[Federal Register Volume 66, Number 69 (Tuesday, April 10, 2001)]
[Proposed Rules]
[Pages 18694-18709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8671]



[[Page 18693]]

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Part III





Department of Housing and Urban Development





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Office of Federal Housing and Enterprise Oversight



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12 CFR Part 1777



Prompt Supervisory Response and Corrective Action; Proposed Rule

12 CFR Part 1710



Corporate Governance; Proposed Rule

  Federal Register / Vol. 66, No. 69 / Tuesday, April 10, 2001 / 
Proposed Rules  

[[Page 18694]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1777

RIN 2550-AA12


Prompt Supervisory Response and Corrective Action

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Proposed regulation.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) 
solicits comments on a proposed regulation to set forth the procedures 
under which OFHEO administers the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992, under which OFHEO takes prompt 
corrective action in response to specified declines in the capital 
levels of the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation (collectively, the Enterprises). OFHEO 
also proposes to implement a system of prompt supervisory responses to 
be taken whenever certain developments internal or external to an 
Enterprise, which are specified in the proposed rule, warrant special 
supervisory review by OFHEO. The occurrence of such a development does 
not of itself establish that an Enterprise is in an unsound condition; 
rather, such a triggering occurrence provides a reasonable juncture for 
OFHEO to undertake a focused inquiry into the likely consequences of 
the development for the Enterprise.

DATES: Written comments on the proposed rule must be received by July 
9, 2001.

ADDRESSES: All comments concerning the proposed rule should be 
addressed to Alfred M. Pollard, General Counsel, Office of Federal 
Housing Enterprise Oversight, 1700 G Street NW, Fourth Floor, 
Washington, DC 20552. Copies of all communications received will be 
available for public inspection and copying at the address above. All 
comments will be posted on the OFHEO web site at http://www.ofheo.gov. 
OFHEO requests that written comments submitted in hard copy also be 
accompanied by an electronic version in MS Word or in 
portable document format (PDF) on 3.5" disk. Alternatively, comments 
may be submitted via electronic mail to: [email protected].

FOR FURTHER INFORMATION CONTACT: David W. Roderer, Deputy General 
Counsel, (202) 414-6924, or Jamey Basham, Counsel (202) 414-8906 (not 
toll-free numbers), 1700 G Street NW, Fourth Floor, Washington, DC 
20552. The telephone number for the Telecommunications Device for the 
Deaf is: (800) 877-8339 (TDD only).

SUPPLEMENTARY INFORMATION:

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Public Law 102-550, entitled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (1992 Act), established OFHEO. OFHEO 
is an independent office within the Department of Housing and Urban 
Development with responsibility for ensuring that the Enterprises are 
adequately capitalized and operate safely and in conformity to the 
requirements of applicable statutes, rules and regulations, including 
their respective charter acts.\1\ The Enterprises were established to 
effect specific public purposes under Federal law, including the 
provision of liquidity to the residential mortgage market and the 
promotion of the availability of mortgage credit benefiting low- and 
moderate-income families and areas that are underserved by lending 
institutions.\2\
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    \1\ 12 U.S.C. 4513(a). See also 12 U.S.C. 4513(b)(1)-(5), 4517, 
4521(a)(2)-(3), 4631(a)(3), 4636(a)(1).
    \2\ See Federal Home Loan Mortgage Corporation Act, 12 U.S.C. 
1451 et seq.; Federal National Mortgage Association Charter Act, 12 
U.S.C. 1716 et seq.; 1992 Act at 12 U.S.C. 4561-4567, 4562 note.
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    The enumerated statutory authorities of the Director explicitly 
include the authority to issue rules to carry out the duties of the 
Director,\3\ as well as other broad supervisory powers similar to those 
of the Federal bank regulatory agencies. OFHEO is empowered to conduct 
examinations of the Enterprises; to require the Enterprises to provide 
reports; \4\ to establish capital standards for the Enterprises; \5\ 
and, in appropriate circumstances, to exercise administrative 
enforcement authority essentially similar to that granted by Congress 
to the Federal bank regulatory agencies. OFHEO's enforcement 
authorities include the power to issue temporary and permanent cease 
and desist orders to an Enterprise or its executive officers or 
directors, and to otherwise sanction or impose civil money penalties 
when appropriate.\6\ OFHEO's enforcement regime, addressing the scope 
of these authorities and the applicable rules of practice and 
procedure, is set forth in part 1780 of OFHEO's regulations.\7\
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    \3\ 12 U.S.C. 4513(b)(1).
    \4\ 12 U.S.C. 4514, 4517, 1456(c), 1723a(k).
    \5\ 12 U.S.C. 4611-4614.
    \6\ 12 U.S.C. 4631-4641.
    \7\ 12 CFR part 1780; see 65 FR 81775 (December 27, 2000)(OFHEO 
notice of proposed rulemaking to amend purpose and scope section of 
part 1780, to summarize agency's statutory enforcement powers).
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    In addition, subtitle B of the 1992 Act\8\ requires OFHEO to 
establish certain capital thresholds for the Enterprises. The statute 
directs OFHEO to assign capital classifications to the Enterprises 
based on those capital thresholds, and authorizes OFHEO to reclassify 
an Enterprise notwithstanding the thresholds. An Enterprise that is not 
classified as ``adequately capitalized'' is required to obtain OFHEO's 
approval for, and carry out, a formal plan to restore the Enterprise's 
capital. Statutory provisions also prohibit an Enterprise from making 
any capital distribution that would result in the Enterprise not 
meeting the capital thresholds, absent OFHEO's approval, and imposes 
additional restrictions on capital distributions so long as the 
Enterprise is not classified as adequately capitalized. An Enterprise 
that is not classified as adequately capitalized may also be subject to 
a variety of regulatory limitations and restrictions as deemed to be 
appropriate by OFHEO.
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    \8\ 12 U.S.C. 4614-4619, 4622, 4623.
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Prompt Supervisory Response to Factors Beyond Capital

    As the exclusive safety and soundness regulator of the Enterprises, 
OFHEO has been constituted with broad supervisory authorities, in order 
to detect and address safety and soundness problems that may arise, and 
has broad enforcement powers in order to ensure that any safety and 
soundness deficiencies are promptly remedied. OFHEO is empowered to 
require such reports and actions by the Enterprises as the agency deems 
to be appropriate to enable OFHEO to monitor the risks encountered by 
the Enterprises so as reduce the possibility of loss long before actual 
losses reach the level of capital impairment.\9\ In order to provide a 
broad early intervention regime that addresses both capital-related and 
non-capital-related supervisory concerns, OFHEO proposes to commit 
itself to undertake specified prompt supervisory

[[Page 18695]]

responses to address both capital and non-capital considerations.
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    \9\ See, e.g., OFHEO Policy Guidance PG-00-001, Minimum Safety 
and Soundness (Dec. 19, 2000) (setting forth the minimum supervisory 
requirementsd used by OFHEO in reviewing and ensuring the adequacy 
of policies and procedures of the Enterprises in the areas of asset 
underwriting and credit quality, balance sheet growth, market risks, 
information technology, internal controls, audits, information 
reporting and documentation, and board and management 
responsibilities and functions). OFHEO PG-00-001 available at http://www.ofheo,gov.
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    As a financial institution supervisory agency, OFHEO's concerns may 
include a diverse array of considerations--ranging from matters such as 
declining collateral values to issues such as asset quality, liquidity, 
and operational difficulties--that could result in substantial losses 
to an Enterprise long before capital is impaired. When, in the course 
of the supervisory process, OFHEO detects any significant changes in 
indicators reflecting upon such matters, it is appropriate that the 
agency analyze the situation at that juncture, rather than relying on 
declines in capital to prompt agency action. If the analysis indicates 
problems exist, supervisory responses might reasonably include a 
mixture of early warning and early action initiatives that would be 
effective before specific problems negatively affect an Enterprise. 
OFHEO is proposing to adopt a prompt supervisory response regulation 
that makes the agency's regime for such analysis and early intervention 
transparent to the public. As recognized by the Government Accounting 
Office (GAO), a comprehensive prompt corrective action regime that 
includes prompt supervisory response based on non-capital indicators is 
likely to be less burdensome and more effective than a system that is 
exclusively capital-based.\10\
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    \10\ See General Accounting Office Report GAO/GGD-97-18, Bank 
and Thrift Regulation, Implementation of FDICIA's Prompt Corrective 
Regulatory Action Provisions (Nov. 21, 1996) at pp. 49-53.
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    Federal bank regulatory agencies have long employed supervisory 
criteria other than capital when assessing capital-related 
classifications. For example, the regulations of the Federal banking 
agencies provide that the agencies may reclassify a depository 
institution to a lower capital classification if an unsafe or unsound 
practice relating to asset quality, management, earnings, or liquidity 
has not been corrected.\11\ Under the proposed rule, OFHEO would adopt 
a system under which OFHEO commits itself to undertake prompt 
supervisory responses, but such responses would not necessarily include 
alteration of the capital classifications of an Enterprise. The prompt 
supervisory response regime is founded on OFHEO's broad authority under 
the 1992 Act to take such actions as are necessary to ensure that the 
Enterprises are, among other things, operating safely in accordance 
with law, including by adopting supervisory policies and standards 
through regulation or other guidance,\12\ by requiring the Enterprises 
to submit reports,\13\ and by taking enforcement or other remedial 
actions, such as temporary or permanent cease and desist orders, 
pursuant to subtitle C of the 1992 Act.
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    \11\ 12 CFR 6.4(d) (Office of the Comptroller of the Currency); 
12 CFR 208.40 (Board of Governors of the Federal Reserve System); 12 
CFR 325.104 (Federal Deposit Insurance Corporation).
    \12\ 12 U.S.C. 4513(b)(1), 4513(b)(5).
    \13\ 12 U.S.C. 4514, 1456(c), 1723a(k).
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Prompt Supervisory Response Provisions of the Proposed Rule

    Subpart A of the proposed rule sets out the prompt supervisory 
response regime, under which OFHEO will monitor various supervisory 
concerns in addition to an Enterprise's capital classification, and may 
require prompt action by an Enterprise to remedy or prevent losses or 
threatened losses, or other threats to safety and soundness. The 
procedures under subpart A of the proposed rule are separate from the 
capital-based prompt corrective action regime described below under 
subpart B of the proposed rule, but they may be used in conjunction 
with subpart B. Similar to the procedures under subpart B, subpart A of 
the proposed rule would establish a set of ``tripwires,'' looking to 
various developments that are appropriate junctures for a supervisory 
review to ascertain the financial or operational consequences of such 
developments upon the Enterprise. The occurrence of these tripwires 
would trigger automatic supervisory responses from OFHEO.
    As described in Sec. 1777.1(a) and Sec. 1777.1(b), the rule would 
be issued under OFHEO's above-discussed broad statutory authority to 
take such actions as the Director of OFHEO deems appropriate to ensure 
that the Enterprises operate in a safe and sound manner, including 
administrative enforcement actions, together with OFHEO's reporting and 
examination authorities. As is set out in Sec. 1777.1(b), the purpose 
of subpart A of the rule would be to fashion a broad early intervention 
regime to address both capital concerns and other serious supervisory 
considerations. However, as is stated in Sec. 1777.1(b), OFHEO's 
initiation of the procedures under the proposed rule would not 
necessarily indicate that a violation of law or regulation has occurred 
or that an unsound condition exists; rather, the proposed rule is 
consistent with the process OFHEO employs in reviewing the conduct of 
an Enterprise's affairs as a safety and soundness regulator. The 
supervisory responses under the proposed rule, described below 
(including a supervisory letter, an action plan, or a notice to show 
cause) do not constitute orders under the 1992 Act for purposes of 12 
U.S.C. 4631 or 4636. They are simply steps in a process under which 
OFHEO will review issues and, as necessary and appropriate, provide 
supervisory guidance to the Enterprises.
    Section 1777.10 lists various developments, the emergence of which 
might reasonably indicate that the Enterprise is experiencing or will 
soon experience some form of unusual stress that is not yet reflected 
in its capital level. Upon the occurrence of any of the items listed in 
Sec. 1777.10 of the proposed rule, OFHEO would take one or more of the 
supervisory responsive actions enumerated in Sec. 1777.11.
    Nevertheless, as is noted under Sec. 1777.2(a), identification of 
particular developments under Sec. 1777.10 in no way limits the 
authority of OFHEO to take action with regard to other issues impacting 
upon the Enterprises' capital, safety and soundness, and compliance 
with applicable law. Moreover, as is noted under Sec. 1777.2(c), the 
enumeration of supervisory responsive actions in Sec. 1777.11 does not 
limit OFHEO's discretion to take whatever form of supervisory action 
OFHEO deems necessary under the 1992 Act. For example, circumstances 
might indicate to OFHEO that more expedient use of enforcement tools is 
warranted.
    Section 1777.10 sets out a list of ten potential developments that 
would cause OFHEO to initiate a review under subpart A. The list 
includes both environmental indicators tied to market factors and 
internal indicators tied to factors within a particular Enterprise. The 
marketplace indicators enumerated in the proposed rule look to certain 
specified changes in housing prices. The internal indicators include 
specific items related to an Enterprise's interest rate risk, net 
income, net interest margin, equity, and loan delinquencies, as well as 
certain operational and governance matters. OFHEO specifically invites 
public comment whether there are other marketplace or internal 
indicators appropriate for inclusion in Sec. 1777.10.
    Section 1777.11 sets out the proposed supervisory responsive 
actions to be taken if one of the developments enumerated in 
Sec. 1777.10 is detected by OFHEO in connection with an examination or 
otherwise as the agency exercises its routine supervisory functions and 
oversight of the Enterprises. There are a number of alternatives.

