[Federal Register Volume 66, Number 163 (Wednesday, August 22, 2001)]
[Rules and Regulations]
[Pages 44258-44268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-21109]



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Part IV





Department of Housing and Urban Development





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24 CFR Parts 300 et al.



Government National Mortgage Association Mortgage-Backed Securities 
Program--Payments to Securityholders; Book-Entry Procedures; Final Rule

  Federal Register / Vol. 66, No. 163 / Wednesday, August 22, 2001 / 
Rules and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 300, 320, 330 and 350

[Docket No. FR-4629-F-02]
RIN 2503-AA16


Government National Mortgage Association Mortgage-Backed 
Securities Program--Payments to Securityholders; Book-Entry Procedures

AGENCY: Government National Mortgage Association, HUD.

ACTION: Final rule.

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SUMMARY: This final rule issued by the Government National Mortgage 
Association (the ``Association'' or ``Ginnie Mae'') will govern 
payments on Ginnie Mae I and Ginnie Mae II Pass-Through Securities 
(``Ginnie Mae MBS'') registered in the name of a securities 
intermediary and clearing corporation (a ``Depository''). The rule 
requires that payments on Ginnie Mae MBS due to Depositories be made in 
immediately available funds and supersedes any current provisions 
allowing those payments to be made by check. Payments to other security 
holders may be made by check or other means provided the check is 
received by the security holder not later than the applicable payment 
date specified in the Ginnie Mae Mortgage-Backed Securities Guide (the 
``Ginnie Mae MBS Guide'' or the ``Guide''). The final rule eliminates 
any requirement that a physical certificate representing a Ginnie Mae 
MBS or, for consistency, a Ginnie Mae multiclass security (``Ginnie Mae 
Multiclass Securities,'' and together with Ginnie Mae MBS, ``Ginnie Mae 
Securities'') be maintained by a Depository. In addition, in the final 
rule, because the Federal Reserve Banks are expected to become 
Depositories for all book-entry Ginnie Mae Securities, Ginnie Mae is, 
consistent with the practices of other Federal entities with securities 
on the Fedwire Book-Entry Securities System, adopting an appropriate 
version of the standard technical rules under which book-entry Ginnie 
Mae Securities will be held and transferred on such system. The final 
rule follows publication of a February 26, 2001 proposed rule, takes 
into consideration public comment on the proposed rule, and make 
certain changes at this final rule stage.

EFFECTIVE DATES: October 1, 2001. This rule is applicable to electronic 
payments covered by Sec. 320.5(h)(1) , beginning with payments due on 
and after October 1, 2001. For the elimination of certificates covered 
by Sec. 320.5(g), the rule is applicable on the date on which each 
issue is first registered in the name of a Federal Reserve Bank. In no 
event, however, shall the applicability of the final rule with respect 
to any issue of Ginnie Mae Securities be earlier than October 1, 2001.

FOR FURTHER INFORMATION CONTACT: Thomas R. Weakland, Vice President, 
Office of Program Administration, Government National Mortgage 
Association, Department of Housing and Urban Development, Room 6204, 
451 Seventh Street, SW., Washington, DC 20410, telephone (202) 708-
2884. A telecommunications device for hearing-impaired persons (TTY) is 
available at (202) 708-9300. (The telephone numbers are not toll-free.)

SUPPLEMENTARY INFORMATION:

I. Background

    On February 26, 2001 (66 FR 12428), Ginnie Mae published a proposed 
rule that would require payments on Ginnie Mae I Modified Pass-Through 
Securities (``Ginnie Mae I MBS'') with an issue date before October 1, 
1998, and registered in the name of a Depository to be made in 
immediately available funds as prescribed by Ginnie Mae, thus 
superseding any current provision allowing payments to be made by 
check. The proposed rule also provided that, if payment on certificated 
Ginnie Mae I MBS was made by check, the check must be received by the 
securityholder not later than the 15th day of each month. In addition, 
the proposed rule would have eliminated any requirement that a 
Depository of a Ginnie Mae Security maintain a physical certificate 
evidencing such security.

II. Reasons for This Rulemaking

A. Statutory Purpose

    Ginnie Mae, a wholly owned corporate instrumentality of the United 
States within the Department of Housing and Urban Development, was 
created as a distinct entity in 1968. Ginnie Mae can trace its origins 
to the creation of the National Mortgage Association of Washington 
(later renamed the Federal National Mortgage Association) on February 
10, 1938, by the Federal Housing Administrator, acting under Title III 
of the National Housing Act. As stated in section 301 of the National 
Housing Act, Ginnie Mae's purposes are:
    To establish secondary market facilities for residential mortgages, 
to provide that the operations thereof shall be financed by private 
capital to the maximum extent feasible, and to authorize such 
facilities to--
    (1) Provide stability in the secondary market for residential 
mortgages;
    (2) Respond appropriately to the private capital market;
    (3) Provide ongoing assistance to the secondary market for 
residential mortgages (including activities relating to mortgages on 
housing for low- and moderate-income families involving a reasonable 
economic return that may be less than the return earned on other 
activities) by increasing the liquidity of mortgage investments and 
improving the distribution of investment capital available for 
residential mortgage financing;
    (4) Promote access to mortgage credit throughout the Nation 
(including central cities, rural areas, and underserved areas) by 
increasing the liquidity of mortgage investments and improving the 
distribution of investment capital available for residential mortgage 
financing .
    Ginnie Mae began guaranteeing mortgage-backed securities in 1970. 
Since that date, more than $1 trillion of Ginnie Mae MBS have been 
issued and sold in the capital markets, and over $600 billion of such 
securities currently are outstanding. Consistent with its legislative 
purpose, Ginnie Mae's guaranteed mortgage-backed securities program 
(the ``MBS Program'') has been a significant contributor to the 
expansion of homeownership opportunities for American families. Ginnie 
Mae has provided an efficient link between the capital markets, issuers 
and homebuyers. By making Ginnie Mae MBS attractive to investors, 
Ginnie Mae ensures that a continuous flow of private capital is 
available to fund mortgage loans. By helping to ensure that mortgage 
funds are available throughout the country, Ginnie Mae has been 
instrumental in eliminating regional differences in the availability of 
mortgage credit for American families.
    In issuing the proposed rule, Ginnie Mae drew on its long 
experience and expertise in an effort to continue to satisfy its 
Congressionally mandated objectives. Most of the approximately $600 
billion of outstanding Ginnie Mae MBS are registered in the name of the 
current Depository, The Depository Trust & Clearing Corporation 
(``DTCC''), for the benefit of holders reflected on the books of DTCC. 
The final rule based on the proposed rule will enable Ginnie Mae to 
transfer the book-entry Ginnie Mae MBS to new Depositories, the Federal 
Reserve Banks. Ginnie Mae has determined that clearing, settling and 
paying Ginnie Mae MBS through the Federal Reserve Banks will further 
its statutory mission as established by Congress by increasing the 
liquidity of

[[Page 44259]]

Ginnie Mae MBS, decreasing the costs of issuance of Ginnie Mae MBS, 
enhancing the stability of Ginnie Mae's MBS programs, improving the 
market for Ginnie Mae MBS, and thus contributing to maximizing capital 
for residential mortgage financing and the public's access to such 
financing.

B. Request From the Securities Industry

    Early in 2000, the investment industry asked Ginnie Mae whether the 
payment and settlement system of the Federal Reserve Banks could be 
used for Ginnie Mae MBS. The Federal Reserve Banks' Fedwire Book-Entry 
Securities System (the ``Fedwire System'') is used to clear, settle and 
pay all United States Treasury marketable debt instruments, most of the 
book-entry securities issued by other government agencies and 
government sponsored enterprises (collectively with the United States 
Treasury securities, referred to herein as ``United States government 
securities'') and the mortgage-backed securities (``Fannie Mae and 
Freddie Mac MBS'') issued by Federal National Mortgage Association (now 
Fannie Mae) and the Federal Home Loan Mortgage Corporation (``Freddie 
Mac''). The use of the Fedwire System for Ginnie Mae Securities also is 
consistent with recent recommendations of the International Securities 
Services Association for securities clearing and settlement systems to 
implement processes for delivery against payment and immediate payment 
in central bank monies.

