supervision requirement. (1) An applicant shall 
be deemed to meet the inspection and supervision requirement in section 
10b(a) of the Act and Sec. 926.3(a)(3) if it provides evidence 
satisfactory to the Bank, such as a copy of, or a citation to, relevant 
statutes and/or regulations, that, pursuant to statute or regulation, 
the applicant is subject to the inspection and supervision of a 
federal, state, local, tribal, or Alaskan native village governmental 
agency.
    (2) An applicant shall be deemed to meet the inspection requirement 
if there is a statutory or regulatory requirement that the applicant be 
audited or examined periodically by a governmental agency or by an 
external auditor.
    (3) An applicant shall be deemed to meet the supervision 
requirement if the governmental agency has statutory or regulatory 
authority to remove an applicant's officers or directors for cause or 
otherwise exercise enforcement or administrative control over actions 
of the applicant.
    (d) Mortgage activity requirement. An applicant shall be deemed to 
meet the mortgage activity requirement in section 10b(a) of the Act and 
Sec. 926.3(a)(4) if it provides documentary evidence satisfactory to 
the Bank, such as a financial statement or other financial

[[Page 26529]]

documents that include the applicant's mortgage loan assets and their 
funding liabilities, that it lends its own funds as its principal 
activity in the mortgage field. For purposes of this paragraph, lending 
funds includes, but is not limited to, the purchase of whole mortgage 
loans. In the case of a federal, state, local, tribal, or Alaskan 
Native village government agency, appropriated funds shall be 
considered an applicant's own funds. An applicant shall be deemed to 
satisfy this requirement notwithstanding that the majority of its 
operations are unrelated to mortgage lending if its mortgage activity 
conforms to this requirement. An applicant that acts principally as a 
broker for others making mortgage loans, or whose principal activity is 
to make mortgage loans for the account of others, does not meet this 
requirement.
    (e) Financial condition requirement. An applicant shall be deemed 
to meet the financial condition requirement in Sec. 926.3(a)(5) if the 
Bank determines that advances may be safely made to the applicant. The 
applicant shall submit to the Bank copies of its most recent regulatory 
audit or examination report, or external audit report, and any other 
documentary evidence, such as financial or other information, that the 
Bank may require to make the determination.


(The Office of Management and Budget has approved the information 
collection contained in this section and assigned control number 
3069-0005 with an expiration date of November 30, 2002.)


Sec. 926.5  Associate application process.

    (a) Authority. The Banks are authorized to approve or deny all 
applications for certification as an associate, subject to the 
requirements of the Act and this part. A Bank may delegate the 
authority to approve applications for certification as an associate 
only to a committee of the Bank's board of directors, the Bank 
president, or a senior officer who reports directly to the Bank 
president other than an officer with responsibility for business 
development.
    (b) Application requirements. An applicant for certification as an 
associate shall submit an application that satisfies the requirements 
of the Act and this part to the Bank of the district in which the 
applicant's principal place of business, as determined in accordance 
with part 925 of this chapter, is located.
    (c) Bank decision process. (1) Action on applications. A Bank shall 
approve or deny an application for certification as an associate within 
60 calendar days of the date the Bank deems the application to be 
complete. A Bank shall deem an application complete, and so notify the 
applicant in writing, when it has obtained all of the information 
required by this part and any other information it deems necessary to 
process the application. If a Bank determines during the review process 
that additional information is necessary to process the application, 
the Bank may deem the application incomplete and stop the 60-day time 
period by providing written notice to the applicant. When the Bank 
receives the additional information, it shall again deem the 
application complete, so notify the applicant in writing, and resume 
the 60-day time period where it stopped.
    (2) Decision on applications. The Bank or a duly delegated 
committee of the Bank's board of directors, the Bank president, or a 
senior officer who reports directly to the Bank president other than an 
officer with responsibility for business development shall approve, or 
the board of directors of a Bank shall deny, each application for 
certification as an associate by a written decision resolution stating 
the grounds for the decision. Within three business days of a Bank's 
decision on an application, the Bank shall provide the applicant and 
the Finance Board with a copy of the Bank's decision resolution.