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    In every case, OFHEO would initiate a Level I supervisory action 
under Sec. 1777.11(a), within five days of OFHEO's determination that a 
Sec. 1777.10 development has occurred. The Enterprise would receive a 
supervisory letter formally advising the Enterprise that OFHEO has 
begun the prompt supervisory response process to address the recent 
development and containing other information depending on the facts and 
circumstances. OFHEO may direct the Enterprise to supply information 
about the situation, respond to OFHEO's specific questions or concerns, 
take corrective or remedial action, or other action deemed appropriate. 
OFHEO seeks to avoid requiring particular actions, encouraging 
management of the Enterprises to design the most appropriate course. 
Unless the development in question has occurred precipitously, OFHEO 
would have in all likelihood already have commenced a supervisory 
dialog with the Enterprise about the situation, and the information 
obtained and points already established through such dialog would 
affect the content of the supervisory letter.
    Based on the Enterprise's response to the supervisory letter and 
other appropriate factors, OFHEO would promptly determine whether 
additional supervisory actions would be necessary. Material provided by 
the Enterprise in response to the supervisory letter may cause OFHEO to 
conclude that the development creates no substantial supervisory 
concern or that the Enterprise's management of the risks and concerns 
presented by the development is adequate. In other cases, the 
supervisory letter process may indicate that some level of supervisory 
concern is warranted, but the letter process itself and continuing 
supervisory dialogue may be all that is required to cause the 
Enterprise to undertake sufficient corrective or remedial measures.
    If additional supervisory actions were deemed necessary, OFHEO 
would have a variety of alternatives under Sec. 1777.11. Level II 
supervisory action, as set out in Sec. 1777.11(b), would provide for a 
special review of an Enterprise. A special review could be useful in 
supplementing information already obtained by OFHEO through the 
examination process, and could provide OFHEO with a clearer picture of 
the situation than could otherwise be obtained through letters or 
reports. Such review would be conducted by OFHEO's Office of General 
Counsel, Office of Research and Model Development, Office of 
Examination and Oversight, Office of Policy Analysis and Research, or 
such other department or individual as determined by the Director. 
Following completion of the special review, OFHEO would promptly 
determine whether additional supervisory action was warranted.
    Under Level III supervisory action set out in Sec. 1777.11(c), 
OFHEO would direct the Enterprise to prepare and submit an action plan 
addressing the development. Among other things, the Enterprise's action 
plan would be required to include information about the circumstances 
leading up to the development and an assessment of its possible effects 
upon the Enterprise. The Enterprise would also describe its proposed 
course of action for dealing with the development, including an 
analysis of alternatives available to the Enterprise. If OFHEO 
determined that the action plan was insufficient to resolve the 
supervisory issues created by the development, OFHEO would direct the 
Enterprise to revise the plan. However, if OFHEO determined that the 
supervisory issues would not be resolved even under a revised plan, 
OFHEO would promptly determine what other supervisory action should be 
initiated.
    Under Level IV supervisory action, as set out in Sec. 1777.11(d), 
OFHEO would require the Enterprise to show cause why OFHEO should not 
initiate formal enforcement action against the Enterprise. OFHEO is 
not, however, required to issue a show cause notice prior to initiating 
an administrative enforcement action.
    The proposed rule contemplates that Level II through Level IV 
supervisory responsive action need not be carried out sequentially. For 
example, depending on the facts and circumstances, OFHEO might deem it 
appropriate to combine Level I action with another Level of action at 
the initiation of the process. For another example, the Level I process 
might subsequently cause OFHEO to initiate simultaneous Level II and 
Level III responses.
    In addition, as specified in Sec. 1777.12, OFHEO might also turn to 
any of the informal or formal supervisory tools available to OFHEO 
under the 1992 Act. OFHEO might do so at any time, notwithstanding the 
pendency of Level I-Level IV action. OFHEO might also use such 
supervisory tools to take action against an Enterprise that failed to 
make a submission or comply with a directive from OFHEO in connection 
with actions under Level I-IV. Moreover, OFHEO might use such 
supervisory tools to address an Enterprise's failure to implement an 
appropriate action in response to a supervisory letter or under an 
action plan.

Summary of Prompt Corrective Action Provisions of the 1992 Act

    Subtitle B of the 1992 Act directs OFHEO to classify the 
Enterprises into one of four capital classifications (``adequately 
capitalized,'' ``undercapitalized,'' ``significantly 
undercapitalized,'' or ``critically undercapitalized,''), based on the 
level of capital maintained by the Enterprise. For these purposes, 
OFHEO assesses the Enterprises' capital by reference to two standards.
    The first capital standard is based on ratios of core capital 
instruments to on balance sheet assets and off balance sheet 
obligations. The ratios are set according to percentages contained in 
12 U.S.C. 4612 and 4613, subject to certain adjustments by OFHEO, and 
calculated in accordance with guidance from OFHEO under part 1750 of 
OFHEO's regulations.\14\ The statute provides for a ``minimum capital'' 
level based on these ratios, as well as a ``critical capital'' level, 
based on lower ratios, that triggers additional enforcement 
requirements and authorities under subtitle B of the 1992 Act.\15\
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    \14\ 12 CFR part 1750.
    \15\ OFHEO's regulations at 12 CFR 1750.4 describe how the 
minimum capital level of an Enterprise is to be calculated. OFHEO 
calculates the critical capital level in accordance with 12 U.S.C. 
4613. As is discussed below, OFHEO is proposing to include a 
regulatory definition of the critical capital level in part 1777.
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    The other capital standard is for ``risk-based capital.'' Rather 
than applying leverage ratios, this risk-based capital level requires 
the Enterprises to hold sufficient total capital to maintain a positive 
capital position during a hypothetical ten-year stress period 
characterized by statutorily-prescribed stressful credit conditions and 
large movements in interest rates, plus an additional amount to cover 
management and operations risk. Section 4611 of Title 12 directs OFHEO 
to develop a stress test which, when applied to an Enterprise's current 
business, will project the amount of total capital that would be 
necessary to survive the stresses described in the statute during the 
stress period. OFHEO has issued a proposed rule to amend 12 CFR part 
1750 to set out this risk-based capital level. 64 FR 18084 (April 13, 
1999).
    Section 4614 of Title 12 directs OFHEO to classify each Enterprise 
as adequately capitalized, undercapitalized, significantly 
undercapitalized, or critically undercapitalized, using each

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Enterprise's compliance with the minimum capital level, critical 
capital level, and risk-based capital level as reference points. 
However, as provided in 12 U.S.C. 4614(d) and 4615(c), OFHEO is not to 
include consideration of an Enterprise's risk-based capital level 
during the classification process, until the expiration of one year 
following the effective date of OFHEO's risk-based capital regulation. 
Until such time, OFHEO is to classify each Enterprise by reference to 
its minimum capital level and critical capital level.
    Section 4614 of Title 12 also grants OFHEO broad discretionary 
authority to reclassify an Enterprise into a lower capital 
classification in appropriate circumstances. OFHEO may reclassify an 
Enterprise at any time if the Director of OFHEO determines, in his or 
her discretion, that the Enterprise is engaging in conduct not approved 
by the Director that could result in a rapid depletion of the 
Enterprise's core capital. Under this standard, if OFHEO determines 
that some action or inaction (including a failure to respond 
appropriately to changes in circumstances or unforeseen events) on the 
part of an Enterprise could result in losses that might impair the 
Enterprise's capital position, OFHEO can intervene promptly. Or, if 
action or inaction could contribute significantly to deepening losses, 
this standard empowers OFHEO to act before increasing losses achieve 
such severity that the Enterprise's capital in excess of regulatory 
minimums is exhausted. Section 4614 also authorizes OFHEO to make a 
discretionary reclassification any time the Director determines, in his 
or her discretion, that the value of property subject to mortgages held 
or securitized by the Enterprise has decreased significantly.
    OFHEO is to issue a capital classification for each Enterprise at 
least quarterly, as required by 12 U.S.C. 4614. The procedure for 
classification (including reclassification) is outlined in 12 U.S.C. 
4618. OFHEO is to provide the Enterprise with prior written notice of 
the capital classification that the agency intends to make. The 
Enterprise then has 30 days (subject to limitation or extension as 
OFHEO deems appropriate) to respond. OFHEO then, in its discretion, 
makes a final determination of the Enterprise's capital classification, 
including consideration of any relevant information the Enterprise 
submitted in its response.
    Subtitle B specifies certain steps that will automatically result 
upon an Enterprise's classification in a category lower than adequately 
capitalized. An Enterprise that is classified as undercapitalized or 
significantly undercapitalized must submit a capital restoration plan 
to OFHEO, describing, among other things, how and when the Enterprise 
will restore its capital position and the types and levels of 
activities in which the Enterprise will engage during the term of the 
plan. OFHEO will approve or reject a plan. In the latter case, the 
Enterprise must revise the plan and resubmit it for OFHEO's review. An 
Enterprise's failure to submit a plan in a timely manner, or to submit 
a plan that is acceptable to OFHEO, is grounds for OFHEO to reclassify 
the Enterprise into the next lower capital category. In addition, if 
OFHEO determines that an Enterprise has failed to make, in good faith, 
reasonable efforts necessary to comply with an approved capital 
restoration plan, including the schedule for fulfilling the plan, then 
OFHEO may reclassify the Enterprise into the next lower capital 
category.
    An Enterprise that is classified in any category lower than 
adequately capitalized is prohibited from making any capital 
distribution that would result in the Enterprise being classified into 
a lower category. A capital distribution is defined by the 1992 Act to 
include (i) dividends and distributions in cash or in kind made with 
respect to any shares or other ownership interests in an Enterprise, 
except a dividend consisting only of shares of the Enterprise; (ii) any 
payment made by an Enterprise to repurchase, redeem, retire, or acquire 
any of its shares or an extension of credit to finance such a 
transaction, or any transaction that OFHEO determines by regulation to 
be a capital distribution in substance. 12 U.S.C. 4502(2).\16\ An 
Enterprise that is classified as significantly undercapitalized is 
further prohibited from making any capital distribution, absent written 
approval by OFHEO pursuant to statutorily-specified standards. It 
should also be noted that, without restriction as to an Enterprise's 
capital classification, each Enterprise's charter act prohibits the 
Enterprise from making any capital distribution that would decrease the 
capital of the Enterprise to an amount less than the risk-based capital 
level or the minimum capital level, absent written approval by 
OFHEO.\17\
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    \16\ The statutory definition provides an exception for payments 
that OFHEO determines are made by an Enterprise to repurchase its 
shares for the purpose of fulfilling an obligation of the Enterprise 
under an employee stock ownership plan qualified under section 401 
of the Internal Revenue Code of 1986, or any substantially 
equivalent plan.
    \17\ The Federal Home Loan Mortgage Corporation Act at 12 U.S.C. 
1452(b)(2), and the Federal National Mortgage Association Charter 
Act at 12 U.S.C. 1718(c)(2).
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    Upon classifying an Enterprise as critically undercapitalized, 12 
U.S.C. 4617 requires OFHEO to appoint a conservator for the Enterprise, 
unless OFHEO makes a written determination, and the Secretary of the 
Treasury concurs in writing, that the appointment of a conservator 
likely would have serious adverse effects on economic conditions of 
national financial markets or on the financial stability of the housing 
finance market, and the public interest would be better served by 
taking some other enforcement action authorized by the 1992 Act. If 
OFHEO makes such a determination not to appoint a conservator, the 
Enterprise is subject to the same mandatory and discretionary 
supervisory responses as apply to a significantly undercapitalized 
Enterprise under 12 U.S.C. 4616. OFHEO is also vested with discretion 
under 12 U.S.C. 4616 to appoint a conservator for an Enterprise that is 
significantly undercapitalized, if OFHEO determines that the 
Enterprise's core capital is less than the minimum capital level and 
that alternative remedies available to OFHEO under the 1992 Act are not 
satisfactory.\18\
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    \18\ OFHEO is also empowered to appoint a conservator for an 
Enterprise under a number of circumstances enumerated in 12 U.S.C. 
4619(a)(1) through (2).
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    In addition to these automatic supervisory steps, 12 U.S.C. 4616(b) 
invests OFHEO with discretionary authority to take a variety of 
supervisory actions at any time with respect to an Enterprise that is 
classified as significantly undercapitalized. OFHEO may fashion such 
remedy or require supervisory action as appropriate including, but not 
limited to, any of the following:
     Limit any increase in, or require a reduction of, any 
borrowings and other types of obligations of an Enterprise, including 
off-balance sheet obligations;
     Limit or prohibit the growth of assets of an Enterprise or 
require reduction of its assets;
     Require an Enterprise to obtain additional capital in such 
form and amount as specified by OFHEO; and
     Require an Enterprise to terminate, reduce, or modify any 
program or activity that OFHEO determines entails excessive risk to the 
Enterprise.
    The procedure for issuing an order to an Enterprise to take such 
remedial action is outlined in 12 U.S.C. 4618. OFHEO is to provide the 
Enterprise with prior written notice of the proposed order. The 
Enterprise then has thirty days (subject to limitation or expansion as 
deemed appropriate by

[[Page 18698]]

OFHEO) to respond. OFHEO then, in its discretion, makes a final 
determination regarding issuance of a final order, including 
consideration of any relevant information the Enterprise submitted in 
its response. The order to take remedial action is enforceable by OFHEO 
through judicial action in the United States District Court for the 
District of Columbia, as provided in 12 U.S.C. 4635.