C. Adopting the Fedwire System in This Final Rule

    Ginnie Mae, after careful review and consideration of public 
comments, has concluded that the Fedwire System will provide a more 
efficient means to clear, settle and pay book-entry Ginnie Mae 
Securities.
    1. Uniformity. By utilizing the Fedwire System, Ginnie Mae 
Securities would trade, clear and settle in the same manner as United 
States government securities and Fannie Mae and Freddie Mac MBS. The 
uniformity created by adding Ginnie Mae Securities to the Fedwire 
System will improve the market for Ginnie Mae Securities. As an 
incidental benefit, because of volume efficiencies, it is likely also 
to improve the market for other United States government securities and 
Fannie Mae and Freddie Mac MBS.
    2. Payment Efficiencies. Use of Automated Clearing House (``ACH'') 
debits in conjunction with the use of the Fedwire System will decrease 
payment delays and uncertainties and reduce costs.
    Eliminating Payment Delays. Under Ginnie Mae's current rules, DTCC 
receives payments on Ginnie Mae MBS by electronic transfer or check and 
then credits those payments to the beneficial owners of Ginnie Mae MBS. 
DTCC has been able to accommodate Ginnie Mae's current rules and has 
been able to credit those payments on the next business day. The delay 
between the receipt of funds and credit of payments to beneficial 
owners of Ginnie Mae MBS is inefficient and inconsistent with how 
payments are made on other United States government securities and 
Fannie Mae and Freddie Mac MBS. In the Fedwire System, Federal Reserve 
Banks credit payments to security holders on the same business day the 
Federal Reserve Banks receive the payments. Same day credit should 
result in more favorable pricing for Ginnie Mae MBS because investors 
will not need to make pricing adjustments for payment delays.
    Eliminating Payment Uncertainties. The use of ACH debits as the 
payment mechanism eliminates uncertainty as to principal payments'that 
is, the amount remitted to the investor will not be different from what 
is reported as being due to the investor.
    Reducing Costs. In order to accommodate Ginnie Mae's current rules, 
DTCC has had to create lines of credit in order to cover the risk that 
issuers' checks will not clear in time to credit payments to 
securityholders. Maintaining the availability of lines of credit 
increases the costs of investing in Ginnie Mae MBS and subjects Ginnie 
Mae to a larger credit risk than under the proposed system.
    3. Attractiveness to Foreign Private Investors and Central Banks. 
Ginnie Mae seeks to increase demand for its securities in order to 
reduce the cost of housing. With fewer United States Treasury 
securities on the market, Ginnie Mae MBS, carrying the full faith and 
credit of the United States government, are a desirable alternative 
investment for foreign investors seeking to maximize investment return 
with a minimum of credit risk. Use of the Fedwire System for settlement 
and clearing of Ginnie Mae Securities, including payments in United 
States central bank funds, will eliminate any perceived risk in having 
a private party (DTCC) involved in the payment system for Ginnie Mae 
Securities. Foreign investors, particularly foreign central banks, have 
indicated a preference for the Fedwire System.
    Moreover, Ginnie Mae has considered the recent change in the focus 
of European central banks as a result of the European economic and 
monetary union. With the European Central Bank assuming the 
responsibilities of monetary policymaking and implementation for the 
union, the task of maintaining price stability and managing foreign 
currency exchange for the eleven members of the union has shifted away 
from those members' central banks to the European Central Bank. As a 
result, the members' central bank reserves no longer are required for 
foreign exchange or monetary policy, and members increasingly focus on 
growing these reserves and maximizing the total return on such 
reserves. Most foreign central banks are members of the Fedwire System 
and can clear and settle directly with the Federal Reserve Banks 
without having to use an intermediary such as a clearing bank. Settling 
through DTCC would require foreign central banks to create new 
processes and procedures that create potential operational risks for 
them.
    Ginnie Mae believes that foreign investors, particularly foreign 
central banks, will be more likely to invest in Ginnie Mae Securities 
if they are traded on the Fedwire System, and thus the change to the 
Fedwire System should expand the market and stimulate demand for Ginnie 
Mae Securities. This would further Ginnie Mae's statutory purposes of 
assisting the secondary market for residential mortgages and promoting 
access to mortgage credit by increasing the liquidity of mortgage 
investments and improving the distribution of investment capital 
available for residential financing.
    4. Back Office Efficiencies. Over time, having a single system 
through which United States government securities, Fannie Mae and 
Freddie Mac MBS and Ginnie Mae Securities are traded should result in 
decreased costs of back office operations for participants in the 
government securities market, including issuers of Ginnie Mae MBS. In 
addition, requiring issuers of book-entry Ginnie Mae I MBS who pay by 
check to convert to ACH payments should not impose operating 
inefficiencies on most issuers, because only three issuers now make 
payments on Ginnie Mae MBS exclusively by check.
    5. More Efficient Securities Settlement Functions. In clearing and 
settling securities trades, the Federal Reserve Banks have a distinct 
advantage over DTCC. DTCC and the Federal Reserve Banks both process 
transactions using the ``delivery against payment'' mechanism. That is, 
the security and the payment for the security are exchanged 
simultaneously. This simultaneous exchange significantly eliminates 
settlement risk, because once the transfer is received it is final and 
cannot be reversed. However, under the

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Fedwire System, transfers are settled immediately in central bank funds 
throughout the day. Thus, all Fedwire transfers are final as soon as 
the receiving institution is notified of the credit to its account.
    In addition, all trades made by Federal Reserve Bank participants 
in United States Government securities, Fannie Mae and Freddie Mac MBS 
and Ginnie Mae MBS can be netted against each other, requiring less 
capital for settlement purposes.
    6. Eliminating Physical Securities. In connection with the move to 
the Fedwire System, all physical certificates currently evidencing 
book-entry Ginnie Mae Securities will be eliminated. This move will 
eliminate the cost to the system of maintaining custodial facilities 
for physical certificates.
    7. Maximizing Capital and Access to Residential Mortgage Financing 
by the Public. By instituting a single standard under the Fedwire 
System, Ginnie Mae believes that the secondary market for residential 
loans guaranteed by it will function more efficiently and increase 
liquidity for Ginnie Mae Securities, as described above. The overall 
effect of this should be to maximize capital available for residential 
mortgage financing. Ginnie Mae believes it has a duty to maximize 
administrative efficiencies that promote its central mission, as 
mandated by Congress, and has concluded that the change to payment by 
electronic means instead of by check fulfills and furthers this duty.

D. Conditions Governing Use of Fedwire System

    In order to utilize the Fedwire System for clearing, settling and 
paying Ginnie Mae MBS, two changes to Ginnie Mae's MBS Program must be 
made. First, because the Federal Reserve Banks do not accept payments 
on securities by check, all payments made by issuers with respect to 
Ginnie Mae MBS must be made through ACH debits, or other electronic 
method acceptable to Ginnie Mae and the Federal Reserve Banks, in 
immediately available funds. Further, as noted in the Federal Reserve 
Bank of New York's comments on the February 26, 2001 proposed rule, in 
order to facilitate payment by ACH debit, issuers must hold funds in 
accounts that are capable of being accessed by ACH debit by or on 
behalf of the Federal Reserve Banks.
    Second, in order to achieve the efficiencies and fungibility of a 
single system for transferring interests both in Ginnie Mae Securities 
and other United States government securities and Fannie Mae and 
Freddie Mac MBS utilizing the Fedwire System, the Federal Reserve Banks 
have asked that Ginnie Mae adopt the regulations described in part 350 
as part of the final rule. Part 350 is discussed in more detail below.