    (3) File. The Bank shall maintain a certification file for each 
applicant for at least three years after the date the Bank decides 
whether to approve or deny certification or the date the Finance Board 
resolves any appeal, whichever is later. At a minimum, the 
certification file shall include all documents submitted by the 
applicant or otherwise obtained or generated by the Bank concerning the 
applicant, all documents the Bank relied upon in making its 
determination regarding certification, including copies of statutes and 
regulations, and the decision resolution.

(The Office of Management and Budget has approved the information 
collection contained in this section and assigned control number 
3069-0005 with an expiration date of November 30, 2002.)


Sec. 926.6  Appeals.

    (a) General. Within 90 calendar days of the date of a Bank's 
decision to deny an application for certification as an associate, the 
applicant may submit a written appeal to the Finance Board that 
includes the Bank's decision resolution and a statement of the basis 
for the appeal with sufficient facts, information, analysis, and 
explanation to support the applicant's position. Appeals shall be sent 
to the Federal Housing Finance Board, 1777 F Street, NW., Washington, 
DC 20006, with a copy to the Bank.
    (b) Record for appeal. Upon receiving a copy of an appeal, the Bank 
whose action has been appealed shall provide to the Finance Board a 
complete copy of the applicant's certification file maintained by the 
Bank under Sec. 926.5(c)(3). Until the Finance Board resolves the 
appeal, the Bank shall promptly provide to the Finance Board any 
relevant new materials it receives. The Finance Board may request 
additional information or further supporting arguments from the 
applicant, the Bank, or any other party that the Finance Board deems 
appropriate.
    (c) Deciding appeals. Within 90 calendar days of the date an 
applicant files an appeal with the Finance Board, the Finance Board 
shall consider the record for appeal described in paragraph (b) of this 
section and resolve the appeal based on the requirements of the Act and 
this part.

(The Office of Management and Budget has approved the information 
collection contained in this section and assigned control number 
3069-0005 with an expiration date of November 30, 2002.)

PART 944--COMMUNITY SUPPORT REQUIREMENTS

    7. The authority citation for part 944 continues to read as 
follows:

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

    8. Amend part 944 by removing the term ``community lending'' 
wherever it appears, and, in its place, adding the term ``targeted 
community lending''.


Sec. 944.6  [Amended]

    9. Amend Sec. 944.6(b)(2) by removing the term ``nonmember 
borrowers'' and, in its place, adding the term ``associates''.

PART 950--ADVANCES

    10. 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.

    11. The table of contents for part 950 is revised to read as 
follows:
Subpart A--Advances to Members
Sec.
950.1   Definitions.
950.2   Authorization and application for advances; obligation to 
repay advances.
950.3   Purpose of long-term advances; proxy text.
950.4   Limitations on access to advances.
950.5   Terms and conditions for advances.
950.6   Fees.

[[Page 26530]]

950.7   Collateral.
950.8   Banks as secured creditors.
950.9   Pledged collateral; verification.
950.10   Collateral valuation; appraisals.
950.11   Capital stock requirements; unilateral redemption of excess 
stock.
950.12   Intradistrict transfer of advances.
950.13   Special advances to savings associations.
950.14   Advances to the Savings Association Insurance Fund.
950.15   Liquidation of advances upon termination of membership.
Subpart B--Advances to Associates
950.16   Scope.
950.17   Advances to associates.

