[Federal Register Volume 65, Number 137 (Monday, July 17, 2000)]
[Rules and Regulations]
[Pages 43969-43986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17663]


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

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 940, 950, 955, 956 and 966

[No. 2000-33]
RIN 3069-AA98


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

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

SUMMARY: The Federal Housing Finance Board (Finance Board) is adding 
regulations to authorize the Federal Home Loan Banks (Banks) to hold 
acquired member assets (AMA) and is amending its regulations to 
enumerate the types of core mission assets (CMA) that must be addressed 
in the Banks' strategic business plans. The Finance Board is also 
making related changes to

[[Page 43970]]

its regulations governing the Banks' investment, advances and debt 
issuance authorities.

DATES: This final rule is effective on July 17, 2000.

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

SUPPLEMENTARY INFORMATION:  

I. Background

    On May 3, 2000, the Finance Board published for comment a proposed 
rule to: (1) Add new provisions in part 940 enumerating the Bank 
activities that are considered to be CMA; (2) add to the regulations a 
new part 955 setting forth in regulation the authority and requirements 
for Banks' AMA programs; (3) revise part 956 of the regulations, 
governing Bank investments; and (4) amend part 950 of the regulations, 
governing advances, so that inter-district advances activity would be 
subject to the same requirements as inter-district AMA activities. See 
65 FR 25676 (May 3, 2000). The initial 30-day public comment period for 
the proposed rule was later extended to 43 days, see 65 FR 34127 (May 
27, 2000), and closed on June 15, 2000. The Finance Board received a 
total of 107 comment letters about the proposed rule. Among the comment 
letters considered in preparing the final rule were 19 that were 
accepted after the official close of the comment period.

II. Analysis of Comment Letters and Changes Made in the Final Rule

A. Core Mission Activities--Part 940

1. General Commentary
    As part of its statutory duty to ensure that the Banks carry out 
their housing finance mission, the Finance Board recently adopted a 
regulatory requirement, set forth in Sec. 917.5 of the regulations, 
that each Bank's board of directors have in effect at all times a 
strategic business plan that describes how the Bank's business 
activities will achieve the mission of the Bank consistent with part 
940 of the regulations. See 65 FR 25267 (May 1, 2000). At the same 
time, the Finance Board adopted Sec. 940.2 of the regulations, which 
states the mission of the Banks in its broadest terms and, by way of 
cross-reference, gives meaning to the strategic business plan 
requirement of Sec. 917.5. See id.
    This final rule adds to part 940 a new Sec. 940.3, which enumerates 
the specific Bank activities that qualify as core mission activities. 
The intent of this new regulatory provision is to further focus the 
Banks' strategic business plans on the activities that the Finance 
Board has determined are most central to the fulfillment of the Banks' 
statutory mission. In so doing, the Finance Board means to stress the 
importance that must be placed upon this category of activities as each 
Bank plans and undertakes its ongoing business activities. Aside from 
the strategic business plan requirements set forth in Sec. 917.5, there 
currently are no other regulatory requirements pertaining to CMA.
    In the proposed rule, activities that would have qualified as CMA 
were listed in Sec. 940.3(a). Proposed Sec. 940.3(b) stated that, 
should the Finance Board impose upon the Banks any future requirement 
regarding the level of Bank CMA holdings, the requirement would not 
prevent the Banks from holding to maturity, or funding with the 
proceeds of consolidated obligations, assets acquired under sections 
II.B.8 through II.B.11 of the Bank System Financial Management Policy 
(FMP) (consisting mostly of agency and privately-issued mortgage-backed 
securities (MBS) and asset-backed securities (ABS)). As discussed in 
detail below, this provision has been removed in the final rule. 
Accordingly, the list of activities that qualify as CMA, which appeared 
as Sec. Sec. 940.3(a)(1) through (9) in the proposed rule, appears as 
Sec. Sec. 940.3(a) through (i) in the final rule.
    Of the comment letters addressing aspects of part 940, support for 
and opposition to the CMA provisions was about evenly divided. Most of 
the commenters who generally supported the CMA provisions of the 
proposed rule agreed with the Finance Board's goal of focusing the 
Banks on their housing finance and community lending mission, and 
especially upon extending the reach of the Banks' resources into 
underserved communities. One commenter (a Bank) agreed with the Finance 
Board that Bank members will be unable to make intelligent choices 
about their Banks' new capital plans without understanding the future 
direction of the Bank System, including the asset categories to be 
supported by the new capital structure.
    Of those opposed to the rule, many stated as the primary reason for 
their opposition a belief that the Finance Board should wait until 
after it has promulgated new capital regulations as required by the 
Federal Home Loan Bank System Modernization Act of 1999 (Modernization 
Act), Title VI of the Gramm-Leach-Bliley Act, Pub. L. 106-102 (1999), 
and the Banks have adopted new capital plans under those regulations, 
before putting into place any further mission regulations. Most of 
these commenters expressed the opinion that, at a time when Congress 
has recently made membership in the Bank System completely voluntary 
and when, as a result, the Banks will need to market ``Class B'' stock 
to their members in order to establish a base of permanent capital, the 
Finance Board should not be implementing actual or implied asset 
requirements that could result in earnings volatility.
    Many commenters stressed their belief that the uncertain ability of 
any Bank to maintain strong earnings and pay an attractive dividend 
while focusing upon the business activities enumerated in Sec. 940.3 
could dissuade members or potential members from purchasing Bank stock. 
Several commenters noted especially that the reference in proposed 
Sec. 940.3(b) to possible future requirements regarding Bank CMA, 
combined with a failure to detail what those requirements could be, 
raises the possibility that a Bank may in the future be required to 
divest itself of legally-acquired investments, making the future 
balance sheet composition of the Banks particularly uncertain for 
potential investors.
    Many of the commenters expressing generally negative reactions to 
proposed Sec. 940.3 raised concerns that the CMA provisions would limit 
the Banks' flexibility in managing their balance sheets and, therefore, 
would adversely impact Bank profits and possibly the safety and 
soundness of the Banks. Frequently mentioned in this regard was the 
Finance Board's exclusion of investments in most types of MBS from the 
list of activities that qualify as CMA. Two commenters (both Banks) 
specifically requested that the Finance Board continue to permit the 
Banks to hold MBS in an amount up to three times capital (as is 
currently the limit under the FMP).
    Regarding the exclusion of most MBS from the list of CMA, many 
commenters expressed a belief that MBS are an important balance sheet 
management tool for the Banks that may be especially useful in 
deploying Bank capital prudently during periods of cyclical business 
downturns. Several commenters stressed the Banks' roles as reliable 
sources of liquidity for their

[[Page 43971]]

members and stated that failure to permit the Banks to continue to 
invest in MBS could threaten the Banks' abilities to act in this role. 
Others questioned whether it is appropriate for the Finance Board to 
restrict Bank investment in assets, like MBS, that are specifically 
authorized by statute as legal investments for a Bank. Still others 
argued that MBS do play an important role in helping Banks to carry out 
their mission in that, as low-risk investments with a reasonable record 
of return, MBS improve the Bank System's financial strength and help to 
reduce rates on advances. Some commenters also asserted that MBS are 
mission-related in that, despite the statements of the Finance Board to 
the contrary, the Banks' purchase of these securities do result in 
increased availability of funds for housing and in reduced cost of 
housing funds.
    More generally, several Bank members commented that Sec. 940.3, as 
proposed, would restrict the Banks' abilities to respond to members' 
needs with well-priced advances by encouraging the Banks to focus upon 
``programs'' required by regulation. Several other commenters expressed 
the opinion that Congress has adequately addressed the ``mission'' of 
the Banks in the Federal Home Loan Bank Act (Bank Act) and that, by its 
failure to impose mission requirements as part of the Modernization 
Act, Congress expressed its intent that such requirements should not be 
imposed through regulation. Several also pointed out that the 
Modernization Act devolved the remaining elements of corporate 
governance authority to the Banks and claimed that the manner in which 
the Banks carry out their statutory mission is a matter of corporate 
governance to be decided upon by the Banks' own boards of directors, 
subject only to the safety and soundness regulation of the Finance 
Board.
    Finally, one commenter stated that the CMA provisions, as proposed, 
would violate the spirit of an October 18, 1999 letter from Finance 
Board Chairman Bruce Morrison to Senator Phil Gramm and Congressman Jim 
Leach. In that letter, Chairman Morrison stated that, upon the 
enactment of the Modernization Act, the Finance Board would withdraw 
its Financial Management and Mission Achievement (FMMA) proposed 
rulemaking, see 64 FR 52163 (1999), and would take no action to 
promulgate proposed or final regulations limiting Bank assets or 
advances beyond those regulations currently in effect (except to the 
extent necessary to protect the safety and soundness of the Banks) 
until such time as the Finance Board's new capital regulations take 
effect.
2. The Final Rule--Background
    The Bank Act authorizes the Finance Board to supervise the Banks 
and to promulgate and enforce such regulations and orders as are 
necessary from time to time to carry out the provisions of the Bank 
Act. See 12 U.S.C. 1422b(a)(1). Among the provisions of the Bank Act 
are those outlining the duties of the Finance Board, which include the 
duty to ``ensure'' that the Banks carry out their housing finance 
mission. See id. at 1422a(a)(3)(B)(ii). The use of the word ``ensure'' 
in section 2A(a)(3)(B)(ii) of the Bank Act makes clear that, consistent 
with the safe and sound operation of the Banks, the Finance Board has 
the duty to take active measures to see to it that the Banks carry out 
their housing finance mission.
    Because Congress has not expressly defined the term ``housing 
finance mission,'' it is the responsibility and the privilege of the 
Finance Board--as the body charged with the duty to ensure that the 
Banks fulfill that mission and, more generally, as the supervisory 
regulator of the Banks and the agency charged with the administration 
of the Bank Act--to construe the term reasonably in light of the 
totality of the Act. It is the position of the Finance Board that, when 
Congress amended the Bank Act in 1989 to require the Banks to offer 
Affordable Housing Programs (AHP) and Community Investment Programs 
(CIP) and authorized the Banks to offer Community Investment Cash 
Advance Programs (CICA), the Banks' ``housing finance mission,'' as 
referenced in section 2A(a)(3)(B)(ii), came to include support not only 
for the financing of traditional housing-related activities, but also 
for those types of community lending that the Banks are authorized by 
statute to support and that indirectly enhance traditional housing 
finance by helping to create and sustain thriving and livable 
communities. See 12 U.S.C. 1430(i), (j).
    Having earlier set forth its construction of the Banks' mission in 
Sec. 940.2 of the regulations, see 65 FR 25267 (May 1, 2000), the 
Finance Board is now further fulfilling its duty to ensure that the 
Banks carry out that mission by requiring that the Banks focus on the 
CMA listed in new Sec. 940.3 as part of their strategic planning 
process. Under the Finance Board's regulations, as amended by this 
final rule, this is the only regulatory requirement regarding CMA.
    The material formerly contained in proposed Sec. 940.3(b) was 
intended to give the Banks and their members some assurance that, if 
the Finance Board were to promulgate at some point in the future any 
effective limits on non-CMA Bank activities, MBS and other investments 
previously made under sections II.B.8 through II.B.11 of the FMP would 
not adversely affected. However, based on the comments it is apparent 
that rather than providing reassurance, the effect of including this 
provision in the proposed rule has been to raise the specter of as-yet-
undisclosed future limits on non-CMA activities, while obscuring the 
fact that no such limits are being contemplated or implemented. 
Accordingly, the Finance Board has eliminated proposed Sec. 940.3(b) 
and its reference to possible limits on non-CMA activities from the 
final rule. Although this declaration of intent has been eliminated 
from the language of the rule, the Finance Board stresses again that: 
(1) It has no current plans to impose limits on non-CMA activities; and 
(2) if any such limits were ever to be imposed, the agency has no 
current plans to require any Bank to divest itself of otherwise legal 
and safe investments already held.
    Because this rule does not limit Bank assets or activities to a 
greater extent than the limits to which they are subject under the FMP, 
the rule does nothing to violate either the spirit, or the literal 
language, of Chairman Morrison's letter to Senator Gramm and 
Congressman Leach.
    The Finance Board disagrees with comments that the Banks would 
suffer from lower profits and reduced balance-sheet management 
flexibility as a result of the Finance Board's failure to characterize 
MBS as CMA. First and foremost, the rule contains no new restrictions 
on the Banks' ability to invest in MBS. The only limit on the Banks' 
authority to invest in MBS is the current FMP ``three times capital'' 
limit (which will remain in effect until expressly repealed by the 
Finance Board). Second, the loans and pools of loans a Bank may acquire 
through AMA programs authorized under part 955 of the final rule (which 
is discussed in more detail below) would be substantially similar to 
loans that are normally acquired in securitized form through the 
purchase of MBS.
    Since 1989, the Banks have gained substantial experience in 
managing the risks associated with MBS. This experience should be 
transferable to the management of what would essentially be ``self-
securitized'' MBS acquired under an AMA program. While the rate of 
return on AMA could be lower than that on MBS depending upon the price 
structure of a particular AMA program,