III. Discussion of Public Comments

    HUD received 12 public comments on its proposed rule. The following 
provides a discussion of the issues raised by the commenters and HUD's 
response to these comments.
Comment--Objection--The Loss of Float
    Ginnie Mae received several comments essentially stating that 
issuers who make payments by check are entitled to continue to use this 
method of payment on book-entry Ginnie Mae I MBS, because this method 
provides them a monetary benefit that was taken into consideration in 
pricing their securities. This benefit, some commenters assert, is both 
a property right and a contract right.
    Response. Ginnie Mae disagrees with these assertions as discussed 
below.
1. Issuers Have No Property Right
    Some of the commenters argue that they have a property right in the 
``float'' created by non-electronic methods of payment, and that the 
proposed rule constitutes a ``taking'' of that property right by Ginnie 
Mae. In order to bring a successful Fifth Amendment takings claim, an 
issuer must demonstrate that its ``private property [was] taken for 
public use, without just compensation.'' U.S. Constitution, Amendment 
V. As an initial matter, a plaintiff must demonstrate the existence of 
a ``legally-cognizable property interest'' and that the government 
interfered with plaintiff's use of that property. See Buse Timber & 
Sales, Inc. v. United States, 45 Fed. Cl. 258 (1999). Ginnie Mae 
believes that the commenters cannot satisfy this test, for the 
following reasons.
    (a) Neither Congress nor Ginnie Mae's MBS Program gave issuers a 
right to make payments by check. Further, the Ginnie Mae MBS Program 
does not permit issuers to earn interest on their principal and 
interest custodial accounts. See Guide, section 16-3(A)(requiring 
custodial accounts to be non-interest bearing accounts). If an issuer 
has made a separate arrangement with a custodial bank to receive a 
benefit resulting from the deposit of principal and interest 
collections, this separate arrangement and benefit neither creates a 
right to make payment by check nor binds Ginnie Mae. Moreover, to give 
issuers a right to the float would be inconsistent with the purposes 
set out in section 301 of the National Housing Act. Ginnie Mae's 
authorizing legislation charged it with the responsibility for: 
Providing stability in the secondary market for residential mortgages; 
responding appropriately to the private capital market; and providing 
ongoing assistance to the secondary market for residential mortgages by 
increasing the liquidity of mortgage investments and improving the 
distribution of investment capital available for residential mortgage 
financing. By enacting the proposed rule, Ginnie Mae is responding to 
this charge by taking measures that are needed to improve the 
efficiency and effectiveness of the secondary market for Ginnie Mae 
Securities.
    (b) Changes over time in the speed of mail delivery and check 
collection and clearing processes also belie the notion that issuers 
have a property right in their float. In particular, inefficiencies in 
the collection of checks and the corresponding availability of funds 
led Congress to enact in 1987 the Expedited Funds Availability Act 
(Title VI of the Competitive Equality Banking Act of 1987), which set 
out standardized funds availability schedules and directed the Board of 
Governors of the Federal Reserve System (the ``Federal Reserve Board'') 
to take further steps to reduce check clearing and processing times. 
Expedited Funds Availability Act, 12 U.S.C. 4001-4010 (2001). The act 
and regulations adopted by the Federal Reserve Board imposed shorter 
time periods between presentation of checks and the clearing of checks 
(the ``settlement period'') by requiring the ``expeditious'' return of 
checks or timely payment between banks. See, e.g., 12 U.S.C. 4002 and 
12 CFR 229.30, 339.36(f)(2001) (providing for same day funding for 
certain checks and cash equivalents). The Federal Reserve Board also 
was charged with the responsibility to consider further proposals to 
accelerate the settlement period between banks. See 12 U.S.C. 4008(b) 
and (c). Future technical innovations may cause the Federal Reserve 
Board to pursue even shorter check clearing times. Ginnie Mae is not 
aware of any successful challenge to such actions as ``unconstitutional 
takings of float'' by the Federal Reserve Board.
    (c) A taking occurs when government action interferes with the 
affected party's ``reasonable investment-backed expectations.'' See 
Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124 (1978). 
Here, it is highly implausible that the issuers reasonably expected 
that more efficient payment methods would never be introduced during 
the life of the securities being issued. Ginnie Mae has, at 
considerable expense, adopted electronic processes in place of

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inefficient, paper-based delivery methods as technological improvements 
have made such changes feasible. For example, in connection with the 
issuance of Ginnie Mae MBS, the Ginnie Mae Guide permits issuers to 
submit electronic versions of various schedules and documents via the 
GinnieNET 2020 system. See generally http://www.ginniemae.gov. Ginnie 
Mae also continues to improve electronic data interchange capabilities 
which allows trading partners to exchange reporting and additional 
information with one another and Ginnie Mae. See All Participants in 
Ginnie Mae Programs Memorandum 99-04 (Feb. 10, 1999). Technical 
improvements in the payment process on Ginnie Mae MBS are a natural 
extension of Ginnie Mae's electronic and automation initiatives.
    The value, significance and cost of Ginnie Mae's full faith and 
credit guaranty, coupled with continued issuance of Ginnie Mae 
certificates after adoption of mandatory payment by wire transfer, 
effective for Ginnie Mae I MBS with an issue date on or after October 
1, 1998, without any change in the guaranty fee, belie any contention 
that payment by check was an ``investment-backed'' expectation. 
Similarly, the evolving changes in the check collection process under 
the mandate of the Funds Availability Act undercut any ``investment-
backed expectation'' that issuers would always have the benefit of 
float.
    (d) There is no set formula for determining whether a deprivation 
of property constitutes a taking. See Connolly v. Pension Benefit Guar. 
Corp., 475 U.S. 211, 224 (1986) (rejecting a takings challenge to 
legislation that, by requiring private employers who chose to withdraw 
from multiemployer pension plans to pay a proportionate share of the 
plan's unfunded but vested benefits in order to prevent the failure of 
the plans, created liability in excess of the limited liability 
expressly fixed by the pension plan agreements). Indeed, no wrongful 
taking has been found to occur when the government adjusts private 
economic rights for the common good rather than simply appropriating 
fees for the government's own use. See Connolly at 225, 227 
(emphasizing that ``[t]hose who do business in the regulated field 
cannot object if the legislative scheme is buttressed by subsequent 
Amendments to achieve the legislative end.'' (quoting FHA v. 
Darlington, Inc., 358 U.S. 84, 91 (1958)).
    (e) Applying the foregoing test, issuers receive the benefits of 
Ginnie Mae's guaranty of their securities under what is clearly a 
regulatory scheme. Issuers could reasonably expect that Ginnie Mae 
would exercise its regulatory powers to make adjustments to its 
programs to fulfill its legislative mandate. Ginnie Mae is acting in 
its regulatory capacity under a public program and in accordance with 
Ginnie Mae's legislative purpose: to maintain and enhance the value and 
liquidity in the secondary market for mortgage loans and mortgage-
backed securities.
    (f) The mortgage loan industry and its secondary market has been 
moving steadily toward paperless execution as technology advances--
mortgage bankers are originating mortgage loans over the internet, 
mortgages are being registered under central registry systems, 
securities are being issued in book-entry form, and substantially all 
United States government securities and Fannie Mae and Freddie Mac MBS 
are issued in electronic form and require electronic payments. Ginnie 
Mae's adoption of electronic payment requirements for all Ginnie Mae 
MBS with an issue date on or after October 1, 1998, was merely one in a 
series of business practice changes that have been adopted to keep up 
with changing technology and a fast-developing financial market. As 
discussed above, in response to technology and at the request of 
issuers, Ginnie Mae incurred substantial costs to provide issuers the 
ability to submit mortgage pools electronically and to exchange reports 
and data electronically. Commenters could have reasonably expected this 
innovation in the method of payment.
2. No Limitation on Ginnie Mae's Ability To Modify Contract Rights
    As noted earlier, the commenters also asserted the retention of 
making payments by check on the basis of contract rights. The 
commenters stated that their ``contracts'' under the Ginnie Mae MBS 
Program allow them to continue to make payments by check, and that 
Ginnie Mae is otherwise bound by whatever outmoded business practices 
existed at the time the contracts were entered into. Ginnie Mae 
disagrees for the following reasons.
    (a) The proposed rule does not change the date by which payments 
are required to be paid to security holders. DTCC is the security 
holder and DTCC is paid on the payment date. The same commenter 
suggests that some investors may prefer to receive payment by check. If 
an investor wishes to receive payments by check, then the investor may 
request the issuance of a physical certificate.
    Payment by electronic transfer is the payment mechanism for all 
book-entry Ginnie Mae I MBS with issue date on or after October 1, 
1998, all Ginnie Mae II MBS, all United States government securities 
and Fannie Mae and Freddie Mac MBS held in the Fedwire System, and most 
privately-issued mortgage-backed securities.
    (b) Even if the method of payment on Ginnie Mae I MBS were 
considered a part of a contract between Ginnie Mae and the issuers, 
Ginnie Mae nonetheless has authority to regulate the method of payment 
under the United States Supreme Court's ``unmistakability doctrine.'' 
See Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 
U.S. 41, 52 (1986) (finding that in the absence of an unmistakable 
promise to the contrary, all ``contractual arrangements, including 
those to which the sovereign is a party, remain subject to subsequent 
legislation by the sovereign''); United States v. Winstar, 518 U.S. 839 
(1996); and Grass Valley Terrace v. United States, 46 Fed. Cl. 629 
(2000) (finding that the ``unmistakability doctrine'' applies to all 
government contracts, and that the government had not made an 
unmistakable promise not to change borrowers' contractual prepayment 
options because the prepayment options were not ``the essence of the 
agreement'' between the government and the borrowers). But see General 
Dynamics Corp. v. United States, 74 Fed. Cl. 514 (2000) (adopting a 
two-step analysis which first determines if the government action 
regarding a contract is a ``public and general'' act rather than a way 
of releasing the government from its own contractual obligations, and 
if so, then applies the unmistakability doctrine; and finding that 
government action for the purpose of reducing federal expenses is not a 
``public and general act''). Here, Ginnie Mae is requiring electronic 
payment to further its statutory mission established by Congress, not 
to avoid an obligation.
    (c) Applying the ``unmistakability doctrine'' to Ginnie Mae's 
proposal, it would have to be established that either:
    (1) Ginnie Mae made an unmistakable promise not to exercise its 
sovereign power to regulate the method of payment on Ginnie Mae MBS, or
    (2) The issuers' option to make payment by check was ``the essence 
of'' or at least a significant part of the essence of their agreement 
with Ginnie Mae.