    12. Amend Sec. 950.1 by:
    a. Adding, in alphabetical order, a definition of ``affiliate'';
    b. Adding, in alphabetical order, a definition of ``cash 
equivalents'';
    c. Removing the definitions of ``Actual thrift investment 
percentage'' or ``ATIP'', ``combination business or farm property'', 
``Non-Qualified Thrift Lender member'', ``Qualified Thrift Lender'' or 
``QTL'', and ``Qualified Thrift Lender test'' or ``QTL test'';
    d. Amending the definition of ``Community Investment Cash Advance'' 
or ``CICA'' by removing the term ``community lending'', and, in its 
place, adding the term ``targeted community lending'';
    e. Revising paragraph (4) of the definition of ``residential 
housing finance assets'';
    f. Amending the definition of ``residential real property'' by 
removing paragraph (1)(v); and
    g. Adding, in alphabetical order, definitions of ``small agri-
business loans'', ``small business loans'', and ``small farm loans'', 
to read as follows:


Sec. 950.1  Definitions.

* * * * *
    Affiliate means any business entity that controls, is controlled 
by, or is under common control with, a member.
* * * * *
    Cash equivalents means investments that--
    (1) Are readily convertible into known amounts of cash;
    (2) Have a remaining maturity of 90 days or less at the acquisition 
date; and
    (3) Are held for liquidity purposes.
* * * * *
    Residential housing finance assets means any of the following:
* * * * *
    (4) Loans or investments qualifying under the definition of 
``community lending'' in Sec. 900.1 of this chapter;
* * * * *
    Small agri-business loans means loans:
    (1) With an original amount (including the aggregate of all loans 
to a particular borrower) of not more than $ 500,000 that are reported 
on either: Schedule SB of the Thrift Financial Report filed by savings 
associations as ``nonmortgage, commercial loans to finance agricultural 
production and other nonmortgage commercial loans to farmers,'' or 
Schedule RC-C, Part II of the Report of Condition and Income filed by 
insured commercial banks and FDIC-supervised savings banks as ``loans 
to finance agricultural production and other loans to farmers;'' or
    (2) For which the CFI, on a case-by-case basis, documents that the 
borrower meets the eligibility standards for a small business concern 
under the Small Business Administration's regulations at 13 CFR part 
121, or any successor provisions.
    Small business loans means loans:
    (1) With an original amount (including the aggregate of all loans 
to a particular borrower) of not more than $1,000,000 that are reported 
on either: Schedule SB of the Thrift Financial Report filed by savings 
associations as ``permanent mortgage loans secured by nonfarm, 
nonresidential properties'' or ``nonmortgage, nonagricultural 
commercial loans,'' or Schedule RC-C, Part II of the Report of 
Condition and Income filed by insured commercial banks and FDIC-
supervised savings banks as ``loans secured by nonfarm, nonresidential 
properties,'' or ``Commercial and industrial loans to U.S. addresses;'' 
or
    (2) For which the CFI, on a case-by-case basis, documents that the 
borrower meets the eligibility standards for a small business concern 
under the Small Business Administration's regulations at 13 CFR part 
121, or any successor provisions.
    Small farm loans means loans:
    (1) With an original amount (including the aggregate of all loans 
to a particular borrower) of not more than $500,000 that are reported 
on either: Schedule SB of the Thrift Financial Report filed by savings 
associations as ``loans secured primarily by farms,'' or Schedule RC-C, 
Part II of the Report of Condition and Income filed by insured 
commercial banks and FDIC-supervised savings banks as ``loans secured 
by farmland (including farm residential and other improvements);'' or
    (2) For which the CFI, on a case-by-case basis, documents that the 
borrower meets the eligibility standards for a small business concern 
under the Small Business Administration's regulations at 13 CFR part 
121, or any successor provisions.
* * * * *
    13. Remove Sec. 950.2.
    14. Remove Sec. 950.3.
    15. Section 950.4 is redesignated as Sec. 950.2.
    16. Section 950.14 is redesignated as Sec. 950.3, and the heading 
and paragraphs (a) and (b)(1) are revised to read as follows:


Sec. 950.3  Purpose of long-term advances; proxy test.