[[Page 43972]]

the slight difference in return would inure to the benefit of the 
selling member, in keeping with the cooperative nature of the Bank 
System. The purchase of MBS from the capital markets typically does 
little or nothing to enhance the availability of any reasonably-priced 
product or service to any member or housing associate.
    Finally, the Finance Board rejects the notion that the promulgation 
of the CMA strategic planning requirement should be postponed until 
after the Banks have put into effect their new capital plans. As the 
Banks' mission regulator, the Finance Board has made decisions 
regarding the broad activities it believes are preferable for the Banks 
to be pursuing in the context of their housing finance and community 
lending mission. Having made these decisions, the Finance Board finds 
it most logical to state those preferences as clearly as possible and 
as soon as possible prior to the development of the Banks' new capital 
plans. In doing so, the Finance Board is enabling the Banks to 
structure their capital plans with specific mission considerations in 
mind, as opposed to amending the plans after they have already been 
developed. In addition, members and potential members will be aware in 
advance of the CMA in which the Banks are encouraged to engage. To do 
otherwise would serve only to undermine the capital planning process 
and the expectations of investors in the Bank System, and to no good 
purpose.
3. Definition of CMA and Government-Insured or -Guaranteed AMA Loans--
Sec. 940.3(b)
    Under Sec. 940.3(b) of the final rule, all AMA authorized under new 
part 955 qualify as CMA, except for certain United States government-
insured or guaranteed whole single-family residential mortgage loans 
acquired under a commitment entered into after April 12, 2000. The 
latter shall qualify as CMA only in a cumulative dollar amount up to 33 
percent of: the cumulative total dollar amount of AMA acquired by a 
Bank after April 12, 2000, less the cumulative dollar amount of United 
States government-insured or guaranteed whole single-family residential 
mortgage loans acquired after April 12, 2000 under commitments entered 
into on or before April 12, 2000. At the discretion of two or more 
Banks, this percentage calculation may be made based on aggregate 
transactions among those Banks.
    This provision appeared as Sec. 940.3(a)(2) in the proposed rule. 
Section 940.3(b) of the final rule differs from the proposal in that 
the ``33 percent'' calculation regarding government-insured and -
guaranteed loans has been made to apply on a cumulative basis, as 
opposed to a year-to-year basis.
    The Finance Board received a total of 20 comments regarding the CMA 
definition as applied to government-insured or -guaranteed loans. 
Seventeen commenters were opposed to that aspect of the CMA definition 
that would result in only a portion of the government-insured or -
guaranteed loans acquired by a Bank being considered as CMA. Two 
commenters supported the definition as proposed, and one noted that the 
issue required further discussion.
    Generally, the commenters opposed to this aspect of the CMA 
definition noted that the Banks should be provided maximum flexibility 
in meeting the needs of their members. It was noted that the exclusion 
of a portion of government-insured or -guaranteed loans from the 
definition of CMA would have a detrimental effect on the ability of 
private sector lenders to pass the full benefits of AMA programs on to 
consumers. It was also noted that the Banks should have unlimited 
flexibility to acquire government insured or guaranteed loans, similar 
to the unlimited flexibility afforded Fannie Mae and Freddie Mac. One 
commenter added that no limitation should exist since there are no 
safety and soundness or mission reasons to justify such a limitation. 
Another commenter suggested that the April 12, 2000 date, relating to 
prior acquisition of government-insured and -guaranteed loans, be 
either deleted or moved to the date of enactment of the final rule. Yet 
another commenter requested that the 33 percent limitation should not 
take effect until 2002.
    One of the comments in favor of the proposed definition noted that 
the Banks should be encouraged to focus on conventional and prime rate 
mortgages that are made to minorities and low-and moderate-income 
populations. Another commenter supporting the proposed definition added 
that the use of mortgage insurance would significantly reduce the need 
for Banks to purchase government-insured or -guaranteed loans, since 
such purchases to date have been the result of the recourse capital 
treatment for members selling conventional loans.
    The Finance Board considered the comments received regarding the 
CMA definition as applied to government-insured and -guaranteed loans 
and decided that the definition should remain as proposed, although the 
calculation thereunder should be made on a cumulative, as opposed to a 
year-to-year, basis. The distribution of the Banks' current mortgage 
portfolio indicates that a high percentage of government-insured loans 
have been acquired when compared to the percentage of these loans in 
the total mortgage market. The final rule encourages the composition of 
the Banks' mortgage portfolios to more closely reflect the distribution 
of loans in the marketplace. This provision is intended to reduce the 
emphasis on government-insured loans that currently exists in the 
Banks' mortgage portfolios and to provide incentive for Bank 
acquisition of conventional mortgages.
    The parenthetical at the end of Sec. 940.3(b) makes clear that the 
calculation of the percentage of AMA loans that qualify as CMA may be 
made based on aggregate transactions between two or more Banks so long 
as the relevant Banks agree (or, even on a System-wide basis if all 
Banks agree). This provision is intended to provide flexibility among 
the Banks such that if one Bank's acquisition of government-insured or 
guaranteed loans exceeds 33 percent of total AMA in a given year, it 
may combine its portfolio for purposes of the calculation with another 
Bank that may not have reached the maximum allowed CMA purchase of such 
loans.
4. Targeted Investments--Sec. 940.3(e)
    Under Sec. 940.3(e) of the final rule, certain targeted debt and 
equity investments may qualify as CMA. As stated in Sec. 940.3(e)(1), 
these include debt or equity investments that primarily benefit 
households having a targeted income level, or areas targeted for 
redevelopment by local, state, tribal or Federal government, by 
providing or supporting: housing; economic development; community 
services; permanent jobs; or area revitalization or stabilization. The 
term ``targeted income level'' is defined in Sec. 940.1 by cross-
referencing to the first two paragraphs of the definition of the same 
term under the Finance Board's CICA regulation. See 12 CFR 952.3. 
There, ``targeted income level'' is defined to refer to a household 
income that is at or below 115 percent of the area median income in 
rural areas, and at or below 100 percent of the area median income in 
urban areas. See 12 CFR 952.3. Section 940.3(e)(1) also requires that a 
significant proportion of the households with a targeted income level 
must have incomes at or below 80 percent of area median income. An 
example of a housing project that would meet the targeted income 
requirement would be a project that qualifies for a federal Low Income 
Housing Tax Credit where either 20 percent of the units are affordable 
to

[[Page 43973]]

households with incomes at or below 50 percent of area median income or 
40 percent of the units are affordable to households with incomes at or 
below 60 percent of area median income.
    Section 940.3(e)(2) provides that, if the targeted investment is an 
MBS or ABS, the acquisition of these securities by the Bank must 
substantially contribute to expanding liquidity for loans that are not 
otherwise adequately provided by the private sector and do not have a 
readily-available or well-established secondary market in order for the 
investment to qualify as CMA. Whether the investment is an MBS or ABS, 
or a non-securitized asset, Sec. 940.3(e)(3) requires that the 
investment must in all cases involve one or more members or housing 
associates in a manner, financial or otherwise, and to a degree to be 
determined by the Bank.
    Most of the comments addressing the targeted lending provision were 
generally supportive, although many suggested additions, clarifying 
language or other modifications. Many of the commenters who praised the 
provision specifically supported Bank debt and equity investments in 
Community Development Financial Institutions (CDFIs) and secondary 
capital in community development credit unions, which, as mentioned in 
the preamble to the proposed rule, would qualify as CMA under 
Sec. 940.3(e). Several commenters also stated generally that the 
Finance Board should make clear that Sec. 940.3(e) is intended to 
encompass whole loans, whole loan portfolios or participations in whole 
loans or whole loan portfolios, where these loans meet the requirements 
of the provision.
    As proposed, Sec. 940.3(e)(1) (which appeared at 
Sec. 940.3(a)(5)(i) of the proposed rule) required that these 
investments primarily benefit ``low- or moderate-income households,'' 
which the proposed rule defined as a household with an income that is 
at or below 115 percent of area median income. With regard to these 
income targets, several commenters stated that the Finance Board should 
amend its definition of ``low- or moderate-income households'' to 
include only those households with incomes up to 80 percent of area 
median income. The commenters noted that this would correspond with the 
income targets under the Community Reinvestment Act (CRA) and would 
enhance the ability of Bank members to meet their CRA requirements by 
making CRA-related loans and investments.
    After considering all of the relevant factors, the Finance Board 
decided that it was desirable to keep the parameters of ``targeted'' 
Bank activities like CICA programs and targeted investments consistent. 
Therefore, in the final rule, the Finance Board as amended the income 
target provision to cross-reference the CICA regulation.
    As indicated, in the realm of targeted lending, the term ``low- or 
moderate-income households'' refers to households with an income that 
is at or below 80 percent of the area median income. In order to avoid 
confusion, the Finance Board has removed the term ``low- or moderate-
income households'' and has used instead referred to households having 
a ``targeted income level,'' a term which is used in the Finance 
Board's CICA regulation. See 12 CFR 952.3. By cross-referencing this 
definition in the CICA regulation, the agency has effectively modified 
the income targets that were set forth in proposed Sec. 940.3(a)(5)(i) 
by tightening the requirement from 115 to 100 percent of area median 
income for urban households. The target remains at 115 percent of area 
median income for rural households.
    As proposed, only ``non-securitized'' debt and equity investments 
could have qualified as CMA under Sec. 940.3(e). However, this 
provision has been revised in the final rule to include targeted MBS 
and ABS as CMA under this section where the requirements of 
Sec. 940.3(e)(2) (described above) have been met. In the proposed rule, 
the Finance Board requested comment on appropriate rule language that 
might allow for MBS and ABS that substantially contribute to opening an 
underserved market to qualify as CMA, while continuing to exclude 
securities that, while they may be backed by loans that could qualify 
as ``targeted,'' actually trade in a well established and liquid 
market.
    While two commenters provided the Finance Board with suggestions 
regarding income targets for loans backing securitized targeted CMA 
investments, these comments did not address the Finance Board's concern 
regarding the market in which the securities trade. The income 
requirements for MBS and ABS are the same as those for non-securitized 
assets.
    Upon consideration of the issue, the Finance Board decided that MBS 
and ABS that are backed by mortgages or other assets that meet the 
targeting requirements, and the purchase of which would substantially 
contribute to expanding liquidity for loans that would not otherwise be 
adequately provided by the private sector and that do not have a 
readily available or well-established secondary market should be deemed 
to be CMA. MBS or ABS where less than half of the dollar amount of the 
assets underlying each of the securities meet the targeting 
requirements of this provision would not be considered to primarily 
benefit targeted areas or households with a targeted income level as 
required under Sec. 940.3(e)(1).
    The Banks are encouraged to invest in MBS and ABS backed by assets 
consisting of whole loans and loan participations that address 
financially underserved income-targeted households or area-targeted 
markets identified by a Bank. Currently, there are a number of 
financing opportunities where the secondary market is not fully 
developed and the Banks' involvement could facilitate the growth and 
liquidity of loans provided to underserved markets. There are many such 
types of MBS and ABS where the majority of the underlying assets are 
composed of loans for households with targeted incomes or loans in 
targeted areas, for example: Single-family home purchase mortgages that 
do not meet the underwriting standards of the secondary market 
Government Sponsored Enterprises (GSEs); mortgages on owner-occupied 
two- to four-unit homes; home equity conversion (reverse) mortgages; 
single-family rehabilitation or combination acquisition/rehabilitation 
loans; home purchase loans for households with incomes less than 80 
percent of area median income in areas where GSE purchases are less 
than the proportion of loans made to such households in those areas; 
loans of less than $3 million for the acquisition, construction or 
rehabilitation of small multifamily buildings; homeowner and rental 
property loans on tribal lands; community facility and economic 
development loans in low-income census tracts or rural areas; and 
economic development and housing loans originated by nonprofit 
organizations.
    Many commenters mentioned specific programs, agencies, non-profit 
organizations and other projects and investments and requested 
confirmation by the Finance Board that each was a type of targeted 
investment that could qualify as CMA under Sec. 940.3(e). The elements 
to be considered under that section can in some cases be known only 
with respect to a specific investment. While it is impossible to list 
every type of investment that might qualify as CMA under Sec. 940.3(e), 
there are several types of investment that would clearly qualify as CMA 
in most circumstances, such as investments in: Community Development 
Venture Capital Funds; SBIC ``fund-of-funds''; and equity investments 
in governmentally-aided economic