Ginnie Mae believes that neither is the case.
    (d) Nothing in Ginnie Mae's Charter Act, its regulations, the 
Ginnie Mae MBS Guide or Ginnie Mae's guaranty agreements (as discussed 
below) suggest that Ginnie Mae would not exercise its

[[Page 44262]]

regulatory authority with respect to maintaining and enhancing the 
value and liquidity in the secondary market for mortgage loans and 
mortgage-backed securities. Indeed, Ginnie Mae acts on a regular basis, 
as evidenced by the change in the Ginnie Mae MBS Guide regarding 
issuances of Ginnie Mae I MBS on and after October 1, 1998, to make the 
market for Ginnie Mae I MBS more efficient.
    (e) Similarly, nothing in Ginnie Mae's Charter Act, its 
regulations, the Ginnie Mae Guide or Ginnie Mae's guaranty agreements 
suggest that Ginnie Mae waived its right to modify the terms of its MBS 
Program. Ginnie Mae MBS are issued pursuant to the Ginnie Mae MBS 
Guide, which specifies, among other things, the methods by which 
payments are required to be made on Ginnie Mae MBS. The Ginnie Mae MBS 
Guide permits Ginnie Mae to modify the Guide from time to time, so long 
as such modifications are consistent with applicable laws and 
regulations and its outstanding guaranty agreements. In its guaranty 
agreements with issuers, Ginnie Mae agrees to guarantee payments of 
principal and interest payable by issuers to holders of Ginnie Mae MBS 
in return for a guaranty premium and the issuers' commitments to comply 
with the guaranty agreement and the provisions of the Ginnie Mae MBS 
Guide (to the extent such provisions do not conflict with the guaranty 
agreements) as the Guide may be amended from time to time. The guaranty 
agreements neither include the specific terms of the Ginnie Mae MBS nor 
specify the methods by which payments are required to be made by the 
issuers to security holders. Consequently, Ginnie Mae has reserved the 
right to change the methods by which payments are made to security 
holders.
    (f) The commenters also have not established that the right to make 
payment by check goes to ``the essence of the agreement'' with Ginnie 
Mae. In this case, there is no doubt that, if there is a contract 
between Ginnie Mae and its issuers, then a viable contract still 
remains if nothing is changed other than the method of making payments. 
This is evidenced by the fact that issuers voluntarily make electronic 
payments on certificated Ginnie Mae I MBS (even though issuers are 
permitted to make these payments by check) and that issuers have 
continued to issue Ginnie Mae I MBS after the date on which electronic 
payments were required to be made with respect to all new issuances.
    (g) The commenters seem to propose that, even if there is no 
express provision in the contracts limiting Ginnie Mae's authority to 
modify the payment rules, by implication they have the right to make 
payments in whatever manner they please. Ginnie Mae reads no such 
implication into its program documents. Any such implication would be 
contrary both to the doctrine of unmistakability and to what Congress 
has by statute, as discussed above, directed Ginnie Mae to do.
3. Estoppel Does Not Run Against Ginnie Mae
    With no basis for a claim of property right or contract right, it 
appears that the commenters' essential claim is one of promissory 
estoppel. Because Ginnie Mae has allowed payment by check in the past 
and the commenters have benefited from this practice, they allege a 
legal ``right'' has been created. Ginnie Mae has considered this claim 
very carefully under the legal tenets discussed below, but ultimately, 
concludes that the claim of a right to inefficient payment here is not 
justified.
    Taking another approach, one commenter states that, when Ginnie Mae 
amended its MBS Guide in 1998 and left in place the check paying method 
for Ginnie Mae I MBS with an issue date before October 1, 1998, Ginnie 
Mae in effect ``ratified'' that check paying method and is now estopped 
from changing it.
    (a) The ordinary rules of estoppel do not apply when estoppel is 
claimed against the government. A party asserting estoppel against the 
government bears a ``heavy burden,'' and the Supreme Court has never 
been hospitable toward such claims. See Bateman v. Federal Deposit 
Insurance Corporation, 112 F. Supp.2d 89, 94 (D. Mass. 2000); Heckler 
v. Community Health Services, Inc., 467 U.S. 51 (1984); and see 
generally Annot., Modern Status of Applicability of Doctrine of 
Estoppel Against Federal Government and its Agencies, 27 ALR Fed. 702 
(2000); Annot., Applicability of Doctrine of Estoppel Against 
Government and its Governmental Agencies, 1 ALR 2nd 338 (1999).
    (b) Some opinions suggest that there might be estoppel against the 
government if there is ``affirmative misconduct.'' See Melrose 
Associates v. United States, 45 Fed. Cl. 56, 59 (Ct. Fed. Cl. 1999), 
aff'd without opinion, 2001 U.S. App. LEXIS 3251 (Fed. Cir. Feb. 12, 
2001). But the commenters have not claimed any misconduct by Ginnie 
Mae. As explained above, the action Ginnie Mae takes today is taken out 
of a desire to follow the directions Congress has given it.
    (c) Although the Supreme Court has stopped short of establishing a 
rule barring all claims of estoppel against the government, it has 
found that ``the whole history and practice with respect to claims 
against the United States reveals the impossibility of an estoppel 
claim for money in violation of a statute.'' Spiroff v. United States, 
95 F. Supp.2d 673, 677-78 (E.D. Mich. 2000). Ginnie Mae does not 
perceive any special circumstances here that would justify such a 
claim.
    (d) If the claim of equitable estoppel were between two private 
parties, the claimant would have to prove several things, including 
that he was ignorant of material facts known to the other party. See 
Penny v. Giuffrida, 897 F.2d 1543 (10th Cir. 1990). Even if the 
ordinary estoppel rules apply to Ginnie Mae's actions, the commenters 
have not alleged that Ginnie Mae failed to disclose material facts that 
were known only to it.
Comment--Less Burdensome Alternatives to Ginnie Mae's Proposal
    Several commenters stated that the proposed regulation unfairly 
burdens issuers who pay by check and that there are less burdensome 
alternatives to eliminating the float enjoyed by these issuers. The 
commenters suggested five specific alternatives.
    Response. Ginnie Mae has carefully considered each alternative and 
determined that grafting any of these alternatives into the Fedwire 
System to accommodate Ginnie Mae Securities would not satisfy two 
important Ginnie Mae goals--uniformity of treatment with United States 
government securities and Fannie Mae and Freddie Mac MBS and 
elimination of payment uncertainties--that will be achieved by adoption 
of the final rule. In addition, the responses set out below more fully 
explain why each alternative is not a solution that benefits Ginnie Mae 
issuers and investors generally.
    Alternative 1. Allow issuers of Ginnie Mae I MBS with an issue date 
before October 1, 1998, that currently remit by check on the 15th of 
the month, to wire payments on such securities on the 16th of the 
month. To implement this alternative, commenters suggested that Ginnie 
Mae advise investors currently paid by check that if they want to 
receive funds by wire transfer on such Ginnie Mae I MBS, then the 
investors must agree to be paid on the 16th.
    Response. The simple problem with this alternative is that it 
defeats the uniformity that Ginnie Mae is seeking. Were this 
alternative adopted, some otherwise fungible Ginnie Mae I MBS would pay 
on one date, while others would be paid on another date.