    (a) A Bank shall make long-term advances only for the purpose of 
enabling any member to purchase or fund new or existing residential 
housing finance assets, which include, for CFI members, small business 
loans, small farm loans and small agri-business loans.
    (b)(1) Prior to approving an application for a long-term advance, a 
Bank shall determine that the principal amount of all long-term 
advances currently held by the member does not exceed the total book 
value of residential housing finance assets held by such member. The 
Bank shall determine the total book value of such residential housing 
finance assets, using the most recent Thrift Financial Report, Report 
of Condition and Income, financial statement or other reliable 
documentation made available by the member.
* * * * *
    17. Section 950.5 is redesignated as Sec. 950.4.
    18. Section 950.6 is redesignated as Sec. 950.5, and paragraphs 
(b)(1), (b)(2)(ii), (b)(3), (d)(1) and (d)(3) are revised to read as 
follows:


Sec. 950.5  Terms and conditions for advances.

* * * * *
    (b) Advance pricing. (1) General. A Bank shall not price its 
advances to members below:
    (i) The marginal cost to the Bank of raising matching term and 
maturity funds in the marketplace, including embedded options; and
    (ii) The administrative and operating costs associated with making 
such advances to members.
    (2) * * *
    (ii) Each Bank shall include in its member products policy required 
by Sec. 917.4 of this chapter, standards and criteria for such 
differential pricing and shall apply such standards and criteria 
consistently and without discrimination to all members applying for 
advances.
    (3) Exceptions. The advance pricing policies contained in paragraph 
(b)(1) of this section shall not apply in the case of:

[[Page 26531]]

    (i) A Bank's CICA programs; and
    (ii) Any other advances that are volume limited and specifically 
approved by the Bank's board of directors.
* * * * *
    (d) Putable or convertible advances. (1) Disclosure. A Bank that 
offers a putable or convertible advance to a member shall disclose in 
writing to such member the type and nature of the risks associated with 
putable or convertible advance funding. The disclosure should include 
detail sufficient to describe such risks.
    (2) Replacement funding for putable advances. If a Bank terminates 
a putable advance prior to the stated maturity date of such advance, 
the Bank shall offer to provide replacement funding to the member.
* * * * *
    19. Section 950.8 is resdesignated as Sec. 950.6, and paragraphs 
(a) and (b)(1) are revised to read as follows:


Sec. 950.6  Fees.

    (a) Fees in member products policy. All fees charged by each Bank 
and any schedules or formulas pertaining to such fees shall be included 
in the Bank's member products policy required by Sec. 917.4 of this 
chapter. Any such fee schedules or formulas shall be applied 
consistently and without discrimination to all members.
    (b) Prepayment fees. (1) Except where an advance product contains a 
prepayment option, each Bank shall establish and charge a prepayment 
fee pursuant to a specified formula which makes the Bank financially 
indifferent to the borrower's decision to repay the advance prior to 
its maturity date.
* * * * *
    20. Section 950.9 is redesignated as Sec. 950.7, paragraphs (a) 
introductory text, (a)(3), (a)(4), (b) and (c) are revised, and 
paragraphs (a) (5) and (f) are added, to read as follows:


Sec. 950.7  Collateral.