Implementation of the Prompt Corrective Action Provisions of the 
1992 Act by the Proposed Rule

    Subpart B of the proposed rule describes the scope of the actions 
OFHEO is authorized to take under the prompt corrective action 
statutory provisions in subtitle B of the 1992 Act, and the procedures 
by which such actions will be carried out.
    The authority, purpose, and scope of subpart B is set out in 
Sec. Sec. 1777.1(a) and (c), which briefly review the statutes 
underlying the rule (discussed above). Also, as is discussed in 
Sec. 1777.1(d), the 1992 Act directs OFHEO to determine capital 
classifications for the Enterprises by reference to three capital 
triggers (the minimum capital level, the critical capital level, and 
the risk-based capital level), but 12 U.S.C. 4614(d) delays 
consideration of the risk-based capital level until one year after 
OFHEO's risk-based capital rule becomes effective. Section 4615 of 
Title 12, setting out the supervisory actions that are applicable to an 
Enterprise that is classified as undercapitalized, similarly provides 
that its provisions will not take effect until one year after OFHEO's 
risk-based capital rule becomes effective. Section 4614(d) provides 
that, until that time, an Enterprise shall be classified as adequately 
capitalized if the Enterprise maintains an amount of capital that 
equals or exceeds the minimum capital level.
    Therefore, under subpart B of the proposed rule at Sec. 1777.20, 
different sets of capital classifications will apply depending on 
whether the one-year post-effectiveness period for the risk-based 
capital rules has expired. Section 1777.20(a) contains the 
``permanent'' set of capital classifications taking the risk-based 
capital level into account as well as the minimum capital level and 
critical capital level. This set of capital classifications will apply 
any time after the expiration of one year following the initial 
effective date of OFHEO's regulations establishing the risk-based 
capital test (issued under 12 U.S.C. 4611(e)). The currently-applicable 
``temporary'' set of capital classifications is contained in 
Sec. 1777.20(c), as an exception to Sec. 1777.20(a) that applies until 
expiration of one year following the initial effective date of the 
risk-based capital regulations. This set of classifications is based on 
an Enterprise's minimum capital level and critical capital level, 
reflecting the classification criteria presently used by OFHEO. Section 
4614(a) of Title 12, when read together with 12 U.S.C. 4616(c) (making 
statutory provisions calling for prompt corrective action with regard 
to a significantly undercapitalized Enterprise effective from the time 
the Enterprise is first classified under section 4614) and 12 U.S.C. 
4617(d) (same, for a critically undercapitalized Enterprise), indicates 
that Congress intended OFHEO to classify the Enterprises for prompt 
corrective action purposes by reference to minimum capital and critical 
capital levels, pending implementation of the risk-based capital test.
    As discussed in Sec. 1777.2(b), the prompt corrective action 
provisions are but one aspect of OFHEO's broad supervisory authority to 
ensure that the Enterprises maintain capital that is adequate for their 
safe and sound operation. Maintenance of the minimum capital level and 
risk-based capital level upon which an Enterprise's capital 
classification is based does not alone establish that the Enterprise is 
operating in a safe and sound manner or possesses sufficient capital to 
address all circumstances. Such capital levels are statutory floors, to 
be considered together with other factors when assessing the strength 
of the Enterprise, such as asset quality and diversity, liquidity, 
earnings, operations, and expected growth, or any unusual stress to the 
Enterprise. Classification of an Enterprise as ``adequately 
capitalized'' under subtitle B of the 1992 Act indicates that the 
Enterprise is at least in compliance with these floor levels as of the 
particular times stated in the classification determination, but it 
does not necessarily mean that the Enterprise's capital is sufficient 
in light of all such considerations. OFHEO has authority to require an 
Enterprise to hold additional capital when the circumstances indicate 
additional capital is necessary or appropriate in light of the overall 
strength of the Enterprise and markets.
    Moreover, the prompt corrective action provisions represent but one 
kind of supervisory response available to OFHEO to deal with capital 
deficiencies at an Enterprise. The 1992 Act grants OFHEO broad 
discretion to take other supervisory actions as may be deemed by OFHEO 
to be appropriate, including issuing temporary and permanent cease and 
desist orders, imposing civil money penalties, appointing a 
conservator, entering into a written agreement the violation of which 
is actionable through enforcement proceedings, or entering into any 
other formal or informal agreement with an Enterprise. Moreover, the 
selection of one form of action or a combination of actions does not 
foreclose OFHEO from pursuing any other action.
    The definitions in Sec. 1777.3 cross-reference to OFHEO's capital 
rules at 12 CFR part 1750 in defining core and total capital. Section 
1777.3 defines the minimum capital level as the minimum amount of core 
capital specified for an Enterprise pursuant to 12 U.S.C. 4612, as 
determined under OFHEO's capital rules at Sec. 1750.4. The definition 
of critical capital in Sec. 1777.3 refers to the calculation of core 
capital required to meet the minimum capital level under Sec. 1750.4 of 
OFHEO's capital rules, making the appropriate adjustments thereto in 
order to implement the lower percentages specified in 12 U.S.C. 4613 as 
compared to 12 U.S.C. 4612. Thus, Sec. 1777.3 defines the critical 
capital level as the amount of core capital that is equal to the sum of 
one half of the amount determined under Sec. 1750.4(a)(1) and five-
ninths of the amounts determined under Sec. 1750.4(a)(2) through 
Sec. 1750.4(a)(7). Section 1777.3 defines the risk-based capital level 
to mean the amount of total capital specified for an Enterprise 
pursuant to 12 U.S.C. 4611, as determined under OFHEO's regulations 
implementing section 4611.\19\
---------------------------------------------------------------------------

    \19\ As discussed above, OFHEO has proposed such rules, to be 
located in 12 CFR part 1750.
---------------------------------------------------------------------------

    The definitions of ``affiliate'' and ``Enterprise'' are taken from 
12 U.S.C. 4502(1) and 4502(6), respectively. The 1992 Act, in defining 
an Enterprise to include the Enterprise's affiliates, vests OFHEO with 
broad jurisdiction over the supervision and regulation of such 
affiliates as appropriate in differing circumstances. Section 4502(1) 
defines an affiliate to be any entity that controls, is controlled by, 
or is under common control with an Enterprise. The 1992 Act does not, 
however, define control, leaving the term to be interpreted by OFHEO in 
light of the context in which the term is used and the particular 
provision of the 1992 Act at issue. In determining whether control 
exists for the purposes of exercising jurisdiction over an affiliate of 
an Enterprise under any particular provision of the 1992 Act, OFHEO 
considers the nature of the particular provision and the facts and 
circumstances involved. Among other things, OFHEO considers whether an 
entity exercises a controlling influence

[[Page 18699]]

over the management and policies of a particular entity, including by 
ownership of, or the power to vote, a concentration of any class of 
voting securities, by the ability to elect or appoint members of the 
board of directors or officers of the entity, or by other means.
    The definition of ``capital distribution'' is taken from 12 U.S.C. 
4502(2). Although the statute authorizes OFHEO to expand the capital 
distribution definition by regulation, OFHEO is not at this time 
proposing to cover any category of payments beyond those listed in the 
statutory definition; OFHEO specifically requests public comment 
addressing whether and what additional types of payments should be 
covered.
    As discussed above, Sec. 1777.20(c) contains a set of capital 
classifications based on an Enterprise's minimum capital level and 
critical capital level, reflecting the classification criteria 
presently used by OFHEO. These classifications apply until the 
expiration of one year following the initial effective date of OFHEO's 
regulations establishing the risk-based test:
     Adequately capitalized: Pending phase-in of the risk-based 
capital test, an Enterprise is deemed to be classified as adequately 
capitalized so long as it meets the minimum capital level, as required 
by 12 U.S.C. 4614(d), unless OFHEO has exercised its discretion to 
reclassify the Enterprise into any lower capital classification.
     Undercapitalized: As discussed above, 12 U.S.C. 4614(d) 
provides that an Enterprise that meets the minimum capital level is to 
be classified nevertheless as adequately classified, notwithstanding 12 
U.S.C. 4614(a)(2). However, pending phase-in of the risk-based capital 
level, an Enterprise that meets the minimum capital level could be 
classified as undercapitalized through discretionary reclassification 
by OFHEO.
     Significantly undercapitalized: An Enterprise will be 
classified as significantly undercapitalized if it meets the critical 
capital level but fails to meet the minimum capital level, unless OFHEO 
has exercised its discretion to reclassify the Enterprise as critically 
undercapitalized.
     Critically undercapitalized: An Enterprise will be 
classified as critically undercapitalized if it does not meet the 
critical capital level.
     Discretionary reclassification: Section 4614(b) of Title 
12 authorizes OFHEO to reclassify an Enterprise into the next lower 
capital classification at any time, in the discretion of the Director 
of OFHEO. Appropriate grounds for reclassification include a finding by 
the Director that the Enterprise is either engaging in action or 
inaction (including a failure to respond appropriately to changes in 
circumstances or unforeseen events) that could result in a rapid 
depletion of the Enterprise's core capital, or that the value of 
property subject to mortgages held or securitized by the Enterprise has 
decreased significantly. Other reclassifications, based on other 
sections of subtitle B of the 1992 Act pertaining to failure to submit 
an acceptable capital restoration plan or implement it, are located in 
Sec. 1777.7, the section addressing capital restoration plans.
    For purposes of OFHEO's discretionary authority to reclassify an 
Enterprise based on ``conduct that could result in a rapid depletion of 
core capital'' under 12 U.S.C. 4614(b), OFHEO interprets ``conduct'' to 
include action or inaction (including a failure to respond 
appropriately to changes in circumstances or unforeseen events). 
Notably, the statute does not require OFHEO to find that depletion of 
the Enterprise's core capital is underway or imminent, but requires 
only that OFHEO determine that such depletion is a possible consequence 
of the conduct in question. Congress, having already established the 
capital classifications based on capital levels to address scenarios in 
which an Enterprise's capital is in decline, established a broad 
standard for discretionary reclassification, to authorize early 
intervention by OFHEO when appropriate.
    Section 1777.20(a) contains the set of capital classifications 
taking the risk-based capital level into account as well as the minimum 
and critical capital levels. This set of classifications will replace 
the set under Sec. 1777.20(c) one year after the initial effective date 
of OFHEO's regulations establishing the risk-based capital test:
     Adequately capitalized: An Enterprise will be classified 
as adequately capitalized if the Enterprise meets the risk-based 
capital level and the minimum capital level, unless OFHEO has exercised 
its discretion to reclassify the Enterprise into any lower capital 
classification.
     Undercapitalized: An Enterprise will be classified as 
undercapitalized if it meets the minimum capital level but does not 
meet the risk-based capital level, unless OFHEO has exercised its 
discretion to reclassify the Enterprise into any lower capital 
classification.
     Significantly undercapitalized: An Enterprise will be 
classified as significantly undercapitalized if the Enterprise meets 
the critical capital level but fails to meet the minimum capital level, 
unless OFHEO has exercised its discretion to reclassify the Enterprise 
as critically undercapitalized.
     Critically undercapitalized: An Enterprise will be 
classified as critically undercapitalized if the Enterprise does not 
meet the critical capital level.
     Discretionary reclassification: As discussed above, 12 
U.S.C. 4614(b) authorizes OFHEO to reclassify an Enterprise into the 
next lower capital classification at any time, in the discretion of the 
Director of OFHEO. Appropriate grounds for reclassification include a 
finding by the Director that the Enterprise is either engaging in 
action or inaction (including a failure to respond appropriately to 
changes in circumstances or unforeseen events) that could result in a 
rapid depletion of the Enterprise's core capital, or that the value of 
property subject to mortgages held or securitized by the Enterprise has 
decreased significantly. Other reclassifications, based on other 
sections of subtitle B of the 1992 Act pertaining to failure to submit 
an acceptable capital restoration plan or implement it, are located in 
Sec. 1777.7, the section addressing capital restoration plans.
    Under Sec. 1777.20(a), the minimum and critical capital levels are 
the determinative standard for assessing whether an Enterprise falls 
into the significantly undercapitalized or critically undercapitalized 
classification based on capital, without regard to whether the 
Enterprise maintains total capital at or above its risk-based capital 
level. In enacting the 1992 Act, Congress intended that the minimum and 
critical capital levels be the ``tripwires'' for the prompt corrective 
actions specified in 12 U.S.C. 4616 and 4617. The amount of capital an 
Enterprise is required to hold to meet its risk-based capital level 
could be less than the amount of the capital required to meet its 
minimum capital level or even its critical capital level. To effectuate 
congressional intent, the rule avoids a result under which an 
Enterprise that failed to meet its minimum capital level or critical 
capital level could avoid classification as significantly 
undercapitalized or critically undercapitalized merely by maintaining 
total capital in compliance with its risk-based capital level.
    As is provided in Sec. 1777.20(b), if an Enterprise is reclassified 
by OFHEO on grounds that the Enterprise is engaging in action or 
inaction that could result in a rapid depletion of core capital, OFHEO 
will continue to take such conduct into account for each subsequent 
determination of the Enterprise's capital classification, until OFHEO 
determines that the action,