[[Page 44263]]

    Alternative 2. Move all book-entry Ginnie Mae MBS to the Fedwire 
System except for Ginnie Mae I MBS issued prior to October 1, 1998. 
Securities remaining at DTCC would include securities with respect to 
which issuers are currently paying electronically in order to defray 
DTCC costs, including operating costs and the cost of funding check-
paying issuer's float.
    Response. Again, a significant problem with this alternative is 
that it defeats the uniformity that Ginnie Mae is seeking with respect 
to the payment dates for otherwise fungible book-entry Ginnie Mae I 
MBS. Further, Ginnie Mae will lose the operation of efficiencies it 
seeks if it has separate processes dependent upon a Ginnie Mae MBS's 
date of issuance.
    In addition, there are practical difficulties. It is not clear 
whether DTCC would continue such limited MBS operations after 
securities that were issued on or after October 1, 1998 moved to the 
Fedwire System. DTCC, as the registered security holder, receives most 
payments for book-entry Ginnie Mae I MBS electronically on the 15th of 
the month. There are no restrictions on DTCC's investment of such 
funds, and DTCC accrues interest on the funds overnight and pays the 
beneficial owners of such securities on the next business day. The 
investors have agreed that DTCC could pay them on the 16th of the month 
because the investors own DTCC and the interest that DTCC earns pays 
for its operations and enables it to advance funds to cover payments on 
the 16th for those checks that have not cleared. If the amount of 
securities paying electronically were significantly reduced, the funds 
available for operational expenses would be similarly reduced. It is 
not clear that the remaining interest would be sufficient to entice 
DTCC into continuing operations.
    Alternative 3. Use a third party to process the issuers' checks 
with respect to book-entry Ginnie Mae I MBS issued before October 1, 
1998.
    Response. As in the case of alternatives 1 and 2, this alternative 
will result in two income payment dates. Furthermore, if Ginnie Mae 
arranged for a third party to process checks on the 15th, it is 
unlikely to obtain same day clearing and payment for those checks. 
Therefore, someone would still need to advance funds to cover checks so 
that investors in such securities could be paid on the 15th. Ginnie Mae 
has no legal authority to bear the cost of putting in place and 
maintaining such a process for the exclusive financial benefit of 
issuers that want to write checks. Moreover, such a process would not 
eliminate the risks associated with the involvement of a private party 
in the payment process. Thus, neither the added complication and 
expense nor the uncertainties of involving third parties in the payment 
process can be justified.
    Alternative 4. Either Ginnie Mae or The Bond Market Association 
could reimburse affected issuers for monthly losses on float.
    Response. Because Ginnie Mae has the authority to make the MBS 
Program changes contained in this final rule, it has no obligation to 
reimburse issuers for any loss of float occasioned by adoption of this 
rule. With respect to the suggestion that The Bond Market Association 
bear such expense, Ginnie Mae has no authority to impose this expense 
on the Association. The Bond Market Association has not indicated that 
it is willing to pay this expense.
    Alternative 5. Ginnie Mae can reduce the guaranty fee payable by 
affected issuers to reimburse them for monthly losses on float.
    Response. Again, because Ginnie Mae has the authority to make the 
MBS Program changes contained in this final rule, it has no obligation 
to reimburse issuers for any loss of float occasioned by adoption of 
this rule.
Comment--Objection to Administrative Process
    Ginnie Mae received several comments questioning whether Ginnie Mae 
had followed proper administrative procedures. The commenters claim 
that thirty days was inadequate time for them to comment on the 
proposal.
    Response. Ginnie Mae disagrees for the following reasons:
    (a) HUD acknowledges that it is the general practice of HUD to 
provide a 60-day public comment period on all proposed rules. HUD, 
however, reduced its usual 60-day public comment period to 30 days for 
its February 26, 2001 proposed rule since most issuers would not be 
affected by the rule and the rule was not anticipated to implement 
changes that would be considered controversial. The proposed changes 
ensure that Ginnie Mae keeps pace with the efficiencies and 
effectiveness of modern systems and technology.
    (b) HUD believes that the 30-day public comment period provided an 
adequate response time for the February 26, 2001 rule. The change in 
the method of payment is a fairly simple proposal that HUD believes 
should have been anticipated by the issuers in light of Ginnie Mae's 
previous adoption of other changes in its MBS programs to incorporate 
market innovations.
    (c) The 30-day comment period also was adequate given the small 
number of persons affected by the proposed change. Approximately 24 out 
of approximately 300 issuers of Ginnie Mae I MBS make payments on book-
entry securities by check. Of those 24 issuers, all but three issuers 
also make payments electronically on Ginnie Mae I MBS issued on or 
after October 1, 1998, and Ginnie Mae II MBS. Thus, for most affected 
issuers, the long-term benefits resulting from implementation of the 
final rule will far outweigh the short-term disadvantages for pre-
October 1998 Ginnie Mae I MBS.
    Moreover, Ginnie Mae has considered all comments that it has 
received on the proposed regulation, even comments received more than 
thirty days after the end of the comment period.
    In addition to Federal Register publication, Ginnie Mae also 
provided notification and a description of its proposed rule in its All 
Participants in Ginnie Mae Programs Memorandum 01-07 (March 15, 2001). 
Ginnie Mae was not required to provide any additional notice of the 
proposed rulemaking to participants in its programs, and the memorandum 
was one of the routine communications that Ginnie Mae from time to time 
sends to participants in its programs. One of the commenters suggested 
that Ginnie Mae had violated the Administrative Procedures Act because 
it believed the description of the proposed rule in the memorandum 
implied that Ginnie Mae's decision to issue the new payment rule was 
predetermined. To the contrary, Ginnie Mae anticipated and has fully 
considered all comments received in response to the February 26, 2001 
proposed notice, as well as the other factors discussed above.
    Two commenters objected to the three-month period for implementing 
the conversion to the Fedwire System, which was described in the All 
Participants in Ginnie Mae Programs Memorandum referred to in the 
preceding paragraph. These commenters noted that the three-month 
conversion process requires issuers to bear the expense associated with 
programming changes that will be used for a short period and then 
discarded after completion of the conversion. These commenters suggest 
that this burdensome process could be eliminated if Ginnie Mae adopted 
a one-time conversion date for all Ginnie Mae Securities. While it has 
considered this approach, the Ginnie Mae Conversion Subcommittee, 
including representatives from broker-dealers, Bond Market staff, 
Ginnie Mae, Federal Reserve, DTCC, clearing banks and

[[Page 44264]]

custodial banks, has concluded that it would be impossible to convert 
all $600 billion of outstanding Ginnie Mae Securities to the Fedwire 
System over one weekend.
    Finally, one commenter objects, as well, to the short time frame 
between the adoption of the final rule and the date on which the 
conversion process is to begin, also as described in the All 
Participants in Ginnie Mae Programs Memorandum 01-07. This commenter 
notes that the 60- to 75-day time frame does not allow adequate time 
for testing and implementing the programming code changes necessary to 
effect the conversion to the Fedwire System, and diverts personnel 
needed to implement other systems' enhancements. Ginnie Mae has 
discussed this issue with the commenter and determined that some of the 
system changes anticipated by the commenter will not be required 
because of information that Ginnie Mae will provide via its GinnieNET 
System. Ginnie Mae has carefully considered this comment, and concludes 
that its conversion timetable should allow issuers adequate time to 
prepare for the conversion.

C. Conclusion

    Ginnie Mae is charged with the responsibility for providing 
stability in the secondary market for residential mortgages, responding 
appropriately to the private capital market and providing ongoing 
assistance to the secondary market for residential mortgages by 
increasing the liquidity of mortgage investments and improving the 
distribution of investment capital available for residential mortgage 
financing. Ginnie Mae carefully considered all comments on the rule and 
in issuing this final rule, which will improve the efficiency and 
effectiveness of the secondary market for Ginnie Mae MBS, Ginnie Mae is 
appropriately responding to its Congressional charge.