    (a) Eligible security for advances to all members. At the time of 
origination or renewal of an advance, each Bank shall obtain from the 
borrowing member or, in accordance with paragraph (f) of this section, 
an affiliate of the borrowing member, and thereafter maintain, a 
security interest in collateral that meets the requirements of one or 
more of the following categories:
* * * * *
    (3) Cash or deposits. Cash or deposits in a Bank.
    (4) Other real estate-related collateral. (i) Other real estate-
related collateral provided that:
    (A) Such collateral has a readily ascertainable liquidation value 
and can be freely liquidated in due course; and
    (B) The Bank can perfect a security interest in such collateral.
    (ii) Eligible other real estate-related collateral may include, but 
is not limited to:
    (A) Privately issued mortgage-backed securities not otherwise 
eligible under paragraph (a)(1)(ii) of this section;
    (B) Second mortgage loans, including home equity loans;
    (C) Commercial real estate loans; and
    (D) Mortgage loan participations.
    (iii) A Bank shall not make total advances to all members secured 
by other real estate-related collateral in an aggregate amount that 
would exceed the highest level of total advances secured by such 
collateral that the Bank has previously made by more than 25 percent 
until it has met the new business activity requirements of part 980 of 
this chapter.
    (5) Securities representing equity interests in eligible advances 
collateral. Any security the ownership of which represents an undivided 
equity interest in underlying assets, all of which qualify either as:
    (i) Eligible collateral under paragraphs (a)(1), (2), (3) or (4) of 
this section; or
    (ii) Cash equivalents.
    (b) Additional collateral eligible as security for advances to CFI 
members or their affiliates. (1) General. Subject to the limitations 
set forth in part 980 of this chapter, a Bank is authorized to accept 
from CFI members or their affiliates as security for advances small 
business loans, small farm loans or small agri-business loans fully 
secured by collateral other than real estate, or securities 
representing a whole interest in such loans, provided that:
    (i) Such collateral has a readily ascertainable liquidation value 
and can be freely liquidated in due course; and
    (ii) The Bank can perfect a security interest in such collateral.
    (2) Change in CFI status. A Bank may not accept as security for new 
advances collateral under this section from a member that loses its CFI 
status. A Bank shall not require a member that loses its CFI status and 
has outstanding advances secured by collateral under this section to 
repay such advances prior to the stated maturities or to provide 
substitute collateral eligible under paragraphs (a)(1) through (5) of 
this section, based solely on the member's change in status, and may 
allow such member to renew maturing advances secured by collateral 
under this section for up to 6 months.
    (c) Additional advances collateral. The provisions of paragraph (a) 
of this section shall not affect the ability of any Bank to take such 
steps as it deems necessary to protect its secured position on 
outstanding advances, including requiring additional collateral, 
whether or not such additional collateral conforms to the requirements 
for eligible collateral in paragraphs (a) or (b) of this section or 
section 10 of the Act (12 U.S.C. 1430).
* * * * *
    (f) Pledge of advances collateral by affiliates. Assets held by an 
affiliate of a member that are eligible as collateral under paragraphs 
(a) or (b) of this section may be used to secure advances to that 
member only if:
    (1) The collateral is pledged to secure either:
    (i) The member's obligation to repay advances; or
    (ii) A surety or other agreement under which the affiliate has 
assumed, along with the member, a primary obligation to repay advances 
made to the member; and
    (2) The Bank obtains and maintains a legally enforceable security 
interest pursuant to which the Bank's legal rights and privileges with 
respect to the collateral are functionally equivalent in all material 
respects to those that the Bank would possess if the member were to 
pledge the same collateral directly, and such functional equivalence is 
supported by adequate documentation.
    21. Section 950.10 is redesignated as Sec. 950.8.
    22. Section 950.11 is redesignated as Sec. 950.9.
    23. Section 950.12 is redesignated as Sec. 950.10, and is revised 
to read as follows:


Sec. 950.10  Collateral valuation; appraisals.

    (a) Collateral valuation. Each Bank shall determine the value of 
collateral securing the Bank's advances in accordance with the 
collateral valuation procedures set forth in the Bank's member products 
policy established pursuant to Sec. 917.4 of this chapter.
    (b) Fair application of procedures. Each Bank shall apply the 
collateral valuation procedures consistently and fairly to all 
borrowing members, and the valuation ascribed to any item of collateral 
by the Bank shall be conclusive as between the Bank and the member.
    (c) Appraisals. A Bank may require a member to obtain an appraisal 
of any item of collateral, and to perform such other investigations of 
collateral as the Bank deems necessary and proper.
    24. Section 950.15 is redesignated as Sec. 950.11.
    25. Section 950.17 is redesignated as Sec. 950.12.

[[Page 26532]]

    26. Section 950.18 is redesignated as Sec. 950.13.
    27. Section 950.20 is redesignated as Sec. 950.14 and transferred 
to subpart A.
    28. Section 950.19 is redesignated as Sec. 950.15.
    29. The heading of Subpart B is revised to read as follows:

Subpart B--Advances to Associates

    30. Section 950.21 is redesignated as Sec. 950.16, and is revised 
to read as follows:


Sec. 950.16  Scope.