[[Page 18700]]

inaction, or condition in question has ceased and been remedied to 
OFHEO's satisfaction. For example, if OFHEO reclassified an Enterprise 
from adequately capitalized to undercapitalized based on such conduct, 
and during the pendency of such conduct, the Enterprise's total capital 
declined below the risk based capital level (which, standing alone, 
would result in classification in the undercapitalized category), the 
resulting classification could be to the significantly undercapitalized 
category. In addition, as provided in Sec. 1777.20(b), nothing in 12 
U.S.C. 4614(b) prohibits OFHEO from subsequently reclassifying an 
Enterprise again if the action, inaction, or condition has not ceased 
or been eliminated and remedied to OFHEO's satisfaction within a 
reasonable time. The foregoing is also applicable for a discretionary 
reclassification based on other grounds under Sec. 1777.20(a)(5) or 
Sec. 1777.20(c)(5), such as a decline in collateral values.
    Section 1777.21, implementing 12 U.S.C. 4618, sets out the 
procedure by which OFHEO classifies the Enterprises.\20\ These 
procedures apply to routine classifications, which OFHEO issues for 
each Enterprise at least once a quarter, based on capital reports from 
the Enterprise and any other additional relevant information. These 
procedures would also be used if it became necessary for OFHEO to 
reclassify an Enterprise in accordance with OFHEO's discretionary 
authority to do so under subtitle B of the 1992 Act, or if OFHEO 
otherwise determined that a new classification would be appropriate for 
any reason, including a change in an Enterprise's condition that is not 
reflected in the Enterprise's capital report.
---------------------------------------------------------------------------

    \20\ Part 1750 of OFHEO's regulations currently contain 
classification procedures at 12 CFR 1750.5. When this part 1777 is 
adopted as a final rule, OFHEO will amend part 1750 to remove the 
classification procedures from part 1750. At that time, all 
classification procedures will be located in part 1777, and 
procedures under which the Enterprises file periodic capital reports 
will remain in part 1750.
---------------------------------------------------------------------------

    OFHEO may issue capital classifications using different ``as of'' 
dates for the Enterprise's risk-based capital level and minimum and 
critical capital levels. The respective ``as of'' dates will be stated 
in the proposed and final capital classifications. For example, OFHEO 
may assess compliance with the minimum capital level on a more frequent 
or rapid basis than the risk-based capital level.
    As Sec. 1777.21(a)(4) provides, OFHEO may initiate a capital 
classification at any time. If another capital classification is 
pending at such time, OFHEO will advise the Enterprise whether the new 
classification supersedes the pending one. In addition, Sec. 1777.21(b) 
requires the Enterprise to notify OFHEO of any material event that may 
reasonably be expected to cause the Enterprise's minimum, critical, or 
risk-based capital level to fall to a point that could result in a 
capital classification lower than the Enterprise's existing or proposed 
capital classifications.
    Under the classification procedure, as set out in 12 U.S.C. 4618, 
OFHEO is to deliver written information to the Enterprise describing 
the proposed capital classification and the agency's basis for such 
classification. The Enterprise then has thirty days to submit any 
relevant information in response to the notice. OFHEO is authorized to 
extend the response period up to an additional thirty days or reduce 
the response period in appropriate circumstances; the Enterprise may 
also consent to an abbreviated response period. In exigent 
circumstances, the response period afforded to an Enterprise would 
likely be quite brief.
    An Enterprise's failure to respond within the applicable period 
waives the opportunity to comment on the proposed classification. Once 
the response period has closed, OFHEO will make a final determination 
of the Enterprise's capital classification. OFHEO will take into 
consideration any relevant information submitted by the Enterprise 
during the response period in reaching the final decision. The final 
capital classification is to be provided to the Enterprise in writing, 
including a description of OFHEO's basis for the classification.
    Section 1777.22 implements statutory capital distribution 
restrictions, including the above-cited provisions under each 
Enterprise's charter act, prohibiting, without regard to capital 
classification, each Enterprise from making any capital distribution 
that would decrease the capital of the Enterprise to an amount less 
than the risk-based capital level or the minimum capital level, except 
as explicitly approved by OFHEO. Section 1777.22(c) and (a) implement 
such provisions before and after the initial effective date of OFHEO's 
risk-based capital regulations, respectively. Section 1777.22(b)(1) 
implements 12 U.S.C. 4615(a)(2) and 4616(a)(2), prohibiting any 
Enterprise that is not classified as adequately capitalized from making 
any capital distributions that would result in classification into a 
lower capital classification. Section 1777.22(b)(2) also implements 12 
U.S.C. 4616(a)(2), prohibiting a significantly undercapitalized 
Enterprise from making any capital distributions absent OFHEO's prior 
approval. Section 1777.22(b)(2) also applies in the case of an 
Enterprise classified as critically undercapitalized. The proposed rule 
acknowledges, in a manner consistent with 12 U.S.C. 4617(b) through 
(c), OFHEO's authority to take actions authorized by 12 U.S.C. 4616 in 
the case of a critically undercapitalized Enterprise, including one in 
conservatorship. Under the same authority, Sec. 1777.23 requires an 
Enterprise classified as critically undercapitalized to submit a 
complete and acceptable capital restoration plan to OFHEO.
    Section 1777.23 addresses capital restoration plans. Under 
Sec. 1777.23(a)(1), an Enterprise is required to file a complete 
capital restoration plan with OFHEO within ten days of receiving final 
notice of capital classification stating that the Enterprise is 
classified as undercapitalized, significantly undercapitalized, or 
critically undercapitalized, unless OFHEO extends the period.
    Under Sec. 1777.23(a)(2), an Enterprise that is already operating 
under an approved capital restoration plan will not be required to 
submit a new plan each time the Enterprise receives subsequent notices 
of capital classification, unless OFHEO notifies the Enterprise to the 
contrary. As a general matter, OFHEO would be likely to direct the 
Enterprise to submit a new or amended plan if subsequent notices of 
capital classification are on grounds different from or in addition to 
the grounds underlying previous notices, or if changes in circumstances 
underlying the original plan indicate that reevaluation is appropriate, 
or if the original plan is not achieving the desired effects within a 
reasonable period.
    In order to be complete, the Enterprise's capital restoration plan 
must include all of the information required by 12 U.S.C. 4622(a) and 
all other information directed by OFHEO. If the Enterprise does not 
submit a complete plan by the specified deadline, OFHEO may in its 
discretion reclassify the Enterprise into a lower capital 
classification, as described in Sec. 1777.23(c). OFHEO's original 
notice of proposed capital classification will notify the Enterprise 
that the Enterprise's failure to submit a complete and timely capital 
restoration plan may lead to additional reclassification, as provided 
in Sec. 1777.21(a)(1)(ii). Consequently, if a complete and timely

[[Page 18701]]

capital restoration plan is not received, OFHEO may issue such 
reclassification under Sec. 1777.21(a)(3) immediately upon expiration 
of the filing deadline, without further notice. As further provided in 
Sec. 1777.23(c), such reclassification may affect each subsequent 
capital classification of the Enterprise, until the Enterprise files a 
plan that obtains OFHEO's approval. If the Enterprise has not corrected 
its failure to file an acceptable plan after a reasonable period, OFHEO 
may issue additional reclassifications to the Enterprise, without 
additional notice.
    OFHEO will review the Enterprise's capital plan and provide an 
order within thirty days specifying the plan is approved or 
disapproved, subject to extension for an additional thirty days as 
OFHEO deems necessary. If the plan is disapproved, OFHEO's order will 
address the reasons for disapproval. The Enterprise must then submit an 
amended plan acceptable to OFHEO within thirty days or such longer 
period as OFHEO approves. This thirty day period is longer than the ten 
day period for submission of the initial plan, in order to facilitate 
dialog with the Enterprise as to how the Enterprise may rehabilitate 
its disapproved plan. However, as provided in Sec. 1777.23(c), OFHEO 
may elect to reclassify the Enterprise into a lower capital 
classification, without additional notice, until such time as the 
Enterprise files an amended capital plan and OFHEO approves it.
    Once a capital plan is approved, it may be amended only with the 
prior written approval of OFHEO, as provided in Sec. 1777.23(f). The 
Enterprise's obligations under the plan remain in place except to the 
extent the plan itself identifies dates, events, or conditions upon 
which the obligations terminate. To the extent the plan is silent in 
regard to any particular obligation, the obligation remains in place 
until OFHEO issues an order terminating such obligation. An Enterprise 
may seek such termination orders from OFHEO.
    Section 1777.23(h) of the proposed rule requires the Enterprise to 
take all actions reasonably necessary to comply with the approved plan 
and fulfill the schedule thereunder. If an Enterprise fails to do so, 
Sec. 1777.23(h) indicates OFHEO may exercise its authority under 12 
U.S.C. 4615(b)(2) and 4616(b)(5), which authorizes OFHEO to reclassify 
an Enterprise if OFHEO finds it has failed to make, in good faith, 
reasonable efforts necessary to comply with the capital restoration 
plan. OFHEO interprets the requirement of good faith under the 
statutory language to mean that the Enterprise must make all efforts 
reasonably necessary to implement the plan. As is provided in 
Sec. 1777.23(h)(1)(ii) through (iii), the Enterprise's failure to 
implement the plan will be considered in the determination of each 
subsequent capital classification of the Enterprise until OFHEO 
determines the Enterprise is making such reasonable efforts. The 
Enterprise may face successive reclassifications for failure to make 
such efforts after a reasonable period.
    In addition, a capital plan that has received an approval order by 
OFHEO is an order under the 1992 Act for purposes of 12 U.S.C. 4631, 
authorizing OFHEO to institute cease and desist proceedings if an 
Enterprise, executive officer, or director thereof engages in, or OFHEO 
has reasonable cause to believe is about to engage in, conduct that 
violates orders issued under the 1992 Act. Under certain circumstances, 
civil money penalties may also be imposed under 12 U.S.C. 4636 against 
an Enterprise, executive officer, or director thereof for violation of 
an order under the 1992 Act. As is noted in Sec. 1777.23(h)(2), an 
Enterprise in any capital classification, its executive officers, and 
directors may be subject to action by OFHEO under 12 U.S.C. 4631, 4632, 
and 4636 and 12 CFR part 1780 for failure to comply with an approved 
plan.
    Section 1777.24 of the proposed rule implements OFHEO's 
discretionary authority under 12 U.S.C. 4616(b)(1) through (4), to 
issue orders requiring a significantly undercapitalized Enterprise to 
take remedial and corrective actions such as reducing liabilities, 
limiting asset growth, obtaining new capital, or refraining from 
engaging in activities as specified by OFHEO. As indicated by 
Sec. 1777.24, OFHEO may also issue such orders to an Enterprise that 
has been classified as critically undercapitalized, including one in 
conservatorship, under authority provided by 12 U.S.C. 4617(b) through 
(c).
    The procedures under which these orders may be issued are similar 
to the procedures for issuance of capital classifications, and are set 
out in Sec. Sec. 1777.24 through 1777.26 of the proposed rule. Similar 
to the treatment of approved capital plans discussed above, the 
provisions contained in these orders bind the Enterprise until such 
provisions terminate under the terms of the order or OFHEO modifies the 
order, as discussed in Sec. 1777.26(b). As indicated in 
Sec. 1777.26(c), these orders constitute orders under the 1992 Act, and 
an Enterprise in any capital classification, its executive officers, 
and directors may be subject to administrative enforcement action by 
OFHEO under 12 U.S.C. 4631, 4632, and 4636 and 12 CFR part 1780 for 
failure to comply with such orders. Moreover, 12 U.S.C. 4635 provides 
jurisdiction in the United States District Court of the District of 
Columbia for direct enforcement of these orders.
    Section 1777.27 summarizes 12 U.S.C. 4623, which provides that an 
Enterprise not classified as critically undercapitalized may seek 
judicial review of OFHEO's final notice of its capital classification, 
or a final notice of order issued under 12 U.S.C. 4616(b)(1) through 
(4). For any issue raised by such Enterprise in connection with such 
review, the Enterprise must have first exhausted its administrative 
remedies, by presenting all its objections, arguments, and information 
relating to such issue for OFHEO's consideration in the Enterprise's 
response to OFHEO's notice of capital classification or notice of 
intent to issue an order. The Enterprise's judicial action will not 
operate as a stay of OFHEO's final capital classification or order.
    Section 1777.28 addresses appointment of a conservator for a 
significantly undercapitalized or critically undercapitalized 
Enterprise.\21\ As is described in Sec. 1777.12(a), 12 U.S.C. 4616 
empowers OFHEO to appoint a conservator for a significantly 
undercapitalized Enterprise, if OFHEO determines the Enterprise's core 
capital is less than the minimum capital level and the alternative 
remedies available to OFHEO under the 1992 Act are not satisfactory. As 
is described in Sec. 1777.12(b), 12 U.S.C. 4617 requires OFHEO to 
appoint a conservator for a critically undercapitalized Enterprise, 
unless OFHEO makes a written determination, and the Secretary of the 
Treasury concurs in writing, that the appointment of a conservator 
likely would have serious adverse effects on economic conditions of 
national financial markets or on the financial stability of the housing 
finance market, and the public interest would be better served by 
taking some other enforcement action authorized by the 1992 Act. Under 
12 U.S.C. 4619(e)(2), either such appointment will be terminated by 
OFHEO upon the agency's determination that the Enterprise has 
maintained an amount of core capital that is equal to or exceeds the 
minimum capital level. OFHEO is also vested with discretion, under 12 
U.S.C. 4619(e)(1), to terminate either