IV. Changes Made at the Final Rule Stage

    The final rule incorporates several changes to the proposed rule. 
First, Sec. 300.3 is included to reflect that The Government National 
Mortgage Association may be referred to variously as ``the 
Association,'' ``GNMA'' or ``Ginnie Mae.'' Second, references in part 
320 of the proposed rule to ``Ginnie Mae I MBS'' have been changed 
throughout the final rule to ``mortgage-backed securities.'' This 
change was made for administrative convenience and is not substantive. 
Part 320 authorizes Ginnie Mae's guaranty of certain mortgage-backed 
securities. Ginnie Mae's mortgage-backed securities program is embodied 
in the Ginnie Mae MBS Guide, which denominates certain securities as 
Ginnie Mae I MBS and others as Ginnie Mae II MBS. The Guide was 
modified and updated in 1998 to require electronic payment on all 
Ginnie Mae I MBS issued on or after October 1, 1998. Although the Guide 
already requires electronic payments on Ginnie Mae II MBS, because part 
320 covers both types of Ginnie Mae guaranteed mortgage-backed 
securities, Ginnie Mae has determined that the final rule with respect 
to electronic payment should refer to ``mortgage-backed securities'' 
(which term currently is used throughout part 320 and would cover both 
Ginnie Mae I and Ginnie Mae II MBS), rather than Ginnie Mae I MBS.
    Next, for similar reasons, Ginnie Mae has modified proposed 
Sec. 320.5(h)(ii) to refer to the applicable payment date as specified 
in the Guide rather than to the 15th day of the month. Ginnie Mae I MBS 
pay on the 15th day of each month or, if such day is not a business 
day, the next business day. Ginnie Mae II MBS generally pay on the 20th 
day of each month or the next business day. Again, because part 320 
covers both types of Ginnie Mae guaranteed mortgage-backed securities, 
Ginnie Mae has determined that the final rule should refer to the 
generic term ``applicable payment date'' in order to preserve existing 
payment dates.
    The Federal Reserve Bank of New York (the ``Reserve Bank'') 
provided comments in support of the proposed rule. The Reserve Bank's 
comments are technical in nature, complement the other changes effected 
by the proposed rule and are logical outgrowths of the proposed rule. 
First, the Reserve Bank recommended that Ginnie Mae follow the practice 
of entities, such the United States Department of Treasury, other 
government agencies, Fannie Mae and Freddie Mac, with securities on the 
Fedwire System by adopting the standard technical ``book-entry rules'' 
under which such securities are held and transferred on the Fedwire 
System. The standard technical rules are well defined, widely known and 
inform investors and pledgees of the precise nature of their interest 
in securities held through the Fedwire System. Ginnie Mae agrees with 
the Reserve Bank, and believes that the ``book-entry rules,'' included 
as new part 350 in the final rule, are not controversial and would not 
have been opposed had they been included in the proposed rule. As 
discussed above, adoption of the ``book-entry rules'' is consistent 
with the objective of having United States government securities, 
including Ginnie Mae Securities, and mortgage-backed securities issued 
by Fannie Mae and Freddie Mac trade under the same rules.
    Second, to facilitate the use of the Fedwire Book-Entry Securities 
System and to achieve the objectives sought to be obtained by Ginnie 
Mae, the Reserve Bank suggested that Ginnie Mae amend its proposed 
Sec. 320.5(h)(1)(i) by requiring issuers to maintain funds in accounts 
that are accessible by ACH debit transactions originated by or on 
behalf of the Depository. In addition, the Reserve Bank asked that the 
definition of ``Depository'' in proposed Secs. 320.5(j) and 330.5 be 
modified to clarify that the Federal Reserve Banks act as clearing 
corporations for purposes of Article 8 of the Uniform Commercial Code. 
Finally, the Reserve Bank requested a revision to proposed 
Sec. 320.5(h)(2)(i)--cross-referencing the section of the regulation in 
which Ginnie Mae's guaranty is described. Ginnie Mae agrees that these 
changes are technical rather than substantive in nature, and has 
incorporated them in the final rule.

V. Other Matters

    In the proposed rule, Ginnie Mae solicited comments on the effect 
and desirability of mandating electronic payments on certificated 
Ginnie Mae I MBS, which comprise approximately 1.4% of outstanding 
Ginnie Mae I MBS. Ginnie Mae received no comments with respect to this 
proposal and at this time is not making any change in the final rule 
that affects the manner in which payments are made on certificated 
Ginnie Mae I MBS.

VI. Findings and Certifications

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this final rule, and in so 
doing certifies that this rule will not have a significant economic 
impact on a substantial number of small entities. This rule addresses 
ministerial functions associated with the Ginnie Mae MBS program, such 
as the manner of dividend payments and the method used to document 
ownership of certificates.

Environmental Impact

    This rule encompasses activities of the Government National 
Mortgage Association under Title III of the National Housing Act (12 
U.S.C. 1716, et. seq.). Therefore, in accordance with 24 CFR 
50.19(c)(19) of HUD's regulations, this rule is categorically excluded 
from environmental review under the National Environmental

[[Page 44265]]

Policy Act of 1969 (42 U.S.C. 4321 et seq.).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on State and local 
governments and is not required by statute, or the rule preempts State 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This does not impose substantial 
direct compliance costs on State and local governments or preempt State 
law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4, approved March 22, 1995) (UMRA) establishes requirements for Federal 
agencies to assess the effects of their regulatory actions on State, 
local, and tribal governments, and on the private sector. This rule 
does not impose any Federal mandates on any State, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

List of Subjects in 24 CFR Parts 300, 320, 330 and 350

    Mortgages, Securities.

    Accordingly, parts 300, 320 and 330 of title 24 of the Code of 
Federal Regulations are amended, and part 350 of title 24 of the Code 
of Federal Regulations is added as follows:

PART 300--GENERAL

    1. The authority for citation for 24 CFR part 300 continues to read 
as follows:

    Authority: 12 U.S.C. 1723a, unless otherwise noted, and 42 
U.S.C. 3535(d).

    2. Section 300.3 is revised to read as follows:


Sec. 300.3  Description.

    The Government National Mortgage Association (hereinafter in this 
chapter called the Association, GNMA or Ginnie Mae) furnishes fiduciary 
services to itself and other departments and agencies of the 
Government, and guarantees privately issued securities backed by trusts 
or pools of mortgages or loans which are insured or guaranteed by the 
Federal Housing Administration (FHA), the Department of Veterans 
Affairs (VA) or the Rural Housing Service (RHS) and certain other loans 
or mortgages guaranteed or insured by the Government. In the course of 
its business, the Association is referred to as GNMA or Ginnie Mae.

PART 320--GUARANTY OF MORTGAGE-BACKED SECURITIES

    3. The authority citation for 24 CFR part 320 continues to read as 
follows:

    Authority: 12 U.S.C. 1721(g) and 1723a(a); 42 U.S.C. 3535(d).

    4. Section 320.5 is amended by revising paragraph (g) and adding 
paragraphs (h), (i), and (j) to read as follows:


Sec. 320.5  Securities

* * * * *
    (g) Registered Ownership. Ownership of mortgage-backed securities 
issued pursuant to this subpart registered in the name of a Depository 
shall be conclusively established by registration in the name of the 
Depository as owner on the Association's central registry and it shall 
be unnecessary for a Depository to maintain custody of any physical 
certificates evidencing such ownership.
    (h) Payments on Mortgage-Backed Securities. Issuers must remit all 
payments due to holders of mortgage-backed securities such that holders 
will receive their installments as follows:
    (1) Payment to a Depository. (i) For all securities registered in 
the name of a Depository or the designated nominee for a Depository, 
issuers are required to make payments in immediately available funds by 
ACH transaction, Fedwire, or by such other method as directed and/or 
authorized by the Association pursuant to the MBS Guide, including 
requiring that issuers maintain funds accounts in institutions that are 
accessible by debit ACH transactions originated by such Depository or 
its designee.
    (ii) Payment must be made by the hour specified in the MBS Guide on 
the calendar day of the month specified in the MBS Guide for payment on 
such mortgage-backed securities (the ``applicable Payment Date''), with 
adjustments to such time as may be specified in the MBS Guide for 
Payments Dates that do not fall on business days.
    (2) Payments to other holders. An issuer of mortgage-backed 
securities that are not registered in the name of a Depository or its 
nominee may make payments to a security holder by ACH transaction or 
Fedwire, provided that it obtains the prior written approval of the 
holder of such mortgage-backed securities. If an issuer begins to make 
such payments by electronic transfer, it must continue to do so while 
the securities are registered in the name of that security holder. If 
an issuer makes payments on mortgage-backed securities by check, the 
check must be received by the security holder not later than the 
applicable Payment Date each month.
    (i) Guaranty. The Association's guaranty described in Sec. 320.13 
is a guaranty that payment will be made to the registered owner of 
securities as reflected in the Association's central registry. The 
Association makes no other guaranty, including any guaranty that a 
Depository will appropriately credit payments to beneficial owners of 
such mortgage-backed securities. The Association's guarantee of 
securities payable to a Depository or its nominee becomes effective 
when the Depository or its nominee is registered as the registered 
owner of the securities on the Association's central registry.
    (j) Definition of Depository. As used in this section, Depository 
means a clearing corporation within the meaning of Article 8 of the 
Uniform Commercial Code, including any Federal Reserve Bank, that 
maintains systems by which ownership and transfer of interests in 
mortgage-backed securities are made through the books of such clearing 
corporation.