    Except as otherwise provided in Secs. 950.14 and 950.17, the 
requirements of subpart A apply to this subpart.
    31. Sections 950.22 and 950.23 are removed.
    32. Section 950.24 is redesignated as Sec. 950.17, and is amended 
by:
    a. Removing the words ``nonmember mortgagee'' and ``nonmember 
mortgagees'', wherever they appear, and, in their place, adding the 
words ``associate'' and ``associates'', respectively; and
    b. In paragraph (b)(2)(i) introductory text, removing the term 
``Sec. 950.22(d)'', and, in its place, adding the term 
``Sec. 926.3(b)'';
    c. In paragraph (b)(2)(i)(B), removing the terms 
``Sec. 950.9(a)(3)'' and ``Sec. 950.22(d)'', and in their place, adding 
the terms ``Sec. 950.7(a)(3)'' and ``Sec. 926.3(b),'' respectively; and
    d. Revising paragraph (b)(2)(i)(C), to read as follows:


Sec. 950.17  Advances to associates.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (C) The real estate-related collateral described in 
Sec. 950.7(a)(4), provided that such collateral is comprised of 
mortgage loans on one-to-four family or multifamily residential 
property.
* * * * *

PART 952--COMMUNITY INVESTMENT CASH ADVANCE PROGRAMS

    33. The authority citation for part 952 continues to read as 
follows:

    Authority: 12 U.S.C. 1422b(a)(1) and 1430.

    34. Amend Sec. 952.3 by removing the definition of ``nonmember 
borrower''.
    35. Amend part 952 by:
    a. Removing the term ``community lending'', wherever it appears, 
and, in its place, adding the term ``targeted community lending''; and
    b. Removing the terms ``nonmember borrower'' and ``nonmember 
borrowers'', wherever they appear, and, in their place, adding the 
terms ``associate borrower'' and ``associate borrowers'', respectively.

PART 961--STANDBY LETTERS OF CREDIT

    36. The authority citation for part 961 continues to read as 
follows:

    Authority: 12 U.S.C. 1422b, 1429, 1430, 1430b, 1431.

    37. Amend Sec. 961.1 by:
    a. Removing the definition of ``community lending'';
    b. Removing the definition of ``nonmember mortgagee'';
    c. Removing the definition of ``nonmember SHFA'';
    d. Adding the definition of ``SHFA associate''; and
    e. Removing the definition of ``small business'', to read as 
follows:


Sec. 961.1  Definitions.

* * * * *
    SHFA associate means an associate that is a ``state housing finance 
agency,'' as that term is defined in Sec. 926.1 of this chapter, and 
that has met the requirements of Sec. 926.3(b) of this chapter.
* * * * *
    38. Amend part 961 by:
    a. Removing the terms ``nonmember mortgagee'' and ``nonmember 
mortgagees'', wherever they appear, and, in their place, adding the 
terms ``associate'' and ``associates'', respectively; and
    b. Removing the terms ``nonmember SHFA'' and ``nonmember SHFAs'', 
wherever they appear, and, in their place, adding the terms ``SHFA 
associate'' and ``SHFA associates'', respectively.
    39. Amend Sec. 961.2 by revising paragraphs (a)(2), (c)(1), and 
(c)(2)(i), to read as follows:


Sec. 961.2  Standby letters of credit on behalf of members.

    (a) * * *
    (2) To assist members in facilitating community lending;
* * * * *
    (c) Eligible collateral. (1) Any standby letter of credit issued or 
confirmed on behalf of a member may be secured in accordance with the 
requirements for advances under Sec. 950.7(a) of this chapter.
    (2) * * *
    (i) Collateral eligible to secure advances under Sec. 950.7(b)(1) 
of this chapter, regardless of whether the applicant is a community 
financial institution;
* * * * *
    40. Amend Sec. 961.3 by:
    a. In the introductory text of paragraph (a), removing the term 
``Secs. 950.24(b)(1)(i) or (ii)'' and, in its place, adding the term 
``Secs. 950.17(b)(1)(i) or (ii)'';
    b. Revising paragraph (a)(2); and
    c. In paragraph (b), removing the term ``950.24(b)(2)(i)(A), (B) or 
(C)'' and, in its place, adding the term ``950.17(b)(2)(i)(A), (B) or 
(C)'', to read as follows:


Sec. 961.3  Standby letters of credit on behalf of associates.