[[Page 43974]]

development entities structured similarly to SBICs, where the 
investment primarily benefits low- or moderate-income individuals or 
areas.
    Section 940.3(e)(3) of the rule (Sec. 940.3(a)(5)(ii) in the 
proposed rule) requires that, to qualify as CMA, an otherwise 
qualifying targeted investment by a Bank must involve one or more 
members or housing associates in a manner, financial or otherwise, and 
to a degree to be determined by the Bank. One commenter opposed any 
requirement that, to qualify as CMA, a targeted investment must have 
the direct financial involvement of one or more members or housing 
associates and recommended that the rule permit a range of involvement 
from sponsorship through financial participation. Section 940.3(e)(3) 
does not require direct financial participation on the part of the 
member or housing associate and, in fact, clearly allows the Bank 
itself to determine the extent and nature of its involvement with its 
member or housing associate. Accordingly, the Finance Board believes 
that, as worded, the rule allows for levels of member or housing 
associate involvement from sponsorship through financial participation.
5. SBIC Investments--Sec. 940.3(g)
    Under Sec. 940.3(g) of the final rule, SBIC debentures, the short-
term tranche of SBIC securities and other debentures guaranteed by the 
Small Business Administration (SBA) under Title III of the Small 
Business Act of 1958 are considered to be CMA. Under the proposed rule, 
this provision (which appeared at Sec. 940.3(a)(7)) would have defined 
only the short-term tranche of SBIC securities as CMA. Two commenters 
(a Bank and the SBA) asked the Finance Board to broaden the provision 
to include all securities insured by the SBA under Title III of the 
Small Business Act, in order to provide needed funding for SBICs and to 
accommodate new programs that the Bank and the SBA are pursuing. In the 
final rule, the Finance Board has expanded the provision to encompass 
the investments that the Bank has proposed to make and other similar 
SBA-guaranteed debt investments. SBIC-related equity investments would 
not count as CMA under this provision, but could qualify under 
Sec. 940.3(f).

B. Acquired Member Assets--Part 955

    Part 955 of the final rule addresses AMA--that is, whole loans and 
certain interests in whole loans that a Bank may acquire from or 
through its members or housing associates in a transaction that is in 
purpose and economic substance functionally equivalent to the business 
of making advances in that: (1) It allows the member or housing 
associate to use its eligible assets to access liquidity for further 
mission-related lending; and (2) all, or a material portion of, the 
credit risk attached to the assets is being borne by the member or 
housing associate.
1. Three-Part Test--Sec. 955.2
    Section 955.2 of the final rule sets forth a three-part test for 
determining whether an asset may qualify as AMA. As adopted, it is 
substantially similar the proposal, except for one change relating to 
state or local housing finance agency (HFA) bonds. This section 
provides that AMA must be: (a) Whole loans or certain interests in 
whole loans; (b) originated or held for a valid business purpose by a 
member or housing associate, and acquired from a member, housing 
associate, or another Bank; and (c) structured such that a member or 
housing associate is responsible for a significant portion of the 
credit risk of the investment and otherwise in compliance with 
Sec. 955.3.
    Two commenters opposed the requirement of proposed 
Sec. 955.2(a)(1)(i) prohibiting the purchase of single-family mortgages 
where the loan amount exceeds the conforming loan limits established 
for Fannie Mae and Freddie Mac. See 12 U.S.C. 1717(b)(2). One commenter 
noted that this limitation would prevent the Bank from fully serving 
its mission. The second commenter requested relief from the loan limit 
specifically for ``Difficult Development Areas,'' where housing costs 
are a significant burden relative to other areas in the region.
    The Finance Board considered these comments and decided to maintain 
the prohibition on the purchase of single-family mortgages where the 
loan amount exceeds the conforming loan limit. This provision is 
intended to prohibit the acquisition of ``jumbo'' loans. Additionally, 
the Finance Board's intent is to create a level playing field among the 
Banks, Fannie Mae and Freddie Mac with respect to the types of loans 
eligible for purchase.
    At the request of one commenter, the Finance Board here clarifies 
that, under Sec. 955.2(a)(1), a Bank may acquire certificates 
representing interests in whole loans as AMA only if: (1) The 
certificates are rated by an NRSRO to meet the credit enhancement 
requirement of Sec. 955.3; (2) the certificates are issued following 
the execution of, and for the purpose of implementing an agreement 
between and initiated by the Bank and a Bank System member or housing 
associate to share risks in compliance with the requirements of 
Sec. 955.3(b); and (3) the initiating Bank or Banks acquire 
substantially all of the certificates. It is the Finance Board's view 
that, in such a case, the use of a third party to securitize the whole 
loans would merely represent a vehicle to invest in certain types of 
AMA under more favorable terms and should therefore be permitted under 
the rule. However, if the certificates have been created as a security 
initially available to investors generally, they will not be considered 
to qualify as ``whole loans'' under Sec. 955.2(a)(1).
    Three commenters addressed the requirements of Sec. 955.2, as 
applied to the acquisition of HFA bonds. All of the commenters were 
opposed to the proposed rule's treatment of HFA bonds to varying 
degrees. Of primary concern was the ``member or housing associate 
nexus'' requirement set forth in Sec. 955.2(b). The commenters were 
generally more concerned with whether HFA bonds could qualify as CMA 
under Sec. 940.3, than with the status of such bonds under the AMA 
provisions of part 955.
    One commenter stated that HFA bonds should qualify as CMA whether 
or not the Bank purchased the bond from an housing associate of the 
Bank, or was granted permission by another Bank to purchase such bonds 
in its district. The commenter believes that this restriction has the 
potential to increase interest rates on taxable securities issued by 
HFAs by decreasing the competition for purchase of such securities. The 
commenter further noted that some Banks may be unwilling to grant 
permission to deal with HFAs in their district and, even where Banks 
are so willing, the cost of crafting a transaction would be onerous and 
unnecessary.
    Another commenter noted that constraining the Banks to acquire HFA 
bonds from out-of-district housing associates only if the Bank has an 
agreement with the housing associate's District Bank granting 
permission to make such an acquisition is inappropriate and could cause 
transactions with housing associates to take place at non-market-
clearing prices. The final commenter noted that costs and time would be 
reduced and HFAs would be able to access a pool of funds to provide 
low-interest loans for affordable housing if HFAs could privately place 
bonds, using the agencies' investment grade stand alone rating. The 
commenter further stated that it would be helpful if the rule would 
provide a clear description of the criteria applicable to HFAs to 
engage in selling bonds to Banks, in joint lending

[[Page 43975]]