PART 330--GUARANTY OF MULTICLASS SECURITIES

    5. The authority citation for 24 CFR part 330 continues to read as 
follows:

    Authority: 12 U.S.C. 1721(g) and 1723a(a); 42 U.S.C. 3535(d).

    6. Revise Sec. 330.5 to read as follows:


Sec. 330.5  Definitions.

    As used in this part, the following terms shall have the meanings 
indicated:
    Consolidated securities. A series of multiclass securities, each 
class of which provides for payments proportionate with payments on the 
underlying eligible collateral.
    Depositor. The entity that deposits, or executes an agreement to 
deposit, as contained in the Multiclass Guide, eligible collateral into 
a trust in exchange for consolidated securities.
    Depository. A clearing corporation within the meaning of Article 8 
of the Uniform Commercial Code, including any Federal Reserve Bank, 
that maintains systems by which ownership and transfer of interests in 
Ginnie Mae multiclass securities are made through entries on the books 
of such clearing corporation.
    GNMA electronic bulletin board. An information distribution system 
established by the Association for the Multiclass Securities program.

[[Page 44266]]

    GNMA MBS certificates. The guaranteed mortgage-backed securities 
issued under part 320 of this chapter.
    Government mortgages. Mortgages that are eligible under section 
306(g) of the National Housing Act (12 U.S.C. 1721(g)) for inclusion in 
GNMA mortgage-backed securities pools.
    Multiclass Registrar. The institution that is specified by the 
Association as the registrar of the related class and series of 
multiclass securities.
    Participant. For structured securities, the sponsor, co-sponsor, 
trustee, trust counsel, and accounting firm. For consolidated 
securities, the depositor. Other entities may be designated as 
participants in the Multiclass Guide.
    Sponsor. With respect to structured securities, the entity that 
establishes the required trust executing the trust agreement and 
depositing the eligible collateral in the trust in exchange for the 
structured securities.
    Structured securities. Securities of a series at least one class of 
which provides for payments of principal or interest disproportionately 
from payments on the underlying eligible collateral.
    7. Revise Sec. 330.30 to read as follows:


Sec. 330.30  GNMA Guaranty.

    (a) Securities held by Depositories. Ownership of multiclass 
securities registered in the name of a Depository shall be conclusively 
established by registration in the name of the Depository as owner on 
the books and records of the Multiclass Registrar, and it shall be 
unnecessary for a Depository to maintain custody of any physical 
certificates evidencing such ownership.
    (b) Guaranty. The Association's guaranty is a guaranty that payment 
will be made to the registered owner of securities as reflected on the 
books and records of the Multiclass Registrar.
    (1) The Association makes no other guaranty, including any guaranty 
that a Depository will appropriately credit payments to beneficial 
owners of GNMA multiclass securities. The Association's guarantee of 
securities payable to a Depository or its nominee becomes effective 
when the Depository or its nominee is registered as the registered 
owner of the securities on the books and records of the Multiclass 
Registrar.
    (2) The Association guarantees the timely payment of principal and 
interest as provided by the terms of the multiclass security. The 
Association's guaranty is backed by the full faith and credit of the 
United States.

    8. Add Part 350 to read as follows:

PART 350--BOOK-ENTRY PROCEDURES

Sec.
350.1  Purpose.
350.2  Definitions.
350.3  Maintenance of Ginnie Mae Securities.
350.4  Law governing rights and obligations of United States, and 
Federal Reserve Banks as Depositories; Rights of any Person against 
United States, and Federal Reserve Banks as Depositories; Law 
Governing Other Interests.
350.5  Creation of Participant's Security Entitlement; Security 
Interests.
350.6  Obligations of the Reserve Banks as Depositories; No Adverse 
Claims.
350.7  Authority of Federal Reserve Banks as Depositories.
350.8  Withdrawal of Eligible Book-entry Ginnie Mae Securities for 
Conversion to Definitive Form.
350.9  Waiver of Regulations.
350.10  Liability of Federal Reserve Banks as Depositories.
350.11  Notice of Attachment for Ginnie Mae Securities in Book-entry 
System.

    Authority: 12 U.S.C. 1721(g) and 1723a(a); 42 U.S.C. 3535(d).


Sec. 350.1  Purpose.

    The purpose of this part is to achieve the efficiencies and 
fungibility through use of a single system for transferring interests 
both in Ginnie Mae Securities and other United States Government 
securities and in mortgage-backed securities issued by the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation. The Association only guarantees that payments required to 
be made by issuers of Ginnie Mae Securities will be made to the 
registered owner of those Ginnie Mae Securities. The Association 
undertakes no other obligation. Under the Book-entry System, the 
Federal Reserve Banks will be the registered owner of Book-entry Ginnie 
Mae Securities, not the agent of the Association, and the Association 
makes no warranty or guaranty with respect to the maintenance of the 
Book-entry System by the Federal Reserve Banks.


Sec. 350.2  Definitions.

    (a) Specified Terms. As used in this part, the following terms 
shall have the meanings indicated:
    Book-entry Ginnie Mae Security. A Ginnie Mae Security issued or 
maintained in the Book-entry System. Book-entry Ginnie Mae Security 
also means the separate interest and principal components of a Book-
entry Ginnie Mae Security if such security has been designated by 
Ginnie Mae as eligible for division into such components and the 
components are maintained separately on the books of one or more 
Federal Reserve Banks.
    Book-entry System. The automated book-entry system operated by the 
Federal Reserve Banks acting as Depositories for Ginnie Mae, on which 
Book-entry Ginnie Mae Securities are recorded, transferred and 
maintained in book-entry form.
    Definitive Ginnie Mae Security. A Ginnie Mae Security in engraved 
or printed form, or that is otherwise represented by a certificate.
    Depository. A clearing corporation within the meaning of Article 8 
of the Uniform Commercial Code, including any Federal Reserve Bank, 
that maintains systems by which ownership and transfer of interests in 
Book-entry Ginnie Mae Securities are made through entries on the books 
of such clearing corporation.
    Eligible Book-entry Ginnie Mae Security. A Book-entry Ginnie Mae 
Security issued or maintained in the Book-entry System which by the 
terms of its Security Documentation is eligible to be converted from 
book-entry form into definitive form.
    Entitlement Holder. A Person to whose account an interest in a 
Book-entry Ginnie Mae Security is credited on the records of a 
Securities Intermediary.
    Federal Reserve Bank Operating Circular. The publication issued by 
each Federal Reserve Bank that sets forth the terms and conditions 
under which the Reserve Bank maintains book-entry securities accounts 
(including Book-entry Ginnie Mae Securities accounts) and transfers 
book-entry Securities (including Book-entry Ginnie Mae Securities).
    Ginnie Mae Security. Any security or obligation guaranteed as to 
payment of principal and/or interest by Ginnie Mae under its Charter 
Act and issued in the form of a Definitive Ginnie Mae Security or a 
Book-entry Ginnie Mae Security.
    Participant. A Person that maintains a Participant's Securities 
Account with a Federal Reserve Bank.
    Person. An individual, corporation, company, governmental entity, 
association, firm, partnership, trust, estate, representative, and any 
other similar organization, but such term does not mean or include the 
United States or a Federal Reserve Bank.
    Revised Article 8. The same meaning as in 31 CFR 357.2.
    Secretary. The Secretary of Housing and Urban Development and, 
where appropriate, any person designated by the Secretary to perform a 
particular function for the Secretary, including any HUD officer, 
employee, or agent.
    Security. Any mortgage participation certificate, note, bond, 
debenture, evidence of indebtedness, collateral-trust certificate, 
transferable share,

[[Page 44267]]

certificate of deposit for a security, or, in general, any interest or 
instrument commonly known as a security.
    Securities Documentation. The applicable statement of terms, trust 
agreement, trust indenture, securities agreement or other documents 
establishing the terms of a Book-entry Ginnie Mae Security.
    Transfer message. An instruction of a member of a Federal Reserve 
Bank to effect a transfer of a Book-entry Security (including a Book-
entry Ginnie Mae Security) maintained in the Book-entry System, as set 
forth in Federal Reserve Bank Operating Circulars.
    (b) Other Terms. Unless the context requires otherwise, terms used 
in this part that are not defined in this part, have the meanings as 
set forth in 31 CFR 357.2. Definitions and terms used in 31 CFR part 
357 should read as though modified to effectuate their application to 
Ginnie Mae Securities.