    (a) * * *
    (2) To assist associates in facilitating community lending;
* * * * *
    41. Amend Sec. 961.4 by removing the term ``Secs. 969.5. 
950.24(b)(2)(i)(B) or 950.24(d)'' in paragraph (a)(1) and, in its 
place, adding the term ``Secs. 950.17(b)(2)(i)(B), 950.17(d), or 
969.2''.
    42. Amend Sec. 961.5 by:
    a. Revising paragraph (a); and
    b. In paragraph (b)(2), removing the reference to ``Secs. 950.9(b), 
950.9(d), 950.9(e), 950.10, 950.11 and 950.12'', and, in its place, 
adding a reference to Secs. 950.7(d), 950.7(e), 950.8, 950.9 and 
950.10'', to read as follows:


Sec. 961.5  Additional provisions applying to all standby letters of 
credit.

    (a) Requirements. Each standby letter of credit issued or confirmed 
by a Bank shall:
    (1) Contain a specific expiration date, or be for a specific term; 
and
    (2) Require approval in advance by the Bank of any transfer of the 
standby letter of credit from the original beneficiary to another 
person or entity.
* * * * *
    43. In subchapter J, add a new part 980 to read as follows:

PART 980--NEW BUSINESS ACTIVITIES

Sec.
980.1  Definitions.
980.2  Limitation on Bank authority to undertake new business 
activities.
980.3  New business activity notice requirement.
980.4  Commencement of new business activities.
980.5  Notice by the Finance Board.
980.6  Finance Board consent.
980.7  Examinations; requests for additional information.

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1431(a), 1432(a).


Sec. 980.1  Definitions.

    As used in this part:
    New business activity means any business activity undertaken, 
transacted, conducted, or engaged in by

[[Page 26533]]

a Bank that has not been previously undertaken, transacted, conducted, 
or engaged in by that Bank, or was previously undertaken, transacted, 
conducted, or engaged in under materially different terms and 
conditions, and that:
    (1) Involves the acceptance of collateral enumerated under 
Sec. Sec. 950.7(a)(4)(i) and (ii) of this chapter in an amount greater 
than that set forth in Sec. 950.7(a)(4)(iii);
    (2) Involves the acceptance of classes of collateral enumerated 
under Sec. 950.7(b) of this chapter for the first time;
    (3) Entails risks not previously and regularly managed by that 
Bank, its members, or both, as appropriate; or
    (4) Involves operations not previously undertaken by that Bank.


Sec. 980.2  Limitation on Bank authority to undertake new business 
activities.

    No Bank shall undertake any new business activity except in 
accordance with the procedures set forth in this part.


Sec. 980.3  New business activity notice requirement.