[[Page 18702]]

type of conservatorship appointment based on the agency's determination 
that such termination is in the public interest and may safely be 
accomplished. These termination provisions are reflected in 
Sec. 1777.28(d).
---------------------------------------------------------------------------

    \21\ OFHEO also has authority under 12 U.S.C. 4619(a)(1) through 
(2) to appoint conservators on various grounds, regardless of an 
Enterprise's capital classification.
---------------------------------------------------------------------------

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    The proposed regulation is not classified as a significant rule 
under Executive Order 12866 because it will not result in an annual 
effect on the economy of $100 million or more or a major increase in 
costs or prices for consumers, individual industries, Federal, State, 
or local government agencies, or geographic regions; or have 
significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic or 
foreign markets. Accordingly, no regulatory impact assessment is 
required and this proposed regulation has not been submitted to the 
Office of Management and Budget for review.

Unfunded Mandates Reform Act of 1995

    This proposed rule does not include a Federal mandate that could 
result in the expenditure by State, local, and tribal governments, in 
the aggregate, or by the private sector, of $100,000,000 or more 
(adjusted annually for inflation) in any one year. As a result, the 
proposed rule does not warrant the preparation of an assessment 
statement in accordance with the Unfunded Mandates Reform Act of 1995.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
proposed regulation under the Regulatory Flexibility Act. The General 
Counsel of OFHEO certifies that the proposed regulation, if adopted, is 
not likely to have a significant economic impact on a substantial 
number of small business entities because the regulation only affects 
the Enterprises, their executive officers, and their directors.

Paperwork Reduction Act of 1995

    This proposed rules contain no information collection requirements 
that require the approval of the Office of Management and Budget 
pursuant to the Paperwork Reduction Act, 44 U.S.C. 3501-3520.

List of Subjects in 12 CFR Part 1777

    Administrative practice and procedure, Capital classification, 
Mortgages.

    Accordingly, for the reasons set out in the preamble, OFHEO 
proposes to add part 1777 to subchapter C of 12 CFR chapter XVII to 
read as follows:

PART 1777--PROMPT CORRECTIVE ACTION

Sec.
1777.1  Authority, purpose, scope, and implementation dates.
1777.2  Preservation of other authority.
1777.3  Definitions.
Subpart A--Prompt Supervisory Response
1777.10  Developments prompting supervisory response.
1777.11  Supervisory response.
1777.12  Other supervisory action.
Subpart B--Capital Classifications and Orders Under Section 1366 of the 
1992 Act
1777.20  Capital classifications.
1777.21  Notice of capital category, and adjustments.
1777.22  Limitation on capital distributions.
1777.23  Capital restoration plans.
1777.24  Notice of intent to issue an order.
1777.25  Response to notice.
1777.26  Final notice of order.
1777.27  Exhaustion and review.
1777.28  Appointment of conservator for significantly 
undercapitalized or critically undercapitalized Enterprise.

    Authority: 12 U.S.C. 1452(b)(2), 1456(c), 1718(c)(2), 1723a(k), 
4513(a), 4513(b), 4514, 4517, 4611-4619, 4622, 4623, 4631, 4635.


Sec. 1777.1  Authority, purpose, scope, and implementation dates.

    (a) Authority. This part is issued by the Office of Federal Housing 
Enterprise Oversight (OFHEO) pursuant to sections 1313, 1371, 1372, and 
1376 of the Federal Housing Enterprises Financial Safety and Soundness 
Act (1992 Act) (12 U.S.C. 4513, 4631, 4632, and 4636). These provisions 
broadly authorize OFHEO to take such actions as are deemed appropriate 
by the Director of OFHEO to ensure that the Federal National Mortgage 
Association and the Federal Home Loan Mortgage Corporation 
(collectively, the Enterprises) maintain adequate capital and operate 
in a safe and sound manner.
    (b) Authority, purpose and scope of subpart A. In addition to the 
authority set forth in paragraph (a) of this section, subpart A of this 
part is also issued pursuant to section 1314 of the 1992 Act (12 U.S.C. 
4514), section 307(c) of the Federal Home Loan Mortgage Corporation Act 
(12 U.S.C. 1456(c)), and section 309(k) of the Federal National 
Mortgage Association Charter Act (12 U.S.C. 1723a(k)), requiring each 
Enterprise to submit such reports to OFHEO as the Director of OFHEO 
determines, in his or her judgment, are necessary to carry out the 
purposes of the 1992 Act. Subpart A is also issued in reliance on 
section 1317 of the 1992 Act (12 U.S.C. 4517) authorizing OFHEO to 
conduct examinations of the Enterprises. The purpose of subpart A is to 
set forth a framework of early intervention supervisory measures, other 
than formal enforcement actions, that OFHEO may take to address 
specified developments that merit supervisory review to ensure they do 
not pose a current or future threat to the safety and soundness of an 
Enterprise. OFHEO's initiation of procedures under subpart A does not 
necessarily indicate that any unsound condition exists or that any 
violation has taken place. The supervisory responses enumerated in 
Sec. 1777.11 do not constitute orders under the 1992 Act for purposes 
of sections 1371, 1372, and 1376 thereof (12 U.S.C. 4631, 4632 and 
4636).
    (c) Authority, purpose, and scope of subpart B. In addition to the 
authority set forth in paragraph (a) of this section, subpart B of this 
part is also issued pursuant to subtitle B of the 1992 Act (12 U.S.C. 
4611 through 4623), section 303(b)(2) of the Federal Home Loan Mortgage 
Corporation Act (12 U.S.C. 1452(b)(2)), and section 303(c)(2) of the 
Federal National Mortgage Association Charter Act (12 U.S.C. 
1718(c)(2)). These provisions authorize OFHEO to administer certain 
capital requirements for the Enterprises, to classify the capital of 
the Enterprises based on capital levels specified in the 1992 Act, and, 
in appropriate circumstances, to exercise discretion to reclassify an 
Enterprise into a lower capital category. Under these provisions, there 
are also automatic consequences for an Enterprise that is not 
classified as adequately capitalized, as well as discretionary 
authority for OFHEO to require an Enterprise to take remedial actions. 
Subpart B implements the provisions of sections 1364 through 1368, 
1369(b) through (e), 1369C, and 1369D of the 1992 Act as they apply to 
the Enterprises (12 U.S.C. 4614 through 4618, 4619(b) through (e), 4622 
and 4623). The principal purposes of subpart B are to identify the 
capital

[[Page 18703]]

measures and capital levels that OFHEO uses in determining the capital 
classification of an Enterprise, to set out the procedures OFHEO uses 
in determining such capital classifications, to establish procedures 
for submission and review of capital restoration plans of an Enterprise 
that is not classified as adequately capitalized, and to establish 
procedures under which OFHEO issues orders pursuant to section 
1366(b)(1) through (4) of the 1992 Act (12 U.S.C. 4616(b)(1) through 
(4)).
    (d) Effective dates of capital classifications. Section 1364 of the 
1992 Act (12 U.S.C. 4614(d)) directs OFHEO to determine capital 
classifications for the Enterprises by reference to two capital 
standards, consisting of the minimum or critical capital level on the 
one hand, and the risk-based capital level on the other. Section 
1364(d) of the 1992 Act (12 U.S.C. 4614(d)) excludes consideration of 
whether the Enterprises meet the risk-based capital level in 
determining capital classifications or reclassifications under 1364, 
until one year after the effective date of OFHEO's regulation 
implementing OFHEO's risk-based capital test (issued under section 
1361(e) of the 1992 Act (12 U.S.C. 4611(e)); until such time, section 
1364(d) provides that an Enterprise is to be classified as adequately 
capitalized so long as it meets the minimum capital level. Subpart B 
contains a currently effective set of capital classifications omitting 
consideration of the risk-based capital level, as well as another set 
of capital classifications which will take effect, and displace the 
current set of capital classifications, one year after the effective 
date of OFHEO's risk-based capital rule.


Sec. 1777.2  Preservation of other authority.

    (a) Supervisory standards. Notwithstanding the identification of 
certain developments for supervisory response under subpart A of this 
part, nothing in this part in any way limits the authority of OFHEO 
otherwise to take such actions as are deemed appropriate by the 
Director of OFHEO to ensure that the Enterprises maintain adequate 
capital, operate in a safe and sound manner, and comply with the 1992 
Act and regulations, orders, and agreements thereunder.
    (b) Capital floor. Classification of an Enterprise as adequately 
capitalized in accordance with subtitle B of the 1992 Act and subpart B 
of this part indicates that the Enterprise meets the capital levels 
under sections 1361 and 1362 of the 1992 Act (12 U.S.C. 4611 and 4612) 
and regulations promulgated thereunder as of particular times stated in 
the classification determination. Nothing in subpart B of this part or 
subtitle B of the 1992 Act limits OFHEO's authority otherwise to 
address circumstances that would require additional capital through 
regulations, orders, notices, guidance, or other actions.
    (c) Form of supervisory action or response. In addition to the 
supervisory responses contemplated under subpart A of this part, and 
the authority to classify and reclassify the Enterprises, to issue 
orders, and to appoint conservators under subpart B of this part, the 
1992 Act grants OFHEO broad discretion to take such other supervisory 
actions as may be deemed by OFHEO to be appropriate, including issuing 
temporary and permanent cease and desist orders, imposing civil money 
penalties, appointing a conservator under section 1369(a)(1) through 
(2) of the 1992 Act (12 U.S.C. 4619(a)(1) through (2)), entering into a 
written agreement the violation of which is actionable through 
enforcement proceedings, or entering into any other formal or informal 
agreement with an Enterprise. Neither the 1992 Act nor this part in any 
way limit OFHEO's discretion over the selection of the type of these 
actions, and the selection of one type of action under this part or 
under these other statutory authorities, or a combination thereof, does 
not foreclose OFHEO from pursuing any other action.