arrangements, in shared risk and credit enhancement programs for 
affordable housing properties, and in programs with member banks and 
through Banks directly.
    The Finance Board considered the comments received and has, for HFA 
bonds only, modified the requirement that the bonds may be acquired 
from out-of-district housing associates only with the permission of the 
Bank in whose district the HFA is located (local Bank). Instead the 
final rule requires that the HFA first give the local Bank a right-of-
first-refusal to purchase, or negotiate the terms of, a particular bond 
issue. If the local Bank refuses, or does not respond within three 
days, the HFA may then offer the bonds to an out-of-district Bank. This 
has been done in order to preserve the integrity of the Bank Districts, 
while at the same time preventing any one Bank from denying an HFA in 
its District financing that another Bank is willing to provide.
    At any rate, under final Sec. Sec. 956.2(f) and 956.3(a)(4)(iii) 
Banks retain their existing authority to invest in AA-rated HFA bonds 
regardless of the District in which the issuer is located. However, HFA 
bonds that are acquired under Part 956 only and that do not meet the 
AMA requirements of Sec. 955.2 do not qualify as CMA.
2. Required AMA Credit Risk-Sharing Structure--Sec. 955.3
    Section 955.3 elaborates upon the credit risk-sharing requirement 
that is the third part of the AMA test set forth in Sec. 955.2. The 
risk-sharing requirements of Sec. 955.3 are based on risk-sharing 
structures that have evolved during the three-and-one-half years that 
the AMA pilots have been in operation. Though somewhat detailed, the 
credit risk-sharing requirements of Sec. 955.3 are intended to produce 
a simple result: a recourse model for capital markets participation in 
the mortgage business that overcomes the traditional problems with the 
capital treatment on recourse transactions for financial institutions 
and results in a reasonable capital charge for the participating member 
or housing associate.
    Although the credit risk of mortgage loans is typically low, it is 
still important to find the most economical way to manage that risk. 
The Finance Board believes that the recourse model, under which the 
seller of a mortgage retains all or part of the credit risk, is a more 
economically efficient system for bringing the benefits of the capital 
markets to the mortgage industry. Under the recourse model, entities 
that underwrite the loans benefit from good underwriting and therefore 
are economically disciplined to reduce credit risk. In contrast to the 
insurance-based secondary market model, under which Fannie Mae and 
Freddie Mac are paid a premium to insure against credit losses, the 
recourse model allows an originator to take on more credit risk (so 
long as that risk is adequately capitalized) and to profit from 
successful management of that credit risk. Thus, credit risk is 
dispersed among the many potential originators in the Bank System, and 
even further dispersed through the permitted insurance and credit 
derivative structures.
    Section 955.3 differs from the proposed rule in several respects. 
These changes generally provide additional clarification and do not 
represent a change in the Finance Board's intent regarding AMA 
activities. In some sections additional requirements have been 
specified to ensure safe and sound operations.
    In general, Sec. 955.3 enables the Bank and the member to take best 
advantage of their core competencies by: (1) Requiring the member to 
bear most of the economic cost and the management burden associated 
with lowering the credit risk of AMA assets to levels comparable with 
investment grade rates securities; thus (2) leaving the Bank with AMA 
assets that have a risk profile similar to the securities that have 
historically been a normal part of Bank operations.
    Under Sec. 955.3(a), a Bank is required to determine, for each AMA 
product, the total credit enhancement needed to enhance an AMA asset or 
pool of assets to a credit quality that is equivalent to that of an 
instrument having at least the fourth highest credit rating from an 
NRSRO, or the credit enhancement associated with such other rating 
equivalent above the lowest investment grade that the Bank may choose. 
It further requires that the determination be made using a methodology 
that is confirmed in writing by an NRSRO to be comparable to a 
methodology that the NRSRO would use in determining credit enhancement 
levels when conducting a rating review of the asset or pool of assets 
in a securitization transaction. In addition, this determination must 
be made at the earlier of 270 days from the date of the Bank's 
acquisition of the first loan in a pool, or the date at which the 
amount of a pool's assets reaches $100 million.
    The portion of Sec. 955.3(a) regarding the confirmation by NRSROs 
combines Sec. Sec. 955.3(a)(1)(ii) and 955.3(a)(2) of the proposed 
rule. The NRSRO's confirmation of the method used to determine the 
required credit enhancement ensures that the Bank's estimates of credit 
ratings are reasonably accurate. However, the Finance Board 
acknowledges that an NRSRO conducting a formal rating of an asset or 
pool of assets may take into account qualitative factors that may not 
be considered by a theoretical model. Hence, the estimate of the credit 
enhancement requirement by a Bank would not be required to be identical 
to that determined by an NRSRO, but should produce roughly the 
equivalent rating, or equivalent ratings on average, to a formal rating 
review of the assets or pools of assets.
    The NRSRO confirmations required by this part help ensure that AMA 
assets have risk and return characteristics that are more transparent, 
because of their similarity to rated instruments, than if the Banks 
simply accepted assets with unspecified levels of credit risk, or with 
credit risk measures that did not map to publicly available rating 
categories. Finance Board discussions with NRSROs indicate that it will 
be possible to obtain confirmations that give the Finance Board 
reasonable assurance regarding the soundness of the approach used to 
estimate the credit risk of AMA assets.
    By specifying that the credit enhancement requirement be determined 
at the earlier of 270 days from the date of the Bank's acquisition of 
the first loan in a pool, or the date at which the amount of a pool's 
assets reaches $100 million, the rule ensures that large volumes of AMA 
assets cannot be acquired without a determination of their credit 
quality. This requirement did not appear in the proposed rule and was 
added to address the safety and soundness concerns that could arise if 
the credit enhancement determination were not performed on large pools 
that were formed over extended periods of time. However, the specified 
period in which the determination may be made still allows Banks 
latitude to assemble AMA assets in sufficient quantity to achieve and 
measure the benefit of diversification.
    The rule no longer includes the text of proposed 
Sec. 955.3(a)(1)(i), which specifically required the Bank to determine, 
at the time of acquisition of member assets, the expected credit losses 
on the asset or pool of assets using a method confirmed by a NRSRO. 
However, this determination likely still must be made to comply with 
Sec. 955.3(b)(2)(ii), regarding the member's incentive to reduce actual 
credit losses.
    Seven comments were received regarding the impact of geographic 
concentration and pool size on the calculation of the credit risk

[[Page 43976]]

requirement and the resulting impact on small originators. These two 
diversification factors are taken into account by the NRSROs and the 
credit rating software that would be used to comply with Sec. 955.3(a). 
Such software is likely to indicate substantially higher credit 
enhancement requirements for loan pools provided by smaller originators 
because the marketplace for such originators does not allow them to 
produce large numbers of geographically dispersed loans. The commenters 
proposed that the portion of credit enhancement requirements 
attributable to the lack of diversification not be included in 
determining compliance with Sec. 955.3(a) for small members because 
such members could incur higher capital charges from the significantly 
higher credit enhancement requirements.
    The Finance Board believes that such an approach would be 
detrimental to the safety and soundness of the acquiring Bank because 
the credit risk associated with the lack of diversification is a real 
risk that must be accounted for and managed. However, the Banks are not 
precluded from proposing a credit enhancement structure that 
appropriately manages the risk associated with the two diversification 
factors as confirmed by an NRSRO. In addition, 955.3(b)(1)(iii) of this 
rule now includes a provision allowing a narrow form of pool insurance, 
discussed more fully below, as one means for the Banks to address this 
issue.
    A comment was also received advocating that Sec. 955.3(a) should 
allow the recalculation of the amount of the credit enhancement on AMA 
pools some period of time after the establishment of the pool for the 
purpose of reducing the amount if such a reduction were found to be 
appropriate. The rule does not restrict the Bank from performing such 
recalculation. However, the timing of recalculations and any actions 
taken by the Bank to apply such new estimates of credit enhancements 
must be deemed appropriate, a priori, in writing, by an NRSRO.
    Under Sec. 955.3(b) of the final rule, the member must provide an 
enhancement to the credit quality of the prospective AMA asset that is 
sufficient to raise the credit quality of the asset to be comparable 
with a rated investment grade instrument. The final rule is similar to 
the provisions of Sec. 955.3(b)(2) of the proposed rule that address 
the total amount of the credit enhancement. Under final Sec. 955.3(b), 
the member must provide and bear the economic cost of the required 
amount of the credit enhancement. The amount of the credit enhancement 
must cover losses from the first dollar up to at least the coverage of 
an equivalent rated investment grade instrument and must be designed to 
extend for the life of the asset or pool of assets. The requirement 
that the amount of the credit enhancement extend for the life of the 
asset or pool of assets is intended to exclude, for example, structures 
that would comply with the credit rating requirement in the first year, 
but would then scale back the amount of the member's credit enhancement 
enough in future years so that the pool no longer meets the credit 
rating requirement. Furthermore, although the Bank may provide loan 
loss reserves for AMA assets, unless it can be demonstrated that, in 
substance, the economic cost of such reserves is borne by the member, 
such reserves would not be included in the credit enhancement for the 
purpose of determining compliance with this section. However, Bank 
reserves can be included in calculating the risk-based capital 
requirement associated with the asset.
    Section 955.3(b) does not specify the form of the credit 
enhancement, only that it must be provided by the member subject to 
some limitations. By allowing flexibility in the form of the credit 
enhancement structure, the Banks can pursue alternative structures that 
meet member needs while providing the best overall return on the AMA 
activity.
    Specifically, Sec. 955.3(b)(1)(i) has been added to the final rule 
to authorize an insurance affiliate of the member to hold a portion of 
the credit enhancement obligation, to accommodate corporate structures 
common to some members that allow the credit enhancement obligation to 
be held by an entity that incurs a lower capital charge than the 
member. Also, Sec. 955.3(b)(1)(ii), which replaces 
Sec. 955.3(b)(ii)(2)(B)(3) of the proposed rule, allows loan-level 
insurance as a part of the credit enhancement but requires that the 
insurer be rated not lower than the second highest rating category. 
However, both of these insurance provisions are subject to the same 
limitation, which is contained in both Secs. 955.3(b)(1)(i) and 
955.3(b)(1)(ii)(B). The limitation requires that any insurance, 
regardless of the source, only absorb losses that remain after the 
member has economically absorbed all losses associated with the 
economic incentives described in Sec. 955.3(b)(2). This limitation was 
added to ensure that members retain an ongoing economic interest in the 
actual credit losses of the asset even though much of the overall 
exposure to credit losses might be covered through an insurance 
arrangement.
    Section 955.3(b)(1)(iii)(A) allows pool-level insurance as part of 
the credit enhancement subject to two limitations. This provision was 
added to the rule to permit a member to help offset the very high 
credit enhancement requirements that may be incurred by members that 
are unable to produce asset pools with sufficient pool size and 
geographic diversity. However, pool insurance may be used for the sole 
purpose of allowing groups of members, that would otherwise have to 
manage financially impractical credit enhancement requirements arising 
from a lack of diversification, to offset only that portion of the 
requirement that arises from a lack of diversification. Section 
955.3(b)(1)(iii)(B) further requires that such pool insurance must only 
cover loss exposure that arises after all other credit support 
structures have been exhausted.
    Section 955.3(b)(1)(iv) incorporates and clarifies 
Sec. 955.3(b)(2)(ii)(B)(2) of the proposed rule by allowing a member to 
contract with another member or housing associate in the Bank's 
district or in another Bank's district, pursuant to an arrangement with 
that Bank, to provide a contractual enhancement or undertaking against 
losses to the Bank in return for some compensation.
    Section 955.3(b)(2) of the final rule has been revised from 
proposed Sec. 955.3(b)(2)(i) and (ii) regarding the member's incentive 
to reduce actual credit losses. Taken together, Sec. 955.3(b)(2)(i) and 
(ii) provide that the member must bear the direct economic consequences 
of actual credit losses in an amount at least equal to expected losses 
and positioned in the credit enhancement structure no later than 
immediately after expected losses (and also before any loan-level or 
pool insurance, as required by Secs. 955.3(b)(1)(ii)(B) and (iii)(B)). 
This design requirement for the credit enhancement structure is 
intended to ensure that the member retains an economic incentive to 
reduce actual losses that is both material in amount and early enough 
in the structure to be meaningful to the member.
    ``Expected losses'' are defined in Sec. 955.1 as losses on the 
underlying assets expected under prevailing economic conditions--i.e., 
the base loss scenario--as estimated at the time the credit enhancement 
requirement was determined under Sec. 955.3(a). Expected losses may be 
calculated as the mean of the losses associated with economic 
conditions represented by the sixth ratings category (e.g. single-B)