    At least sixty days prior to undertaking a new business activity, a 
Bank shall submit to the Finance Board a written notice containing the 
following information:
    (a) General requirements. Except as provided in paragraph (b) of 
this section, a Bank's notice of new business activity shall include:
    (1) An opinion of counsel citing the statutory, regulatory, or 
other legal authority for the new business activity;
    (2) A good faith estimate of the anticipated dollar volume of the 
activity over the short-and long-term;
    (3) A full description of:
    (i) The purpose and operation of the proposed activity;
    (ii) The market targeted by the activity;
    (iii) The delivery system for the activity;
    (iv) The effect of the activity on the housing, or relevant 
community lending, market; and
    (4) A demonstration of the Bank's capacity, through staff, or 
contractors employed by the Bank, sufficiency of experience and 
expertise, to safely administer and manage the risks associated with 
the new activity;
    (5) An assessment of the risks associated with the activity, 
including the Bank's ability to manage these risks and the Bank's 
ability to manage the risks associated with increasing volumes of the 
new activity; and
    (6) The criteria that the Bank will use to determine the 
eligibility of its members or associates to participate in the new 
activity.
    (b) New collateral activities. If a proposed new business activity 
relates to the acceptance of collateral under Sec. 950.7 of this 
chapter, a Bank's notice of new business activity shall include:
    (1) A description of the classes or amounts of collateral proposed 
to be accepted by the Bank;
    (2) A copy of the Bank's member products policy, adopted pursuant 
to Sec. 917.4 of this chapter;
    (3) A copy of the Bank's procedures for determining the value of 
the collateral in question, established pursuant to Sec. 950.10 of this 
chapter; and
    (4) A demonstration of the Bank's capacity, personnel, technology, 
experience and expertise to value, discount and manage the risks 
associated with the collateral in question.


Sec. 980.4  Commencement of new business activities.

    A Bank may commence a new business activity:
    (a) Sixty days after receipt by the Finance Board of the notice of 
new business activity under Sec. 980.3, if the Finance Board has not 
issued to the Bank a notice of disapproval, a notice of intent to 
examine, or a request for additional information under Sec. 980.5; or
    (b) Immediately upon issuance by the Finance Board of a letter of 
approval under Sec. 980.6.


Sec. 980.5  Notice by the Finance Board.

    (a) Issuance. Within sixty days after receipt of a notice of new 
business activity under Sec. 980.3, the Finance Board may issue to a 
Bank a notice that:
    (1) Disapproves the new business activity;
    (2) Instructs the Bank not to commence the new business pending 
further consideration by the Finance Board;
    (3) Declares an intent to examine the Bank;
    (4) Requests additional information including but not limited to 
the requests listed in Sec. 980.7;
    (5) Establishes conditions for the Finance Board's approval of the 
new business activity, including but not limited to the conditions 
listed in Sec. 980.7; or
    (6) Contains other instructions or information that the Finance 
Board deems appropriate under the circumstances.
    (b) Effect. Following receipt of a notice issued pursuant to 
paragraph (a) of this section, a Bank may not undertake any new 
business activity that is the subject of the notice until the Bank has 
received the Finance Board's consent pursuant to Sec. 980.6.


Sec. 980.6  Finance Board consent.

    The Finance Board may at any time provide consent for a Bank to 
undertake a particular new business activity and setting forth the 
terms and conditions that apply to the activity, with which the Bank 
shall comply if the Bank undertakes the activity in question.


Sec. 980.7  Examinations; requests for additional information.

    (a) General. Nothing in this part shall limit in any manner the 
right of the Finance Board to conduct any examination of any Bank.
    (b) Requests for additional information and conditions for 
approval. With respect to a new business activity, nothing in this part 
shall limit the right of the Finance Board at any time to:
    (1) Request further information from a Bank concerning a new 
business activity; and
    (2) Require a Bank to comply with certain conditions in order to 
undertake, or continue to undertake, the new business activity in 
question, including but not limited to:
    (i) Successful completion of pre-or post-implementation safety and 
soundness examinations;
    (ii) Demonstration by the Bank of adequate operational capacity, 
including the existence of appropriate policies, procedures and 
controls;
    (iii) Demonstration by the Bank of its ability to manage the risks 
associated with accepting increasing volumes of particular collateral, 
or holding increasing volumes of particular assets, including the 
Bank's capacity reliably to value, discount and market the collateral 
or assets for liquidation;
    (iv) Demonstration by the Bank that the new business activity is 
consistent with the housing finance and community lending mission of 
the Banks and the cooperative nature of the Bank System; and
    (v) Finance Board review of any contracts or agreements between the 
Bank and its members or associates.

    Dated: March 22, 2000.
    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-11078 Filed 5-5-00; 8:45 am]
BILLING CODE 6725-01-P