Sec. 1777.3  Definitions.

    For purposes of this part, the following definitions will apply:
    1992 Act means the Federal Housing Enterprises Financial Safety and 
Soundness Act, 12 U.S.C. 4501 et seq.
    Affiliate means an entity that controls an Enterprise, is 
controlled by an Enterprise, or is under common control with an 
Enterprise.
    Capital distribution means:
    (1) Any dividend or other distribution in cash or in kind made with 
respect to any shares of, or other ownership interest in, an 
Enterprise, except a dividend consisting only of shares of the 
Enterprise; and
    (2) Any payment made by an Enterprise to repurchase, redeem, 
retire, or otherwise acquire any of its shares or other ownership 
interests, including any extension of credit made to finance an 
acquisition by the Enterprise of such shares or other ownership 
interests, except to the extent the Enterprise makes a payment to 
repurchase its shares for the purpose of fulfilling an obligation of 
the Enterprise under an employee stock ownership plan that is qualified 
under section 401 of the Internal Revenue Code of 1986 (26 U.S.C. 401 
et seq.) or any substantially equivalent plan and is approved in 
writing by OFHEO in advance.
    Core capital has the same meaning as provided in 12 CFR 1750.2.
    Critical capital level means the amount of core capital that is 
equal to the sum of one half of the amount determined under 12 CFR 
1750.4(a)(1) and five-ninths of the amounts determined under 12 CFR 
1750.4(a)(2) through 1750.4(a)(7).
    Enterprise means the Federal National Mortgage Association and any 
affiliate thereof, and the Federal Home Loan Mortgage Corporation and 
any affiliate thereof.
    Minimum capital level means the minimum amount of core capital 
specified for an Enterprise pursuant to section 1362 of the 1992 Act 
(12 U.S.C. 4612), as determined under 12 CFR 1750.4.
    OFHEO means the Office of Federal Housing Enterprise Oversight.
    Risk-based capital level means the amount of total capital 
specified for an Enterprise pursuant to section 1361 of the 1992 Act 
(12 U.S.C. 4611), as determined under OFHEO's regulations implementing 
section 1361.
    Total capital has the same meaning as provided at 12 CFR 
1750.11(n).

Subpart A--Prompt Supervisory Response


Sec. 1777.10  Developments prompting supervisory response.

    In the event of any of the following developments, OFHEO shall 
undertake one of the supervisory responses enumerated in Sec. 1777.11, 
or a combination thereof:
    (a) OFHEO's national House Price Index (HPI) for the most recent 
quarter is more than two percent less than the national HPI four 
quarters previously, or for any Census Division or Divisions in which 
are located properties securing more than 25 percent of single-family 
mortgages owned or securing securities guaranteed by an Enterprise, the 
HPI for the most recent quarter for such Division or Divisions is more 
than five percent less than the HPI for that Division or Divisions four 
quarters previously;
    (b) An Enterprise's interest rate risk, as assessed by any internal 
measure, exceeds the limit at which the Enterprise's policies and 
procedures require a report of such exception to its board of 
directors;
    (c) An Enterprise's net income for the most recent calendar quarter 
is less than one-half of its average quarterly net income for any four-
quarter period during the prior eight quarters;
    (d) An Enterprise's net interest margin (NIM) for the most recent 
quarter is less

[[Page 18704]]

than one-half of its average NIM for any four-quarter period during the 
prior eight quarters;
    (e) For single-family mortgage loans owned or securitized by an 
Enterprise that are delinquent ninety days or more or in foreclosure, 
the proportion of such loans in the most recent quarter has increased 
more than one-half of a percentage point compared to the lowest 
proportion of such loans in any of the prior four quarters;
    (f) An Enterprise's equity, as measured on its Consolidated Fair 
Value Balance Sheet as of the end of a calendar year, is ten percent 
less than the Enterprise's equity so measured as of the end of the 
previous calendar year, and is ten percent or more below the amount of 
its core capital;
    (g) An Enterprise experiences material and sustained disruptions to 
its data processing or operational systems;
    (h) An Enterprise changes its external auditor without cause;
    (i) The board of directors of an Enterprise fails to hold a 
scheduled meeting without cause; or
    (j) Any other development, including conduct of an activity by an 
Enterprise, that OFHEO determines in its discretion presents a risk to 
the safety and soundness of the Enterprise or a possible violation of 
applicable law, regulation, or order.


Sec. 1777.11  Supervisory response.

    (a) Level I supervisory response.--(1) Supervisory letter. Not 
later than five business days after OFHEO determines that a development 
enumerated in Sec. 1777.10 has transpired, OFHEO shall deliver a 
supervisory letter alerting the chief executive officer or to the board 
of directors, of the Enterprise to OFHEO's determination that the 
development has occurred.
    (2) Contents of supervisory letter. The supervisory letter shall 
notify the Enterprise that OFHEO is commencing review of the 
development pursuant to this subpart. As is appropriate under the 
particular circumstances and the nature of the development, the letter 
may direct the Enterprise to undertake one or more of the following, as 
of such time OFHEO directs:
    (i) Provide OFHEO with any relevant information known to the 
Enterprise about the development, in such format as OFHEO directs;
    (ii) Respond to specific questions and concerns OFHEO has about the 
development; and
    (iii) Take appropriate action.
    (3) Review; further action. Based on the Enterprise's response to 
the supervisory letter and consideration of other appropriate factors, 
OFHEO shall promptly determine whether the Level I supervisory response 
is adequate to resolve any supervisory issues implicated by the 
development, or whether additional supervisory response under this 
section is warranted.
    (b) Level II supervisory response.--(1) Special review. In addition 
to any other supervisory response described in this section, OFHEO may 
conduct a special review of the Enterprise in order to assess the 
impact of the development on the Enterprise.
    (2) Review; further action. Based on the results of the special 
review and consideration of other appropriate factors, OFHEO shall 
promptly determine whether additional supervisory response under this 
section is warranted.
    (c) Level III supervisory response.--(1) Action plan. In addition 
to any other supervisory response described in this section, OFHEO may 
direct the Enterprise to prepare and submit an action plan to OFHEO, in 
such format and at such time as OFHEO directs.
    (2) Contents of action plan. Such action plan shall include, 
subject to additional direction by OFHEO, the following:
    (i) In the case of developments, activities, or investments 
described in Sec. 1777.10(b) through (j), any relevant information 
known to the Enterprise about the circumstances that led to such 
development, activity, or investment;
    (ii) An assessment of likely consequences that the development, 
activity, or investment may have for the Enterprise; and
    (iii) The proposed course of action the Enterprise will undertake 
in response to the development, in conducting the activity, or making 
the investment, including an explanation as to why such approach is 
preferred to any other alternative actions by the Enterprise and how 
such approach will address the concerns of OFHEO.
    (3) Review; further action. If OFHEO in its discretion determines 
that the information, assessment, or proposed course of action 
contained in the action plan is incomplete or inadequate, OFHEO shall 
promptly direct the Enterprise to correct such deficiencies to the 
extent OFHEO determines such corrections will aid in resolving 
supervisory issues implicated by the development, and will promptly 
determine whether additional supervisory response under this section is 
warranted.
    (d) Level IV supervisory response.--(1) Notice to show cause. In 
addition to any other supervisory response described in this section, 
OFHEO may issue written notice to the board of directors of the 
Enterprise directing the Enterprise to show cause, on or before the 
date specified in the notice, why OFHEO should not issue one or more of 
the following:
    (i) A notice of charges to the Enterprise under section 1371 of the 
1992 Act (12 U.S.C. 4631) and the procedures in 12 CFR part 1780 
commencing an action to order the Enterprise to cease and desist 
conduct, conditions, or violations specified in the notice to show 
cause;
    (ii) A temporary order to the Enterprise under section 1372 of the 
1992 Act (12 U.S.C. 4632) and the procedures in 12 CFR part 1780 to 
cease and desist from, and take affirmative actions to prevent or 
remedy harm from, conduct, conditions, or violations specified in the 
notice to show cause;
    (iii) A notice of charges under section 1376 of the 1992 Act (12 
U.S.C. 4636) and the procedures in 12 CFR part 1780 commencing 
imposition of a civil money penalty against the Enterprise; and
    (iv) A notice of discretionary reclassification of the Enterprise's 
capital classification under section 1364(b) of the 1992 Act (12 U.S.C. 
4614(b)) and subpart B of this part.
    (2) Review; further action. Based on the Enterprise's response to 
the notice to show cause and consideration of other appropriate 
factors, OFHEO shall determine promptly whether to commence the actions 
described in the notice, and whether additional supervisory response 
under this section is warranted.


Sec. 1777.12  Other supervisory action.

    Notwithstanding the pendency or completion of one or more 
supervisory responses described in Sec. 1777.11, OFHEO may at any time 
undertake additional supervisory steps and actions in the form of any 
informal or formal supervisory tool available to OFHEO under the 1992 
Act, including but not limited to the issuance of guidance or 
directives under section 1313 (12 U.S.C. 4513), the requiring of 
reports under section 1314 (12 U.S.C. 4514), the conduct of other 
examinations under section 1317 (12 U.S.C. 4517), discretionary 
reclassification under section 1364 (12 U.S.C. 4614), discretionary 
action under section 1366(b) (12 U.S.C. 4616(b)), appointment of a 
conservator under section 1369(a) (12 U.S.C. 4619(a)), or 
administrative enforcement action under sections 1371, 1372, and 1376 
(12 U.S.C. 4631, 4632 and 4636). In addition, OFHEO may take any such 
steps or actions with respect to an

[[Page 18705]]

Enterprise that fails to make a submission or comply with a directive 
as required by Sec. 1777.11, or to address an Enterprise's failure to 
implement an appropriate action in response to a supervisory letter or 
under an action plan under Sec. 1777.11.

Subpart B--Capital Classifications and Orders Under Section 1366 of 
the 1992 Act


Sec. 1777.20  Capital classifications.