[[Page 43977]]

determined by computer rating models that map to NRSRO ratings.
    Recognizing that advantages exist under each structure, the Finance 
Board is giving the Banks the flexibility to offer products or programs 
under either of the structures. However, any combination that removes 
the incentive to reduce actual credit losses is prohibited.
    The economic responsibility of the expected credit losses may be 
borne by the member or housing associate in a variety of ways. For 
instance, under the product developed by the Federal Home Loan Bank of 
Chicago known as MPF 100, a Bank establishes an account to 
absorb credit losses. As the Bank incurs losses, it is reimbursed by 
the member through the reduction of credit enhancement fees paid to the 
member by the Bank. Essentially, the fees paid to the member are 
contingent upon the performance of the asset.
    The Finance Board has determined that the amount represented by 
expected credit losses is typically of sufficient size that members or 
housing associates, when responsible for such losses, have incentive to 
seek ways to achieve better than expected performance. In the case of 
acquiring mortgage loans, by requiring that the member or housing 
associate bear direct economic responsibility for such an amount, 
position early in the structure, a system of risk and reward is 
established that is based on the core competencies of the participating 
institutions. Since member financial institutions are most 
knowledgeable regarding their local housing markets, this structure 
allows members the opportunity to benefit from their expertise in 
underwriting mortgage loans in their communities. The credit risk 
sharing structure is based on the concept that different institutions 
have different capacities. The Banks are capital market specialists, 
with the ability to bear market risks well, while depository 
institutions are experts in credit risk evaluation since they know 
their communities best. Therefore, by establishing a structure where 
the member or housing associate from which the Bank acquired the asset 
or pool of assets bears economic responsibility for the amount of the 
expected credit losses, members or housing associates are rewarded for 
their credit risk management expertise.
    Regardless of how credit loss coverage is allocated, the economic 
cost of expected credit losses must be borne by the member or housing 
associate from which the Bank acquired the asset or pool of assets. In 
the case of an FHA-insured loan, the loan would meet the risk-sharing 
requirements since it is insured by the government; however, the member 
or housing associate would have to bear the economic responsibility of 
all unreimbursed servicing expenses, up to the amount of expected 
losses on the loan or loan pool. In the case of HFA bonds, the Banks 
are only permitted to purchase bonds that have been assigned a credit 
rating of at least investment grade, and that rating cannot be achieved 
unless the housing associate selling the bonds has somehow credit 
enhanced the underlying loans in an amount sufficient to earn the 
credit rating. In particular, HFA bonds are usually rated in at least 
the third highest credit rating category based on the fact that the 
bonds are backed by FHA-insured, VA-guaranteed or private mortgage 
insurance (PMI)-insured whole loans. In many cases the bonds are backed 
by loans securitized by the Government National Mortgage Association 
(Ginnie Mae), Fannie Mae or Freddie Mac and are rated in the highest 
credit rating category. Additional bondholder protections frequently 
include mortgage reserve funds.
    Section 955.3(b)(3) of the final rule adds a provision requiring 
the member's credit enhancement obligation to be fully secured. This 
provision was added to address the concern that the Bank might be 
exposed to credit risk if the member were not able to comply with its 
contractual credit enhancement obligation. This provision requires that 
the member's credit enhancement obligation must be secured in parallel 
with the requirement for advances to members under part 950.
    Section 955.3(b)(4) requires the Bank to obtain written 
confirmation from an NRSRO regarding the sufficiency of the credit 
enhancement. This section generally expands and clarifies Sec. 955.3(b) 
of the proposed rule. The rule clarifies that the confirmation must be 
satisfactory to the Finance Board and must be based on the underlying 
economic terms of the credit enhancement structure as represented by 
the Bank for each AMA product. This confirmation may be provided in two 
forms. Section 955.3(b)(4)(i) allows the NRSRO to verify that the level 
of credit enhancement provided by the member or housing associate is 
generally sufficient to enhance the asset or pool of assets to a credit 
quality that is equivalent to that of an instrument having the fourth 
highest credit rating from an NRSRO, or such higher rating as the Bank 
may require. In this case the NRSRO is, in essence, describing the 
value of the credit enhancement structure hypothetically for the 
purpose of determining a credit rating.
    Section 955.3(b)(4)(ii) allows that the NRSRO may confirm that the 
methodology used by the Bank for estimating the level of credit 
enhancement provided by the member or housing associate is in 
accordance with the practices established by the NRSRO. In this 
approach the NRSRO does not provide the value of the credit enhancement 
but rather indicates whether the Bank is estimating the value of the 
credit enhancement structure in a way that is comparable to the 
methodology used by the NRSRO in determining the sufficiency of credit 
enhancements.
    Section 955.3(c), regarding the timing of NRSRO confirmations, was 
added to the rule to ensure that the confirmations are received on a 
timely basis for already-established programs. It requires that ongoing 
AMA programs shall acquire these confirmations within 90 days of the 
effective date of this rule. This provision was added because 
established AMA programs have acquired large portfolios even as of the 
date of the proposed rule.
    Two comments were received advocating that certain mortgage 
financing instruments, if backed by member loans, should be included 
within the general definition of AMA assets. One of the comments 
specifically discussed securitized structures in which the Bank would 
acquire an investment grade senior portion and the member would retain 
the credit support tranches necessary to support the investment grade 
tranches. A Bank would not be in compliance with part 955 if it the 
transaction were merely a capital markets purchase of senior tranches 
resulting from securitizations of this type. However, it is expected 
that such structures would meet the requirements of part 955 if the 
structure were implemented through a Bank's AMA program using assets 
that conform with the AMA requirements that were previously held by the 
member for a valid business purpose. In this regard, the structure 
contemplated by the comment is similar to a ``sequential'' loan 
participation program previously approved by the Finance Board. The 
fact that such a structure might include rated subordinate credit 
tranches would not constitute non-compliance with part 955 as long as 
the structure were arranged cooperatively with the Bank and the member 
bore the risk of holding or selling the credit support tranches.
    Six comments were received advocating a provision in part 955 that 
would give members participating in AMA programs the ability to 
transfer

[[Page 43978]]

credit enhancement obligations and the servicing of AMA loans to other 
members in the same or other Bank districts. The final rule does not 
explicitly address, nor does it restrict, such transfers, though they 
may only be undertaken with the concurrence of the Bank of which the 
transferee is a member. In addition, such transfers must be accompanied 
by a similar undertaking by the transferee of the incentive 
requirements in Sec. 955.3(b)(2). Finally, the credit enhancement 
obligations must be secured according to the same requirements that 
apply to advances pursuant to part 950.
3. AMA Reporting Requirements--Sec. 955.4
    A total of 24 comment letters were received regarding the AMA 
reporting requirements set forth in Sec. 955.4 of the rule, and in 
appendices A and B to part 955. Eighteen of the comments, while not 
opposed to reporting requirements in general, were opposed to certain 
aspects of the requirements. Six commenters supported all of the 
reporting requirements.
    In general, the commenters that stated some opposition to the 
reporting requirements were most concerned with the burden of requiring 
data elements in addition to those already required by the Department 
of Housing and Urban and Development (HUD) and Office of Federal 
Housing Enterprise Office (OFHEO) of Fannie Mae and Freddie Mac. The 
commenters noted that any data elements in excess of what was already 
required of members selling loans to Fannie Mae and Freddie Mac would 
require expensive computer programming and procedural changes. It was 
further noted that any such changes required to be made to members' 
systems would make AMA programs less attractive in the marketplace. 
Some commenters also objected to the lack of a transition period within 
which the Banks would be required to begin reporting to the Finance 
Board.
    Some commenters were supportive of the reporting requirements in 
the proposal. These commenters generally were in favor of collecting of 
``prepayment penalty'' data on single-family mortgages, noting that 
predatory lending is a problem in the U.S. and the collection of 
prepayment penalty data will help prevent the Banks from engaging in 
anti-borrower activities. One commenter stated that the data elements 
submitted by the Banks to the Finance Board should be made publicly 
available and that the Finance Board should consider mandating 
reporting requirements on all CMA activities. Another commenter 
supporting the reporting requirements suggested additional data 
elements to be collected.
    The Finance Board has considered the comments received regarding 
reporting requirements and has made a number of revisions to the final 
rule in response. In the proposed rule, the Finance Board based its 
list of data elements on HUD's and OFHEO's requirements of Fannie Mae 
and Freddie Mac. In addition to the data elements required by HUD and 
OFHEO for single-family and multifamily mortgage loans, the Finance 
Board included a total of ten additional data elements to the two 
lists. Six of these data elements, ``originating lender institution,'' 
``originating lender city'' and ``originating lender state'' for both 
single-family and multifamily acquisitions, are not regularly reported 
to Fannie Mae and Freddie Mac by financial institutions selling loans. 
Given the comments received, the Finance Board has decided it would be 
too burdensome to require the members to provide this data to the Banks 
and has eliminated these data elements from both the single-family and 
multifamily data element lists in the rule (Appendices A and B). The 
Finance Board's original intent was to use this information to monitor 
compliance with the valid business purpose requirement set forth in 
Sec. 955.2(b)(1)(ii). The Finance Board has determined that the cost 
burden on members and housing associates would exceed the benefits of 
collecting such data on a System-wide and regular basis.
    The additional four items not reported to HUD or OFHEO include, 
``front-end ratio,'' ``back-end ratio,'' ``self-employment indicator,'' 
and ``prepayment penalties.'' Although not reported to either HUD or 
OFHEO, financial institutions selling loans to Fannie Mae and Freddie 
Mac currently report front-end ratio, back-end ratio, and self-
employment indicator to the GSEs. The prepayment penalties data element 
is currently reported by Fannie Mae and Freddie Mac to OFHEO for 
multifamily loans. Although not reported by Fannie Mae and Freddie Mac 
for single-family loans, prepayment penalties for single-family loans 
have become more prevalent in the marketplace.
    Upon consideration, the Finance Board has determined that the 
collection of the four above-mentioned data elements does not cause 
undue burden on members and is necessary to evaluate the risk of the 
loans acquired under AMA programs. Therefore, these four items will 
remain on the list of required data elements for reporting purposes.
    The Finance Board has added three data elements to the single-
family and multifamily lists published in the proposed rules. These 
items are ``owner-occupied'' on the single-family list and 
``construction loan'' and ``total number of units'' on the multifamily 
list. All three of these data elements are reported by Fannie Mae and 
Freddie Mac to HUD, but were inadvertently omitted from the proposed 
rule.
    In addition to the changes made to the data elements by the Finance 
Board, the Finance Board has specified in the final rule the date on 
which Banks must begin to collect and report information to the Finance 
Board. The Banks must begin collecting from their members the required 
information on loans acquired as of January 1, 2001. By allowing this 
transition period, the Finance Board is providing the Banks ample time 
to design and implement the systems necessary for this type of data 
collection. The first mortgage report the Banks must submit to the 
Finance Board will be due no later than May 31, 2001, which is 60 days 
after the end of the first quarter.
4. Risk-Based Capital Requirements for AMA--Sec. 955.6
    Section 955.6(a) of the rule sets forth capital requirements for 
AMA that shall apply until the Finance Board's new capital rule is 
finalized later in 2000. In the proposed rule, the provision would have 
required each Bank to hold retained earnings plus specific loan loss 
reserves as support for the credit risk of all AMA estimated by the 
Bank to be below the second highest credit rating, in an amount equal 
to or greater than: the outstanding balance of the assets or pools of 
assets times a factor associated with the credit rating of the assets 
or pools of assets as determined by the Finance Board. In the final 
rule, the reference to specific loan loss has been changed to refer to 
``general'' loan loss reserves, as was originally intended and a table 
has been added setting forth the factors applying to single-family AMA.
    The Finance Board received three comments regarding the proposed 
risk-based capital requirement, all of which were opposed in varying 
degrees to the provision. One of the comments noted that the proposed 
rule, because it stated that the amount of retained earnings the Banks 
would be required to hold would be ``as determined by the Finance 
Board,'' provided little real guidance and made it difficult for the 
Banks to comply in an effective manner. Another commenter suggested 
that the Finance Board's risk-based capital requirements were overly 
complex since they were included in separate regulations. The

[[Page 43979]]

commenter further noted that loan-loss reserves established under GAAP 
should be deducted from risk-based capital.
    After considering the comments, the Finance Board has included in 
final Sec. 955.6(a) a table stipulating the percentage applicable to 
the on-balance sheet equivalent value of single-family AMA rated below 
the second highest rating category. The percentages included in the 
table for the third through sixth categories take into account the 
difference, in a sample of AMA assets, between the credit enhancement 
requirement for these grades and the second highest investment grade 
with a base requirement of 100 percent for pools below the sixth 
highest investment grade. The sample of AMA assets used to produce 
these percentages is thought to be representative of the general level 
of credit risk in AMA. The percentage in the table for AMA with credit 
quality below the sixth national grade coincides with the requirement 
that all AMA have credit quality estimated to be equal to or better 
than similar investment grade instruments. The Finance Board may adjust 
this requirement going forward if there is information indicating that 
higher or lower percentages are necessary.
    The percentages in table differ from those set forth in the table 
for single-family mortgage loans contained in the proposed capital 
regulation. At this time, while the Bank System is still largely 
subject to the restrictive safety and soundness parameters of the FMP, 
the Banks will not be required to hold capital against AMA that have a 
putative rating (calculated in accordance with the requirements of 
Sec. 955.3) in the second highest credit rating category or higher. 
Correspondingly, the factors listed for AMA having a rating below the 
second highest credit rating category are intended to result in a 
Bank's entire AMA portfolio having the same risk of uncapitalized loss 
as an instrument rated in at least the second highest credit rating 
category. Thus, the interim risk-based capital requirement for AMA has 
been calibrated to be consistent with the risk management regime now in 
place under the FMP. Once the Finance Board's new capital regulations 
are in place, banks will need to hold risk based capital against all 
assets, including those rated in the second highest category or higher, 
but in amounts determined on a different basis than that reflected in 
Sec. 955.6(a).
    The Finance Board also modified the provision for risk-based 
capital requirements for AMA by adding Sec. 955.6(b), which requires 
that, for risk-based capital purposes, each Bank shall recalculate the 
estimated credit rating of a pool of AMA if there is evidence that a 
decline in the credit quality of the may have occurred. This provision 
was added to ensure that any downgrade in credit status of a pool would 
be reflected in the risk-based capital charge.
5. Removal of Pilot Status of AMA Programs
    A total of 13 comments were received regarding the pilot status of 
the AMA programs. Eleven commenters were in favor of removing the pilot 
status and two commenters were opposed.
    In general, the commenters in favor of converting the AMA programs 
from pilot to permanent status noted the success of the current MPF 
program in terms of Bank and member cooperation, allocation of risk, 
and safety and soundness. It was noted that the AMA cap of $9 billion 
needed to be lifted so that AMA programs could provide further benefits 
to members and consumers. It was also noted that pilot status of the 
AMA program creates unnecessary concern and uncertainty about the 
Banks' ability to fulfill its obligations.
    Two commenters opposed the removal of the pilot status on AMA 
programs. One commenter noted that the Finance Board should defer any 
action on the cap until the changes to the Banks' capital structures 
mandated by the Modernization Act are put into place. The second 
commenter noted that the cap on AMA programs should not be removed 
since the performance of the MPF program has not been fully evaluated.
    The Finance Board considered the comments received on the removal 
of the pilot status of these programs and determined that existing AMA 
programs had, in their pilots stages, proved to be a safe and sound 
investment for the Banks, as well as a valuable, alternative means for 
its members and housing associates to sell loans to the secondary 
market. Accordingly, the Finance Board finds it appropriate to 
authorize AMA programs on a permanent basis and to ensure the safety 
and soundness of these programs through appropriate risk-based capital, 
collateral and credit-risk sharing requirements, as well as through 
thorough supervisory examinations.
6. Effect of New Business Activities Requirement of Part 980 on AMA
    Section 955.2 of the rule makes all Bank AMA activities subject to 
the ``new business activity'' requirements of part 980 of the Finance 
Board's regulations. Part 980 is being finalized as part of the Finance 
Board's rule on advances collateral, which was approved at the Board of 
Directors meeting of June 29, 2000. Thereunder, Banks are required to 
provide 60 days notice to the Finance Board before undertaking any new 
business activity (defined in Sec. 980.1). To the extent that an AMA 
transaction involves acquisition of a new class of asset, new types of 
risk or risk structures, or new types of operations, Banks will need to 
follow the notice procedures set out in part 980 before proceeding. It 
is anticipated that new AMA products will almost always be new business 
activities for purposes of part 980. In addition, new classes of 
transactions engaged in under existing AMA programs may also be new 
business activities, and thus subject to part 980, if they expose the 
Bank to new loans types, risks, or operations.
    The Finance Board received eight comments on the 60-day approval 
period for new business activities. All commenters found the approval 
period was to be lengthy and thought it would hinder product innovation 
and development. However, the Finance Board believes that this 
requirement is most needed as a safety and soundness measure where, as 
with AMA, the Banks will be taking part in transactions with which they 
have little past experience.
7. Predatory Lending
    On June 20, 2000, HUD and the Department of Treasury released a 
report entitled ``Curbing Predatory Home Mortgage Lending--A Joint 
Report'' that describes the damaging impact predatory lending practices 
have on individuals and whole neighborhoods. Predatory lending 
practices include loan flipping (refinancing borrowers' loans 
repeatedly in a short period of time), excessive fees, financing single 
premium credit life insurance products in the mortgage, lending without 
regard to the borrower's ability to repay, and outright fraud.
    The report included recommendations for actions that the Finance 
Board, working to assure consistency with any requirements that HUD 
will impose on Fannie Mae and Freddie Mac, could apply to the Federal 
Home Loan Banks to help end predatory lending. Specifically, the 
Finance Board could prohibit purchases of high cost mortgages with 
excessive fees, prepayment penalties (except in circumstances that 
benefit the borrower, where the terms are fully disclosed, and 
alternative options are offered), and prepaid single-premium credit 
life insurance products, as well as

[[Page 43980]]

mortgages from a seller/servicer that fails to document monthly that it 
is submitting payment information to a credit bureau.
    Six commenters to the proposed rule recommended that the Finance 
Board consider prohibitions on the purchase or funding of predatory 
loans, or that certain information be added to the reporting 
requirements for AMA so the Finance Board could determine whether AMA 
included predatory loans.
    On June 26, 2000, the Federal Home Loan Banks of Chicago, Atlanta, 
Boston, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, and 
Topeka voluntarily agreed to adopt guidelines pertaining to predatory 
lending, which will be consistent with the relevant secondary market 
guidelines. In particular, these guidelines will focus on not 
purchasing or funding loans through the MPF Program that meet the 
characteristics of a high cost mortgage under the Home Owners' Equity 
Protection Act of 1994.
    The Finance Board anticipates that in a future rulemaking it, 
working closely with HUD as it develops regulatory requirements for 
Fannie Mae and Freddie Mac, will propose for public comment parallel 
requirements for the AMA and Bank debt investments to assure that they 
will not include predatory loans or contribute to predatory lending 
practices.

C. Investments--Part 956

    Part 956 of the final rule governs Bank investments. Along with the 
advances, AMA and standby letter of credit regulations (parts 950, 955 
and 961, respectively), part 956 provides the authority necessary for 
the Banks to carry out several of the core mission activities listed in 
Sec. 940.3. The final provision remains largely unchanged from the that 
in the proposed rule. However, three modifications have been made.
    First, the investment authorization set forth in Sec. 956.2 has 
been amended to make explicit that, except for those provisions in the 
FMP that are directly overridden by this proposed rule, all provisions 
of the FMP will remain in effect until expressly repealed by the 
Finance Board. Accordingly, Bank investment in agency and private MBS, 
CMOs and REMICs and in asset-backed securities secured by manufactured 
housing or home equity loans would continue to be limited to a total 
amount equal to 300 percent of a Bank's capital. It is anticipated that 
the remaining provisions of the FMP will be repealed, or at least 
codified as regulations, at such time as the Finance Board promulgates 
a final rule on capital and risk management.
    Second, Sec. 956.4(a)(4) has been changed in the final rule so that 
targeted investments described in Sec. 940.3(e) of the CMA regulation 
are exempted from the list from the general prohibition on Bank 
investment in whole loans or interests in loans other than pursuant to 
the AMA requirements. The omission of this provision from the proposed 
rule was merely an oversight. Its inclusion ensures that targeted loan 
purchase programs such as the Federal Home Loan Bank of Atlanta's AMPP 
will qualify as CMA.
    Finally, under proposed Sec. 956.4, the Banks must hold retained 
earnings plus specific loan loss reserves as support for the credit 
risk of all investments that are not rated by an NRSRO, or are rated 
below the second highest credit rating, in an amount equal to or 
greater than the outstanding balance of the investments times a factor 
associated with the credit rating of the investments as determined by 
the Finance Board. The Finance Board has clarified in the final 
provision that the factor shall be 0.08 for unrated assets. It is 
expected that this specific Sec. 956.4 will be superceded at the time 
that a final capital rule is promulgated, to be replaced by specific 
requirements set forth in the capital regulation relating to each 
credit rating category.

III. Regulatory Flexibility Act

    The final 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 final rule will not have a significant 
economic impact on a substantial number of small entities.

IV. Paperwork Reduction Act

    In the proposed rule, the Finance Board inadvertently failed to 
include a notice and request for comment regarding the Paperwork 
Reduction Act implications of the information collection contained in 
Sec. 955.4 of the rule, described more fully in part II of the 
Supplementary Information. That notice and request for comment are 
being provided here.
    The data collected are intended to be used to create a data base 
and reporting infrastructure for monitoring the Banks' risk management 
and achievement of the public purpose of the residential mortgage-
related AMA programs. Responses are required in order obtain or retain 
a benefit. The Finance Board will maintain the confidentiality of 
information obtained from respondents pursuant to the collection of 
information as required by applicable statute, regulation, and agency 
policy. Books or records relating to this collection of information 
must be retained as provided in the regulation.
    Likely respondents and/or recordkeepers will be Banks, institutions 
that are members or housing associates of a Bank and the Finance Board. 
Potential respondents are not required to respond to the collection of 
information unless the regulation collecting the information displays a 
currently valid control number assigned by the OMB. See 44 U.S.C. 
3512(a).
    The estimated annual reporting and recordkeeping hour burden is:
    a. Number of respondents: 412.
    b. Total annual responses: 1600.
    Percentage of these responses collected electronically: 75%.
    c. Total annual hours requested: 38,880.
    d. Current OMB inventory: n/a.
    e. Difference: n/a.
    The estimated annual reporting and recordkeeping cost burden is:
    a. Total annualized capital/startup costs: $300,000.00.
    b. Total annual costs (O&M): 0.
    c. Total annualized cost requested: $1,212,297.94.
    d. Current OMB inventory: n/a.
    e. Difference: n/a.
    The Finance Board will accept written comments concerning the 
accuracy of the burden estimates and suggestions for reducing the 
burden at the address listed above.
    The Finance Board submitted an analysis of the information 
collection to the Office of Management and Budget (OMB) for review. 
Subsequent to submitting the analysis to OMB, the Finance Board decided 
to reduce the level of reporting required in the final rule and, 
therefore, has reduced the estimated annual reporting and recordkeeping 
hour and cost burden. OMB assigned a control number, 3069-0058, and 
temporarily approved the information collection with an expiration date 
of December 31, 2000. Prior to the expiration of this temporary 
approval, the Finance Board will again submit the collection of 
information to OMB for review, with the intent of obtaining a full 
three-year approval and will publish a final notice regarding the 
information collection.
    Comments regarding the proposed collection of information may be 
submitted in writing to the Office of Information and Regulatory 
Affairs of OMB, Attention: Desk Officer for Federal Housing Finance 
Board,

[[Page 43981]]

Washington, D.C. 20503 by September 15, 2000.

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

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

    Accordingly, the Finance Board hereby amends title 12, chapter IX, 
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 the term ``acquired member assets or AMA'' and ``NRSRO'' to read as 
follows:


Sec. 900.1  Definitions applying to all regulations.