    (a) Capital classifications after the effective date of section 
1365 of the 1992 Act. The capital classification of an Enterprise for 
purposes of subpart B of this part is as follows:
    (1) Adequately capitalized. Except as otherwise provided under 
paragraph (a)(5) of this section, an Enterprise will be classified as 
adequately capitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, held total capital equaling or exceeding the risk-based 
capital level; and
    (ii) As of the date specified in the notice of proposed capital 
classification, held core capital equaling or exceeding the minimum 
capital level.
    (2) Undercapitalized. Except as otherwise provided under paragraph 
(a)(5) of this section or Sec. 1777.23(c) or Sec. 1777.23(h), an 
Enterprise will be classified as undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, held total capital less than the risk-based capital 
level; and
    (ii) As of the date specified in the notice of proposed capital 
classification, held core capital equaling or exceeding the minimum 
capital level.
    (3) Significantly undercapitalized. Except as otherwise provided 
under paragraph (a)(5) of this section or Sec. 1777.23(c) or 
Sec. 1777.23(h), an Enterprise will be classified as significantly 
undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, held core capital less than the minimum capital level; 
and
    (ii) As of the date specified in the notice of proposed capital 
classification, held core capital equaling or exceeding the critical 
capital level.
    (4) Critically undercapitalized. An Enterprise will be classified 
as critically undercapitalized if, as of the date specified in the 
notice of proposed capital classification, the Enterprise held core 
capital less than the critical capital level.
    (5) Discretionary reclassification.--(i) Determination to 
reclassify. If OFHEO determines in writing that an Enterprise is 
engaging in action or inaction (including a failure to respond 
appropriately to changes in circumstances or unforeseen events) that 
could result a rapid depletion of core capital, or that the value of 
the property subject to mortgages held or securitized by the Enterprise 
has decreased significantly, or that reclassification is otherwise 
deemed necessary to ensure that the Enterprise holds adequate capital 
and operates safely, OFHEO may reclassify the Enterprise as:
    (A) Undercapitalized if the Enterprise is otherwise classified as 
adequately capitalized;
    (B) Significantly undercapitalized if the Enterprise is otherwise 
classified as undercapitalized;
    (C) Critically undercapitalized if the Enterprise is otherwise 
classified as significantly undercapitalized.
    (ii) Prior approvals. In making any determination to reclassify an 
Enterprise under paragraph (a)(5)(i) of this section, OFHEO will not 
base its decision to reclassify solely on action or inaction that 
previously was given specific approval by the Director of OFHEO in 
connection with the Director's approval of the Enterprise's capital 
restoration plan under section 1369C of the 1992 Act (12 U.S.C. 4622), 
or of a written agreement with the Enterprise that is enforceable in 
accordance with section 1371 of the 1992 Act (12 U.S.C. 4631).
    (b) Duration of reclassification; successive reclassifications.--
(1) Any reclassification of an Enterprise based on action, inaction, or 
conditions under paragraph (a)(5) or (c)(5) of this section shall be 
considered in the determination of each subsequent capital 
classification of the Enterprise, and shall only cease being considered 
in the determination of the Enterprise's capital classification after 
OFHEO determines that the action, inaction or condition upon which the 
reclassification was based has ceased or been eliminated and remedied 
to OFHEO's satisfaction.
    (2) If the action, inaction, or condition upon which a 
reclassification was based under paragraph (a)(5) or (c)(5) of this 
section has not ceased or been eliminated and remedied to OFHEO's 
satisfaction within such reasonable period as is determined by OFHEO to 
be appropriate, OFHEO may consider such failure to be the basis for 
additional reclassification under such paragraph (a)(5) or (c)(5) of 
this section into lower capital classifications.
    (c) Capital classifications before the effective date of section 
1365 of the 1992 Act. Notwithstanding paragraph (a) of this section, 
until the expiration of one year following the initial effective date 
of OFHEO's regulations establishing the risk-based capital test (issued 
under section 1361(e) of the 1992 Act (12 U.S.C. 4611(e)), the capital 
classification of an Enterprise for purposes of subpart B of this part 
is as follows:
    (1) Adequately capitalized. Except as otherwise provided in 
paragraph (c)(5) of this section, an Enterprise will be classified as 
adequately capitalized if the Enterprise, as of the date specified in 
the notice of proposed capital classification, held core capital 
equaling or exceeding the minimum capital level.
    (2) Undercapitalized. An Enterprise will be classified as 
undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, held core capital equaling or exceeding the minimum 
capital level; and (ii) Is reclassified as undercapitalized by OFHEO 
under paragraph (c)(5) of this section.
    (3) Significantly undercapitalized. Except as otherwise provided 
under paragraph (c)(5) of this section or Sec. 1777.23(c) or 
Sec. 1777.23(h), an Enterprise will be classified as significantly 
undercapitalized if the Enterprise:
    (i) As of the date specified in the notice of proposed capital 
classification, held core capital less than the minimum capital level; 
and (ii) As of the date specified in the notice of proposed capital 
classification, held core capital equaling or exceeding the critical 
capital level.
    (4) Critically undercapitalized. An Enterprise will be classified 
as critically undercapitalized if, as of the date specified in the 
notice of proposed capital classification, the Enterprise held core 
capital less than the critical capital level.
    (5) Discretionary reclassification.--(i) Determination to 
reclassify. If OFHEO determines in writing that an Enterprise is 
engaging in action or inaction (including a failure to respond 
appropriately to changes in circumstances or unforeseen events) that 
could result a rapid depletion of core capital, or that the value of 
the property subject to mortgages held or securitized by the Enterprise 
has decreased significantly, or that reclassification is deemed 
necessary to ensure that the Enterprise holds adequate capital and 
operates safely, OFHEO may reclassify the Enterprise as:
    (A) Undercapitalized if the Enterprise is otherwise classified as 
adequately capitalized;
    (B) Significantly undercapitalized if the Enterprise is otherwise 
classified as undercapitalized;

[[Page 18706]]

    (C) Critically undercapitalized if the Enterprise is otherwise 
classified as significantly undercapitalized.
    (ii) Prior approvals. In making any determination to reclassify an 
Enterprise under paragraph (c)(5)(i) of this section, OFHEO will not 
base its decision to reclassify solely on action or inaction that 
previously was given specific approval by the Director of OFHEO in 
connection with the Director's approval of the Enterprise's capital 
restoration plan under section 1369C of the 1992 Act (12 US.C. 4622), 
or of a written agreement with the Enterprise that is enforceable in 
accordance with section 1371 of the 1992 Act (12 U.S.C. 4631).


Sec. 1777.21  Notice of capital category, and adjustments.

    (a) Notice of capital classification. OFHEO will classify each 
Enterprise according to the capital classifications in Sec. 1777.20(a) 
or Sec. 1777.20(c) on at least a quarterly basis. OFHEO may classify an 
Enterprise according to the capital classifications in Sec. 1777.20(a) 
or Sec. 1777.20(c), or reclassify an Enterprise as set out in 
Sec. 1777.20(a)(5), Sec. 1777.20(c)(5), Sec. 1777.23(c), or 
Sec. 1777.23(h), at such other times as OFHEO deems appropriate.
    (1) Notice of proposed capital classification. (i) Before OFHEO 
classifies or reclassifies an Enterprise, OFHEO will provide the 
Enterprise with written notice containing the proposed capital 
classification, the information upon which the proposed classification 
is based, and the reason for the proposed classification, as 
appropriate.
    (ii) Notices proposing to classify or reclassify an Enterprise as 
undercapitalized or significantly undercapitalized may be combined with 
a notice that OFHEO may further reclassify the Enterprise under 
Sec. 1777.23(c), without additional notice.
    (iii) Notices proposing to classify or reclassify an Enterprise as 
significantly undercapitalized or critically undercapitalized may be 
combined with a notice under Sec. 1777.24 that OFHEO intends to issue 
an order under section 1366 of the 1992 Act (12 U.S.C. 4616).
    (iv) Notices proposing to classify an Enterprise as 
undercapitalized or significantly undercapitalized may be combined with 
a notice proposing to simultaneously reclassify the Enterprise under 
Sec. 1777.20(a)(5) or Sec. 1777.20(c)(5).
    (2) Response by the Enterprise. The Enterprise may submit a 
response to OFHEO containing information for OFHEO's consideration in 
classifying or reclassifying the Enterprise.
    (i) The Enterprise has thirty calendar days from receipt the notice 
of proposed capital classification to submit its response to OFHEO, 
unless OFHEO determines a shorter period to be appropriate or the 
Enterprise consents to a shorter period.
    (ii) The Enterprise's response period may be extended for up to an 
additional thirty calendar days if OFHEO determines there is good cause 
for such extension.
    (iii) The Enterprise's failure to submit a response during the 
response period (as extended or shortened, if applicable) shall waive 
any right of the Enterprise to comment on or object to the proposed 
capital classification.
    (3) Classification determination and written notice of capital 
classification. After the Enterprise has submitted its response under 
paragraph (a)(2) of this section or the response period (as extended or 
shortened, if applicable) has expired, whichever occurs first, OFHEO 
will make its determination of the Enterprise's capital classification, 
taking into consideration such relevant information as is provided by 
the Enterprise in its response, if any, under paragraph (a)(2) of this 
section. OFHEO will provide the Enterprise with a written notice of 
capital classification, which shall include a description of the basis 
for OFHEO's determination.
    (4) Timing. OFHEO may, in its discretion, issue a notice of 
proposed capital classification to an Enterprise at any time. If a 
notice of proposed classification is pending (under the process set out 
in paragraphs (a)(1) through (3) of this section) at that time, OFHEO 
may, in its discretion, specify whether the subsequent notice of 
proposed capital classification supersedes the pending notice.
    (b) Developments indicating possible change to capital 
classification--(1) Notice to OFHEO. An Enterprise shall promptly 
provide OFHEO with written notice of any material development that may 
reasonably be expected to cause the Enterprise's core or total capital 
to fall to a point that could result in assignment of the Enterprise to 
a lower capital classification than the capital classification assigned 
to the Enterprise in its most recent notice of capital classification 
from OFHEO, or proposed to be assigned in the Enterprise's most recent 
notice of proposed capital classification from OFHEO. The Enterprise 
shall deliver such notice to OFHEO no later than 10 calendar days after 
the Enterprise becomes aware of or reasonably should have become aware 
of such development.
    (2) OFHEO, in its discretion, will determine whether to issue a new 
notice of proposed capital classification under paragraph (a) of this 
section, based on OFHEO's review of the notice under paragraph (a)(1) 
of this section from the Enterprise and any other information deemed 
relevant by OFHEO.


Sec. 1777.22  Limitation on capital distributions.

    (a) Capital distributions on or after the effective date of the 
risk-based capital level. On or after the effective date of OFHEO's 
regulations establishing the risk-based capital level (issued under 
section 1361(e) of the 1992 Act (12 U.S.C. 4611(e)), an Enterprise 
shall make no capital distribution that would decrease the total 
capital of the Enterprise to an amount less than the risk-based capital 
level or the core capital of the Enterprise to an amount less than the 
minimum capital level without the prior written approval of OFHEO.
    (b) Capital distributions by an Enterprise that is not adequately 
capitalized--(1) Prohibited distributions. An Enterprise that is not 
classified as adequately capitalized shall make no capital distribution 
that would result in the Enterprise being classified into a lower 
capital classification than the one to which it is classified at the 
time of such distribution.
    (2) Restricted distributions. An Enterprise classified as 
significantly or critically undercapitalized shall make no capital 
distribution without the prior written approval of OFHEO. OFHEO may 
grant a request for such a capital distribution only if OFHEO 
determines, in its discretion, that the distribution:
    (i) Will enhance the ability of the Enterprise to meet the risk-
based capital level and the minimum capital level promptly;
    (ii) Will contribute to the long-term financial safety and 
soundness of the Enterprise; or
    (iii) Is otherwise in the public interest.
    (c) Capital distributions before the effective date of the risk-
based capital level. Until the effective date of OFHEO's regulations 
establishing the risk-based capital level (issued under section 1361(e) 
of the 1992 Act)( 12 U.S.C. 4611(e)), an Enterprise may make no capital 
distribution that would decrease the core capital of the Enterprise to 
an amount less than the minimum capital level without the prior written 
approval of OFHEO.


Sec. 1777.23  Capital restoration plans.

    (a) Schedule for filing plans.--(1) In general. An Enterprise shall 
file a capital restoration plan in writing with OFHEO within ten days 
of receiving a notice of capital classification under 
Sec. 1777.21(a)(3) stating that the Enterprise is classified as 
undercapitalized, significantly

[[Page 18707]]