* * * * *
    Acquired member assets or AMA means those assets that may be 
acquired by a Bank under part 955 of this chapter.
* * * * *
    NRSRO means a credit rating organization regarded as a Nationally 
Recognized Statistical Rating Organization by the Securities and 
Exchange Commission.
* * * * *

PART 940--CORE MISSION ACTIVITIES

    3. The heading for part 940 is revised to read as set forth above.

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

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

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


Sec. 940.1  Definitions.

* * * * *
    Financial Management Policy (FMP) has the meaning set forth in 
Sec. 956.1 of this chapter.
    SBIC means a small business investment company formed pursuant to 
15 U.S.C. 681(d).
    Targeted income level has the meaning set forth in paragraphs (1) 
and (2) of the definition of ``targeted income level'' in Sec. 952.3 of 
this chapter.

    6. Amend part 940 by adding a new Sec. 940.3, to read as follows:


Sec. 940.3  Core mission activities.

    The following Bank activities qualify as core mission activities:
    (a) Advances;
    (b) Acquired member assets (AMA), except that United States 
government-insured or guaranteed whole single-family residential 
mortgage loans acquired under a commitment entered into after April 12, 
2000 shall qualify only in a cumulative dollar amount up to 33 percent 
of: The cumulative total dollar amount of AMA acquired by a Bank after 
April 12, 2000, less the cumulative dollar amount of United States 
government-insured or guaranteed whole single-family residential 
mortgage loans acquired after April 12, 2000 under commitments entered 
into on or before April 12, 2000 (which calculation, at the discretion 
of two or more Banks, may be made based on aggregate transactions among 
those Banks);
    (c) Standby letters of credit;
    (d) Intermediary derivative contracts;
    (e) Debt or equity investments:
    (1) That primarily benefit households having a targeted income 
level, a significant proportion of which must benefit households with 
incomes at or below 80 percent of area median income, or areas targeted 
for redevelopment by local, state, tribal or Federal government 
(including Federal Empowerment Zones and Enterprise and Champion 
Communities), by providing or supporting one or more of the following 
activities:
    (i) Housing;
    (ii) Economic development;
    (iii) Community services;
    (iv) Permanent jobs; or
    (v) Area revitalization or stabilization;
    (2) In the case of mortgage- or asset-backed securities, the 
acquisition of which would expand liquidity for loans that are not 
otherwise adequately provided by the private sector and do not have a 
readily available or well established secondary market; and
    (3) That involve one or more members or housing associates in a 
manner, financial or otherwise, and to a degree to be determined by the 
Bank;
    (f) Investments in SBICs, where one or more members or housing 
associates of the Bank also make a material investment in the same 
activity;
    (g) SBIC debentures, the short term tranche of SBIC securities, ore 
other debentures that are guaranteed by the Small Business 
Administration under title III of the Small Business Investment Act of 
1958, as amended (15 U.S.C. 681 et seq.);
    (h) Section 108 Interim Notes and Participation Certificates 
guaranteed by the Department of Housing and Urban Development under 
section 108 of the Housing and Community Development Act of 1974, as 
amended (42 U.S.C. 5308); and
    (i) Investments and obligations issued or guaranteed under the 
Native American Housing Assistance and Self-Determination Act of 1996 
(25 U.S.C. 4101 et seq.).

PART 950--ADVANCES

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

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


    8. Amend part 950 by adding a new subpart C consisting of 
Sec. 950.25 to read as follows:

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


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

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

    9. In subchapter G, add a new part 955 to read as follows:

PART 955--ACQUIRED MEMBER ASSETS

Sec.
955.1  Definitions.
955.2  Authorization to hold acquired member assets.
955.3  Required credit-risk sharing structure.
955.4  Reporting requirements for acquired member assets.
955.5  Administrative and investment transactions between Banks.
955.6  Risk-based capital requirement for acquired member assets.
Appendix A to Part 955--Reporting requirements for single-family 
acquired member assets that are residential mortgages: loan-level 
data elements

[[Page 43982]]

Appendix B to Part 955--Reporting requirements for multi-family 
acquired member assets that are residential mortgages: loan-level 
data elements


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


Sec. 955.1  Definitions.

    As used in this section:
    Affiliate has the meaning set forth in Sec. 950.1 of this chapter.
    Expected losses means the base loss scenario in the methodology of 
an NRSRO applicable to that type of AMA asset.
    Residential real property has the meaning set forth in Sec. 950.1 
of this chapter.
    State has the meaning set forth in Sec. 925.1 of this chapter.


Sec. 955.2  Authorization to hold acquired member assets.

    Subject to the requirements of part 980 of this chapter, each Bank 
may hold assets acquired from or through Bank System members or housing 
associates by means of either a purchase or a funding transaction 
(AMA), subject to each of the following requirements:
    (a) Loan type requirement. The assets are either:
    (1) Whole loans that are eligible to secure advances under 
Secs. 950.7 (a)(1)(i), (a)(2)(ii), (a)(4), or (b)(1) of this chapter, 
excluding:
    (i) Single-family mortgages where the loan amount exceeds the 
limits established pursuant to 12 U.S.C. 1717(b)(2); and
    (ii) Loans made to an entity, or secured by property, not located 
in a state;
    (2) Whole loans secured by manufactured housing, regardless of 
whether such housing qualifies as residential real property; or
    (3) State and local housing finance agency bonds;
    (b) Member or housing associate nexus requirement. The assets are:
    (1) Either:
    (i) Originated or issued by, through, or on behalf of a Bank System 
member or housing associate, or an affiliate thereof; or
    (ii) Held for a valid business purpose by a Bank System member or 
housing associate, or an affiliate thereof, prior to acquisition by a 
Bank; and
    (2) Acquired either:
    (i) From a member or housing associate of the acquiring Bank;
    (ii) From a member or housing associate of another Bank, pursuant 
to an arrangement with that Bank, which, in the case of state and local 
finance agency bonds only, may be reached in accordance with the 
following process:
    (A) The housing finance agency shall first offer the Bank in whose 
district the agency is located (local Bank) a right of first refusal to 
purchase, or negotiate the terms of, its proposed bond offering;
    (B) If the local Bank indicates, within a three day period, that it 
will negotiate in good faith to purchase the bonds, the agency may not 
offer to sell or negotiate the terms of a purchase with another Bank; 
and
    (C) If the local Bank declines the offer, or has failed to respond 
within the three day period, the acquiring Bank will be considered to 
have an arrangement with the local Bank for purposes of this section 
and may offer to buy or negotiate the terms of a bond sale with the 
agency;
    (iii) From another Bank; and
    (c) Credit risk-sharing requirement. The transactions through which 
the Bank acquires the assets either:
    (1) Meet the credit risk-sharing requirements of Sec. 955.3 of this 
part; or
    (2) Were authorized by the Finance Board under section II.B.12 of 
the FMP and are within any total dollar cap established by the Finance 
Board at the time of such authorization.


Sec. 955.3  Required credit risk-sharing structure.

    (a) Determination of necessary credit enhancement. At the earlier 
of 270 days from the date of the Bank's acquisition of the first loan 
in a pool, or the date at which the amount of a pool's assets reaches 
$100 million, a Bank shall determine the total credit enhancement 
necessary to enhance the asset or pool of assets to a credit quality 
that is equivalent to that of an instrument having at least the fourth 
highest credit rating from an NRSRO, or such higher credit rating as 
the Bank may require. The Bank shall make this determination for each 
AMA product using a methodology that is confirmed in writing by an 
NRSRO to be comparable to a methodology that the NRSRO would use in 
determining credit enhancement levels when conducting a rating review 
of the asset or pool of assets in a securitization transaction.
    (b) Credit risk-sharing structure. A Bank acquiring AMA shall 
implement, and have in place at all times, a credit risk-sharing 
structure for each AMA product under which a member or housing 
associate of the Bank or, with the approval of both Banks, a member or 
housing associate of another Bank, provides a sufficient credit 
enhancement from the first dollar of credit loss for each asset or pool 
of assets such that the acquiring Bank's exposure to credit risk for 
the life of the asset or pool of assets is no greater than that of an 
asset rated in the fourth highest credit rating category, as determined 
pursuant to paragraph (a) of this section, or such higher rating as the 
acquiring Bank may require. This credit enhancement structure shall 
meet the following requirements:
    (1) A portion of the credit enhancement may be provided by:
    (i) Contracting with an insurance affiliate of that member or 
housing associate to provide an enhancement or undertaking against 
losses to the Bank, but only where such insurance is positioned in the 
credit enhancement structure so as to cover only losses remaining after 
the member or housing associate has borne losses as required under 
paragraph (b)(2) of this section;
    (ii) Purchasing loan-level insurance, which may include United 
States government insurance or guarantee, but only where:
    (A) The member or housing associate is legally obligated at all 
times to maintain such insurance with an insurer rated not lower than 
the second highest credit rating category; and
    (B) Such insurance is positioned in the credit enhancement 
structure so as to cover only losses remaining after the member or 
housing associate has borne losses as required under paragraph (b)(2) 
of this section;
    (iii) Purchasing pool-level insurance, but only where such 
insurance:
    (A) Insures that portion of the required credit enhancement 
attributable to the geographic concentration and size of the pool; and
    (B) Is positioned last in the credit enhancement structure so as to 
cover only those losses remaining after all other elements of the 
credit enhancement structure have been exhausted; or
    (iv) Contracting with another member or housing associate in the 
Bank's district or in another Bank's district, pursuant to an 
arrangement with that Bank, to provide an enhancement or undertaking 
against losses to the Bank in return for some compensation;
    (2) The member or housing associate that is providing the credit 
enhancement required under paragraph (b)(1) of this section shall in 
all cases bear the direct economic consequences of actual credit losses 
on the asset or pool of assets:
    (i) From the first dollar of loss up to the amount of expected 
losses; or
    (ii) Immediately following expected losses, but in an amount equal 
to or exceeding the amount of expected losses; and
    (3) The portion of the credit enhancement that is an obligation of 
a

[[Page 43983]]

Bank System member or housing associate shall be fully secured;
    (4) The Bank shall obtain written verification from an NRSRO that 
concludes to the satisfaction of the Finance Board, based on the 
underlying economic terms of the credit enhancement structure as 
represented by the Bank for each AMA product, that either:
    (i) The level of credit enhancement provided by the member or 
housing associate is generally sufficient to enhance the asset or pool 
of assets to a credit quality that is equivalent to that of an 
instrument having the fourth highest credit rating from an NRSRO, or 
such higher rating as the Bank may require; or
    (ii) The methodology used by the Bank for estimating the level of 
credit enhancement provided by the member or housing associate is in 
accordance with the practices established by the NRSRO.
    (c) Timing of NRSRO opinions. For AMA programs already in operation 
at the time of the effective date of this rule, a Bank shall have 90 
days from the effective date of this rule to obtain the NRSRO 
verifications required under paragraphs (a) and (b)(4) of this section.


Sec. 955.4  Reporting requirements for acquired member assets.