undercapitalized, or critically undercapitalized, unless OFHEO in its 
discretion determines an extension of the ten day period is necessary 
and provides the Enterprise with written notice of the date the plan is 
due.
    (2) Successive capital classifications. Notwithstanding paragraph 
(a)(1) of this section, an Enterprise that has already submitted and is 
operating under a capital restoration plan approved by OFHEO under this 
part is not required to submit an additional capital restoration plan 
based on a subsequent notice of capital classification, unless OFHEO 
notifies the Enterprise that it must submit a new or amended capital 
restoration plan. An Enterprise that receives such a notice to submit a 
new or amended capital restoration plan shall file in writing with 
OFHEO a complete plan that is responsive to the terms of and within the 
deadline specified in such notice.
    (b) Contents of capital restoration plan.--(1) The capital 
restoration plan submitted under paragraph (a)(1) or (2) of this 
section shall:
    (i) Specify the level of capital the Enterprise will achieve and 
maintain;
    (ii) Describe the actions that the Enterprise will take to become 
classified as adequately capitalized;
    (iii) Establish a schedule for completing the actions set forth in 
the plan;
    (iv) Specify the types and levels of activities (including existing 
and new programs) in which the Enterprise will engage during the term 
of the plan;
    (v) Describe the actions that the Enterprise will take to comply 
with any mandatory and discretionary requirements to be imposed under 
Subtitle B of the 1992 Act (12 U.S.C. 4611 through 4623) or subpart B 
of this part;
    (vi) To the extent the Enterprise is required to submit (or revise) 
a capital restoration plan as the result of a reclassification of the 
Enterprise under Sec. 1777.20(a)(5) or Sec. 1777.20(c)(5), describe the 
steps the Enterprise will take to cease or eliminate and remedy the 
action, inaction, or conditions that caused the reclassification; and
    (vii) Provide any other information or discuss any other issues as 
instructed by OFHEO.
    (2) The plan shall include a declaration by the president, vice 
president, treasurer, or other officer designated by the Board of 
Directors of the Enterprise to make such declaration, that the material 
contained in the plan is true and correct to the best of such officer's 
knowledge and belief.
    (c) Failure to submit.--(1) Failure to submit; submission of 
unacceptable plan. If, upon the expiration of the period provided in 
paragraph (c)(1) or (2) of this section for an Enterprise to submit a 
capital restoration plan, an Enterprise fails to comply with the 
requirement to file a complete capital restoration plan, or if the 
capital restoration plan is disapproved after review under paragraph 
(d) of this section, OFHEO may, in accordance with 
Sec. 1777.21(a)(1)(ii) without additional notice, reclassify the 
Enterprise:
    (i) As significantly undercapitalized if it is otherwise classified 
as undercapitalized; or (ii) As critically undercapitalized if it is 
otherwise classified as significantly undercapitalized.
    (2) Duration of reclassification. An Enterprise's failure to submit 
an approved capital restoration plan as described in paragraph (c)(1) 
of this section shall continue to be grounds for reclassification at 
each subsequent capital classification of the Enterprise, and shall 
only cease being considered grounds for reclassification after the 
Enterprise files a capital restoration plan that receives OFHEO's 
approval under paragraph (d) of this section.
    (3) Successive reclassifications. If an Enterprise has not remedied 
its failure to file a complete capital restoration plan or an 
acceptable capital restoration plan within such reasonable period as is 
determined by OFHEO to be appropriate, OFHEO may consider such failure 
to be the basis for additional reclassification under paragraph (c)(1) 
of this section into a lower capital classification. Such 
reclassification may be made without additional notice in accordance 
with Sec. 1777.21(a)(1)(ii).
    (d) Order approving or disapproving plan. Not later than thirty 
calendar days after receipt of the Enterprise's complete or amended 
capital restoration plan under this section (subject to extension upon 
written notice to the Enterprise for an additional thirty calendar days 
as OFHEO deems necessary), OFHEO shall issue an order to the Enterprise 
approving or disapproving the plan. An order disapproving a plan shall 
include the reasons therefore.
    (e) Resubmission. An Enterprise that receives an order disapproving 
its capital restoration plan shall submit an amended capital plan 
acceptable to OFHEO within thirty calendar days of the date of such 
order, or a longer period if OFHEO determines an extension is in the 
public interest.
    (f) Amendment. An Enterprise that has received an order approving 
its capital restoration plan may amend the capital restoration plan 
only after written notice to OFHEO and OFHEO's issuance of an order 
approving the modification. Pending OFHEO's review and approval of the 
amendment in OFHEO's discretion, the Enterprise shall continue to 
implement the capital restoration plan under the original approval 
order.
    (g) Termination--(1) Termination under the terms of the plan. An 
Enterprise that has received an order approving its capital restoration 
plan remains bound by each of its obligations under the plan until each 
such obligation terminates under express terms of the plan itself 
identifying a date, event, or condition upon which such obligation 
shall terminate.
    (2) Termination orders. To the extent the plan does not include 
such express terms for any obligation thereunder, the Enterprise's 
obligation continues until OFHEO issues an order terminating such 
obligation under the plan. The Enterprise may also submit a written 
request to OFHEO seeking termination of such obligations. OFHEO will 
approve termination of such obligation to the extent that OFHEO 
determines, in its discretion, that the obligation's purpose under the 
plan has been fulfilled and that termination of the obligation is 
consistent with the overall safety and soundness of the Enterprise.
    (h) Implementation.--(1) An Enterprise that has received an order 
approving its capital restoration plan is required to implement the 
plan.
    (i) If OFHEO determines, in its discretion, that an Enterprise has 
failed to make efforts reasonably necessary to comply with the capital 
restoration plan and fulfill the schedule thereunder, OFHEO may 
reclassify the Enterprise:
    (A) As significantly undercapitalized if it is otherwise classified 
as undercapitalized; or
    (B) As critically undercapitalized if it is otherwise classified as 
significantly undercapitalized.
    (ii) Duration of reclassification. An Enterprise's failure to 
implement an approved capital restoration plan as described in 
paragraph (h)(1)(i) of this section shall continue to be grounds for 
reclassification at each subsequent capital classification of the 
Enterprise, and shall only cease being considered grounds for 
reclassification after OFHEO determines, in its discretion, that the 
Enterprise is making such efforts as are reasonably necessary to comply 
with the capital restoration plan and fulfill the schedule thereunder.
    (iii) Successive reclassifications. If an Enterprise has not 
remedied its failure to implement an approved capital restoration plan 
within such reasonable period as is determined by OFHEO to be 
appropriate, OFHEO may consider such

[[Page 18708]]

failure to be the basis for additional reclassification under paragraph 
(h)(1)(i) of this section into a lower capital classification.
    (2) Administrative enforcement action. A capital plan that has 
received an approval order from OFHEO under this section constitutes an 
order under the 1992 Act. An Enterprise, regardless of its capital 
classification, as well as its executive officers, and directors may be 
subject to action by OFHEO under sections 1371, 1372, and 1376 of the 
1992 Act (12 U.S.C. 4631, 4632, and 4636) and 12 CFR part 1780 for 
failure to comply with such plan.


Sec. 1777.24  Notice of intent to issue an order.

    (a) Orders under section 1366 of the 1992 Act (12 U.S.C. 4616). In 
addition to any other action taken under this part, part 1780 of this 
chapter, or any other applicable authority, OFHEO may, in its 
discretion, issue an order to an Enterprise that is classified as 
significantly undercapitalized or critically undercapitalized, or is in 
conservatorship, directing the Enterprise to take one or more of the 
following actions:
    (1) Limit any increase in, or reduce, any obligations of the 
Enterprise, including off-balance sheet obligations;
    (2) Limit or eliminate growth of the Enterprise's assets or reduce 
the amount of the Enterprise's assets;
    (3) Acquire new capital, in such form and amount as determined by 
OFHEO; and
    (4) Terminate, reduce, or modify any activity of the Enterprise 
that OFHEO determines creates excessive risk to the Enterprise.
    (b) Notice of intent to issue an order. Before OFHEO issues an 
order to an Enterprise pursuant to section 1366 of the 1992 Act (12 
U.S.C. 4616), OFHEO will provide the Enterprise with written notice 
containing the proposed order.
    (c) Contents of notice. A notice of intent to issue an order under 
this subpart shall include:
    (1) A statement of the Enterprise's capital classification and its 
minimum capital level or critical capital level, and its risk-based 
capital level;
    (2) A description of the restrictions, prohibitions, or affirmative 
actions that OFHEO proposes to impose or require; and
    (3) The proposed date when such restrictions or prohibitions would 
become effective or the proposed date for the commencement and/or 
completion of the affirmative actions.


Sec. 1777.25  Response to notice.

    (a) Content of response. The Enterprise may submit a response to 
OFHEO containing information for OFHEO's consideration in connection 
with the proposed order. The response should include, but is in no way 
limited to, the following:
    (1) Any relevant information, mitigating circumstances, 
documentation, or other information the Enterprise wishes OFHEO to 
consider in support of the Enterprise's position regarding the proposed 
order; and
    (2) Any recommended modification of the proposed order, and 
justification thereof.
    (b) Time to respond. The Enterprise has thirty calendar days from 
receipt the notice of proposed order to submit its response to OFHEO, 
unless OFHEO determines a shorter period to be appropriate or the 
Enterprise consents to a shorter period. OFHEO may extend the 
Enterprise's response period for up to an additional thirty calendar 
days if OFHEO determines, in its discretion, that there is good cause 
for such extension.
    (c) Waiver and consent. The Enterprise's failure to submit a 
response during the response period (as extended or shortened, if 
applicable) shall waive any right of the Enterprise to comment on or 
object to the proposed order.


Sec. 1777.26  Final notice of order.

    (a) Determination and notice. After the Enterprise has submitted 
its response under Sec. 1777.25 or the response period (as extended or 
shortened, if applicable) has expired, whichever occurs first, OFHEO 
will make its determination regarding the order in its discretion, 
taking into consideration such relevant information as is provided by 
the Enterprise in its response, if any, under Sec. 1777.25. OFHEO will 
provide the Enterprise with a written final notice of any order issued 
by OFHEO under this subpart, which shall include a description of the 
basis for OFHEO's determination.
    (b) Termination or modification. An Enterprise that has received an 
order under paragraph (a) of this section remains subject to each 
provision of the order until each such provision terminates under the 
express terms of the order. The Enterprise may submit a written request 
to OFHEO seeking modification or termination of one or more provisions 
of the order. Pending OFHEO's review and approval of the Enterprise's 
request in OFHEO's discretion, the Enterprise shall remain subject to 
the provisions of the order.
    (c) Enforcement of order--(1) Judicial enforcement. An order issued 
under paragraph (a) of this section is an order for purposes of section 
1375 of the 1992 Act (12 U.S.C. 4635). An Enterprise in any capital 
classification may be subject to enforcement of such order in the 
United States District Court for the District of Columbia pursuant to 
such section.
    (2) Administrative enforcement. An order issued under paragraph (a) 
of this section constitutes an order under the 1992 Act. An Enterprise, 
regardless of its capital classification, as well as its executive 
officers, and directors may be subject to action by OFHEO under 
sections 1371, 1372, and 1376 of the 1992 Act (12 U.S.C. 4631, 4632, 
and 4636) and 12 CFR part 1780 for failure to comply with such order.


Sec. 1777.27  Exhaustion and review.

    (a) Judicial review.--(1) Review of certain actions. An Enterprise 
that is not classified as critically undercapitalized may seek judicial 
review of a final notice of capital classification issued pursuant to 
Sec. 1777.21(a)(3) or a final notice of order issued pursuant to 
Sec. 1777.26(a) in accordance with section 1369D of the 1992 Act (12 
U.S.C. 4623).
    (2) Other review barred. Except as set out in paragraph (a)(1) of 
this section, or review of conservatorship appointments to the limited 
extent provided in section 1369(b) of the 1992 Act (12 U.S.C. 4619(b)) 
and Sec. 1777.28(c), no court shall have jurisdiction to affect, by 
injunction or otherwise, the issuance or effectiveness of a capital 
classification or any other action of OFHEO pursuant to this subpart B, 
as provided in section 1369D of the 1992 Act (12 U.S.C. 4623).
    (b) Exhaustion of administrative remedies. In connection with any 
issue for which an Enterprise seeks judicial review in connection with 
an action described in paragraph (a)(1) of this section, the Enterprise 
must have first exhausted its administrative remedies, by presenting 
all its objections, arguments, and information relating to such issue 
for OFHEO's consideration pursuant to Sec. 1777.21(a)(2), as part of 
the Enterprise's response to OFHEO's notice of capital classification, 
or pursuant to Sec. 1777.25, as part of the Enterprise's response to 
OFHEO's notice of intent to issue an order.
    (c) No stay pending review. The commencement of proceedings for 
judicial review of a final capital classification or order as described 
in paragraph (a)(1) of this section shall not operate as a stay 
thereof.


Sec. 1777.28  Appointment of conservator for a significantly 
undercapitalized or critically undercapitalized Enterprise.

    (a) Significantly undercapitalized enterprise. At any time after an 
Enterprise is classified as significantly undercapitalized, OFHEO may 
issue an

[[Page 18709]]

order appointing a conservator for the Enterprise upon determining 
that:
    (1) The amount of core capital of the Enterprise is less than the 
minimum capital level; and
    (2) The alternative remedies available to OFHEO under the 1992 Act 
are not satisfactory.
    (b) Critically undercapitalized Enterprise.--(1) Appointment upon 
classification. Not later than thirty days after issuing a final notice 
of capital classification pursuant to Sec. 1777.21(a)(3) classifying an 
Enterprise as significantly undercapitalized, OFHEO shall issue an 
order appointing a conservator for the Enterprise.
    (2) Exception. Notwithstanding paragraph (b)(1) of this section, 
the Director of OFHEO may make a written finding, with the written 
concurrence of the Secretary of the Treasury, that:
    (i) The appointment of a conservator would have serious adverse 
effects on economic conditions of national financial markets or on the 
financial stability of the housing finance market; and
    (ii) The public interest would be better served by taking some 
other enforcement action authorized under this title.
    (c) Judicial review. An Enterprise for which a conservator has been 
appointed pursuant to paragraph (a) or (b) of this section may seek 
judicial review of the appointment in accordance with section 1369(b) 
of the 1992 Act (12 U.S.C. 4619(b)). Except as provided therein, no 
court may take any action regarding the removal of a conservator or 
otherwise restrain or affect the exercise of the powers or functions of 
a conservator.
    (d) Termination.--(1) Upon reaching the minimum capital level. 
OFHEO will issue an order terminating a conservatorship appointment 
under paragraph (a) or (b) of this section upon a determination that 
the Enterprise has maintained an amount of core capital that is equal 
to or exceeds the minimum capital level.
    (2) In OFHEO's discretion. OFHEO may, in its discretion, issue an 
order terminating a conservatorship appointment under paragraph (a) or 
(b) of this section upon a determination that such termination order is 
in the public interest and may safely be accomplished.

    Dated: April 4, 2001.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 01-8671 Filed 4-9-01; 8:45 am]
BILLING CODE 4220-01-U