    (a) Loan-Level Data Elements. Each Bank that acquires AMA that are 
residential mortgages shall collect and maintain loan-level data on 
each mortgage held, as specified in appendix A (for single-family 
mortgage assets) or appendix B (for multifamily mortgage assets) to 
this part.
    (b) Quarterly Mortgage Reports. Beginning with calendar year 2001, 
within 60 days of the end of every quarter of every calendar year, each 
Bank that acquires AMA that are residential mortgages shall submit to 
the Finance Board a Mortgage Report, which shall include:
    (1) Aggregations of the loan-level mortgage data compiled by the 
Bank pursuant to paragraph (a) of this section for year-to-date 
mortgage acquisitions, in a format specified by the Finance Board;
    (2) Year-to-date dollar volume, number of units and number of 
mortgages on owner-occupied and rental properties relating to AMA 
acquired by the Bank; and
    (3) For the second and fourth quarter Mortgage Reports only, year-
to-date loan-level data that:
    (i) Comprises the data elements required to be collected and 
maintained by the Bank under paragraph (a) of this section; and
    (ii) Appears in a machine-readable format specified by the Finance 
Board.
    (c) Additional Reports. The Finance Board may at any time require a 
Bank to submit reports in addition to those required under paragraph 
(b) of this section.


Sec. 955.5  Administrative and investment transactions between Banks.

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


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

    (a) General. Each Bank shall hold retained earnings plus general 
allowance for losses as support for the credit risk of all AMA 
estimated by the Bank to represent a credit risk that is greater than 
that of comparable instruments that have received the second highest 
credit rating from an NRSRO in an amount equal to or greater than the 
outstanding balance of the assets or pools of assets times a factor 
associated with the putative credit rating of the assets or pools of 
assets as determined by the Finance Board on a case-by-case basis. For 
single-family mortgage assets, the factors are as set forth in Table 1 
of this part.

                                 Table 1
------------------------------------------------------------------------
                                                           Percentage
                                                        applicable to on-
   Putative rating of single-family mortgage assets       balance sheet
                                                        equivalent value
                                                             of AMA
------------------------------------------------------------------------
Third Highest Investment Grade........................              0.90
Fourth Highest Investment Grade.......................              1.50
If Downgraded to Below Investment Grade After
 Acquisition By Bank:
    Highest Below Investment Grade....................              2.25
    Second Highest Below Investment Grade.............              2.60
    All Other Below Investment Grade..................            100.00
------------------------------------------------------------------------

    (b) Recalculation of credit enhancement. For risk-based capital 
purposes, each Bank shall recalculate the estimated credit rating of a 
pool of AMA if there is evidence that a decline in the credit quality 
of that pool may have occurred.

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

    1. Bank District Flag--Two-digit numeric code designating the 
District Bank that originally acquired the loan.
    2. Participating Bank District Flag--Two-digit numeric code 
designating the District Bank that purchased a participation in the 
loan.
    3. Loan Number--Unique numeric identifier used by the Banks for 
each mortgage acquisition.
    4. US Postal State--Two-digit numeric Federal Information 
Processing Standard (FIPS) code.
    5. US Postal Zip Code--Five-digit zip code for the property.
    6. MSA Code--Four-digit numeric code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA.
    7. Place Code--Five-digit numeric FIPS code.

[[Page 43984]]

    8. County--County, as designated in the most recent decennial 
census by the Bureau of the Census.
    9. Census Tract/Block Numbering Area (BNA)--Tract/BNA number as 
used in the most recent decennial census by the Bureau of the 
Census.
    10. Census Tract-Percent Minority--Percentage of a census 
tract's population that is minority based on the most recent 
decennial census by the Bureau of the Census.
    11. Census Tract-Median Income--Median family income for the 
census tract based on the most recent decennial census.
    12. Local Area Median Income--Median income for the area based 
on the most recent decennial census.
    13. Tract Income Ratio--Ratio of the census tract median income 
based on the most recent decennial census to that year's local area 
median income (i.e., loan-level data element number 11 divided by 
loan-level data element number 12).
    14. Borrower(s) Annual Income--Combined income of all borrowers.
    15. Area Median Family Income--Current median family income for 
a family of four for the area as established by HUD.
    16. Borrower Income Ratio--Ratio of Borrower(s) annual income to 
area median family income.
    17. Acquisition Unpaid Principal Balance (UPB)--UPB in whole 
dollars of the mortgage when acquired by the Bank.
    18. Loan-to-Value (LTV) Ratio at Origination--LTV ratio of the 
mortgage at the time of origination.
    19. Participation Percentage--Where the mortgage acquisition is 
a participation, the percentage of the mortgage for each Bank listed 
in loan-level data element number 2.
    20. Date of Mortgage Note--Date the mortgage note was created.
    21. Date of Acquisition--Date the Bank acquired the mortgage.
    22. Purpose of Loan--Indicates whether the mortgage was a 
purchase money mortgage, a refinancing, a construction mortgage, or 
a financing of property rehabilitation.
    23. Cooperative Unit Mortgage--Indicates whether the mortgage is 
on a dwelling unit in a cooperative housing building.
    24. Product Type--Indicates the product type of the mortgage 
(i.e., fixed rate, adjustable rate mortgage (ARM), balloon, 
graduated payment mortgage (GPM) or growing equity mortgages (GEM), 
reverse annuity mortgage, or other).
    25. Federal Guarantee--Numeric code that indicates whether the 
mortgage has a Federal guarantee, and from which agency.
    26. Term of Mortgage at Origination--Term of the mortgage at the 
time of origination in months.
    27. Amortization Term--For amortizing mortgages, the 
amortization term of the mortgage in months.
    28. Acquiring Lender Institution--Name of the institution from 
which the Bank acquired the mortgage.
    29. Acquiring Lender City--City location of the institution from 
which the Bank acquired the mortgage.
    30. Acquiring Lender State--State location of the institution 
from which the Bank acquired the mortgage.
    31. Type of Acquiring Lender Institution--Type of institution 
that the Bank acquired the mortgage from (i.e., mortgage company, 
Savings Association Insurance Fund (SAIF) insured depositary 
institution, Bank Insurance Fund (BIF) insured depositary 
institution, National Credit Union Association (NCUA) insured credit 
union, or other seller).
    32. Number of Borrowers--Number of borrowers.
    33. First-Time Home Buyer--Numeric code indicating whether the 
mortgagor(s) are first-time homebuyers (second mortgages and 
refinancings are not treated as first-time homebuyers).
    34. Mortgage Purchased under the Banks' Community Investment 
Cash Advances (CICA) Programs--Indicates whether the mortgage is on 
a project funded under an AHP, CIP or other CICA program.
    35. Acquisition Type--Indicates whether the Bank acquired the 
mortgage with cash, by swap, with a credit enhancement, a bond or 
debt purchase, reinsurance, risk-sharing, real estate investment 
trust (REIT), or a real estate mortgage investment conduit (REMIC), 
or other.
    36. Bank Real Estate Owned--Indicates whether the mortgage is on 
a property that was in the Bank's real estate owned (REO) inventory.
    37. Borrower Race or National Origin--Numeric code indicating 
the race or national origin of the borrower.
    38. Co-Borrower Race or National Origin--Numeric code indicating 
the race or national origin of the co-borrower.
    39. Borrower Gender--Numeric code that indicates whether the 
borrower is male or female.
    40. Co-Borrower Gender--Numeric code that indicates whether the 
co-borrower is male or female.
    41. Age of Borrower--Age of borrower in years.
    42. Age of Co-Borrower--Age of co-borrower in years.
    43. Occupancy Code--Indicates whether the mortgaged property is 
an owner-occupied principal residence, a second home, or a rental 
investment property.
    44. Number of Units--Indicates the number of units in the 
mortgaged property.
    45. Unit--Number of Bedrooms--Where the property contains non-
owner-occupied dwelling units, the number of bedrooms in each of 
those units.
    46. Unit--Affordable Category--Where the property contains non-
owner-occupied dwelling units, indicates under which, if any, of the 
special affordable goals the units qualified.
    47. Unit--Reported Rent Level--Where the property contains non-
owner-occupied dwelling units, the rent level for each unit in whole 
dollars.
    48. Unit--Reported Rent Plus Utilities--Where the property 
contains non-owner-occupied dwelling units, the rent level plus the 
utility cost for each unit in whole dollars.
    49. Unit--Owner Occupied--Indicates whether each of the units 
are owner-occupied.
    50. Geographically Targeted Indicator--Numeric code that 
indicates loans made in census tracts classified as underserved by 
HUD.
    51. Interest Rate--Note rate on the loan.
    52. Loan Amount--Loan balance at origination.
    53. Front-end Ratio--Ratio of principal, interest, taxes, and 
insurance to borrower(s) income.
    54. Back-end Ratio--Ratio of all debt payments to borrower(s) 
income.
    55. Borrower FICO Score--Fair, Isaacs, Co. credit score of 
borrower.
    56. Co-Borrower FICO Score--Fair, Isaacs, Co. credit score of 
co-borrower.
    57. PMI Percent--Percent of original loan balance covered by 
private mortgage insurance.
    58. Credit Enhancement--Numeric code indicating type of credit 
enhancement.
    59. Self-Employed Indicator--Numeric indicator for whether the 
borrower is self-employed.
    60. Property Type--Numeric indicator for whether the property is 
single-family detached, condominium, townhouse, PUD, etc.
    61. Default Status--Numeric indicator for whether the loan is 
currently in default.
    62. Termination Date--Date on which the loan terminated.
    63. Termination Type--Numeric indicator for whether the loan 
terminated in a prepayment, foreclosure, or other types of 
termination.
    64. ARM Index--Index used for the calculation of interest on an 
ARM.
    65. ARM margin--Margin added to the index for calculation of the 
interest on an ARM.
    66. Prepayment Penalty Terms--Numeric indicator for types of 
prepayment penalties.

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

    1. Bank District Flag--Two-digit numeric code designating the 
District Bank that originally acquired the loan.
    2. Participating Bank District Flag--Two-digit numeric code 
designating the District Bank that purchased a participation in the 
loan.
    3. Loan Number--Unique numeric identifier used by the Banks for 
each mortgage acquisition.
    4. US Postal State--Two-digit numeric Federal Information 
Processing Standard (FIPS) code.
    5. US Postal Zip Code--Five-digit zip code for the property.
    6. MSA Code--Four-digit numeric code for the property's 
metropolitan statistical area (MSA) if the property is located in an 
MSA.
    7. Place Code--Five-digit numeric FIPS code.
    8. County--County, as designated in the most recent decennial 
census by the Bureau of the Census.
    9. Census Tract/Block Numbering Area (BNA)--Tract/BNA number as 
used in the most recent decennial census by the Bureau of the 
Census.

[[Page 43985]]

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

    10. In subchapter G, revise part 956 to read as follows:

PART 956--FEDERAL HOME LOAN BANK INVESTMENTS

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

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


Sec. 956.1  Definitions.

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

[[Page 43986]]

Sec. 956.2  Authorized investments.

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


Sec. 956.3  Prohibited investments and prudential rules.

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


Sec. 956.4  Risk-based capital requirement for investments.

    Each Bank shall hold retained earnings plus general allowance for 
losses as support for the credit risk of all investments that are not 
rated by a NRSRO, or are rated or have a putative rating below the 
second highest credit rating, in an amount equal to or greater than the 
outstanding balance of the investments multiplied by:
    (a) A factor associated with the credit rating of the investments 
as determined by the Finance Board on a case-by-case basis for rated 
assets to be sufficient to raise the credit quality of the asset to the 
second highest credit rating category; and
    (b) 0.08 for assets having neither a putative nor actual rating.

PART 966--CONSOLIDATED OBLIGATIONS

    11. The authority citation of part 966 continue to read as follows:

    Authority: 12 U.S.C. 1442a, 1422b, and 1431.

    12. Amend section 966.1 by removing the definition of the term 
``NRSRO''.

    Dated: June 29, 2000.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-17663 Filed 7-14-00; 8:45 am]
BILLING CODE 6725-01-P