Sec. 350.3  Maintenance of Ginnie Mae Securities.

    A Ginnie Mae Security may be maintained in the form of a Definitive 
Ginnie Mae Security or a Book-entry Ginnie Mae Security. A Book-entry 
Ginnie Mae Security shall be maintained in the Book-entry System.


Sec. 350.4  Law governing rights and obligations of United States, and 
Federal Reserve Banks as Depositories; Rights of any Person against 
United States, and Federal Reserve Banks as Depositories; Law Governing 
Other Interests.

    (a) Except as provided in paragraph (b) of this section, the 
following rights and obligations are governed solely by the book-entry 
regulations contained in this part, the Securities Documentation, and 
Federal Reserve Bank Operating Circulars (but not including any choice 
of law provisions in the Security Documentation to the extent such 
provisions conflict with the Book-entry regulations contained in this 
part):
    (1) The rights and obligations of a Federal Reserve Bank as a 
Depository with respect to:
    (i) A Book-entry Ginnie Mae Security or Security Entitlement; and
    (ii) The operation of a book-entry system operated by a Depository 
as it applies to Ginnie Mae Securities; and
    (2) The rights of any Person, including a Participant, against the 
Federal Reserve Banks as Depositories with respect to:
    (i) A Book-entry Ginnie Mae Security or Security Entitlement; and
    (ii) The operation of the book-entry system operated by the Federal 
Reserve Banks as Depositories as it applies to Ginnie Mae Securities.
    (b) A security interest in a Security Entitlement that is in favor 
of a Federal Reserve Bank from a Participant and that is not recorded 
on the books of a Federal Reserve Bank pursuant to Sec. 350.5(c)(1), is 
governed by the law (not including the conflict-of-law rules) of the 
jurisdiction where the head office of the Federal Reserve Bank 
maintaining the Participant's Securities Account is located. A security 
interest in a Security Entitlement that is in favor of a Federal 
Reserve Bank from a Person that is not a Participant, and that is not 
recorded on the books of a Federal Reserve Bank pursuant to 
Sec. 350.5(c)(1), is governed by the law determined in the manner 
specified in paragraph (d) of this section.
    (c) If the jurisdiction specified in the first sentence of 
paragraph (b) of this section is a State that has not adopted Revised 
Article 8, then the law specified in paragraph (b) of this section 
shall be the law of that State as though Revised Article 8 had been 
adopted by that State.
    (d) To the extent not otherwise inconsistent with this part, and 
notwithstanding any provision in the Security Documentation setting 
forth a choice of law, the provision set forth in 31 CFR 357.11 
regarding law governing other interests apply and shall be read as 
though modified to effectuate the application of 31 CFR 357.11 to Book-
entry Ginnie Mae Securities.


Sec. 350.5  Creation of Participant's Security Entitlement; Security 
Interests.

    (a) A Participant's Security Entitlement is created when a Federal 
Reserve Bank indicates by book-entry that a Book-entry Ginnie Mae 
Security has been credited to a Participant's Securities Account.
    (b) A security interest in a Security Entitlement of a Participant 
in favor of the United States to secure deposits of public money, 
including without limitation deposits to the Treasury tax and loan 
accounts, or other security interests in favor of the United States 
that is required by Federal statute, regulation, or agreement, and that 
is marked on the books of a Federal Reserve Bank is thereby effected 
and perfected, and has priority over any other interest in the 
securities. Where a security interest in favor of the United States in 
a Security Entitlement of a Participant is marked on the books of a 
Federal Reserve Bank, such Reserve Bank may rely, and is protected in 
relying, exclusively on the order of an authorized representative of 
the United States directing the transfer of the security. For purposes 
of this paragraph, an ``authorized representative of the United 
States'' is the official designated in the applicable regulations or 
agreement to which a Federal Reserve Bank is a party, governing the 
security interest.
    (c)(1) The Federal Reserve Banks as Depositories have no obligation 
to agree to act on behalf of any Person or to recognize the interest of 
any transferee of a security interest or other limited interest in 
favor of any Person except to the extent of any specific requirement of 
Federal law or regulation or to the extent set forth in any specific 
agreement with the Federal Reserve Bank on whose books the interest of 
the Participant is recorded. To the extent required by such law or 
regulation or set forth in an agreement with a Federal Reserve Bank, or 
the Federal Reserve Bank Operating Circular, a security interest in a 
Security Entitlement that is in favor of a Federal Reserve Bank or a 
Person may be created and perfected by a Federal Reserve Bank as 
Depository marking its books to record the security interest. Except as 
provided in paragraph (b) of this section, a security interest in a 
Security Entitlement marked on the books of a Federal Reserve Bank 
shall have priority over any other interest in the securities.
    (2) In addition to the method provided in paragraph (c)(1) of this 
section, a security interest, including a security interest in favor of 
a Federal Reserve Bank, may be perfected by any method by which a 
security interest may be perfected under applicable law as described in 
Sec. 350.4(b) or (d). The perfection, effect of perfection or non-
perfection and priority of a security interest are governed by such 
applicable law. A security interest in favor of a Federal Reserve Bank 
shall be treated as a security interest in favor of a clearing 
corporation in all respects under such law, including with respect to 
the effect of perfection and priority of such security interest. A 
Federal Reserve Bank Operating Circular shall be treated as a rule 
adopted by a clearing corporation for such purposes.


Sec. 350.6  Obligations of the Reserve Banks as Depositories; No 
Adverse Claims.

    Except in the case of a security interest in favor of the United 
States or a Federal Reserve Bank or otherwise as provided in 
Sec. 350.5(c)(1), for the purposes of this part, the Federal Reserve 
Banks as Depositories shall treat the Participant to whose Securities 
Account an interest in a Book-entry Ginnie Mae Security has been 
credited as the person exclusively entitled to issue a Transfer 
Message, to receive interest and other payments with respect thereof 
and otherwise to

[[Page 44268]]

exercise all the rights and powers with respect to such Security, 
notwithstanding any information or notice to the contrary. The Federal 
Reserve Banks as Depositories are not liable to a Person asserting or 
having an adverse claim to a Security Entitlement or to a Book-entry 
Ginnie Mae Security in a Participant's Securities Account, including 
any such claim arising as a result of the transfer or disposition of a 
Book-entry Ginnie Mae Security by a Federal Reserve Bank pursuant to a 
Transfer Message that the Federal Reserve Bank reasonably believes to 
be genuine.


Sec. 350.7  Authority of Federal Reserve Banks as Depositories.

    (a) Each Federal Reserve Bank is hereby authorized as Depository 
for Book-entry Ginnie Mae Securities to perform the following functions 
with respect to Book-entry Ginnie Mae Securities to which this part 
applies, in accordance with the Securities Documentation, Federal 
Reserve Bank Operating Circulars, this part, and procedures established 
by the Secretary consistent with these authorities:
    (1) To service and maintain Book-entry Ginnie Mae Securities in 
accounts established for such purposes;
    (2) To make payments with respect to such securities;
    (3) To effect transfer of Book-entry Ginnie Mae Securities between 
Participants' Securities Accounts as directed by the Participants;
    (4) To effect conversions between Book-entry Ginnie Mae Securities 
and Definitive Ginnie Mae Securities pursuant to the applicable 
Securities Documentation; and
    (5) To perform such other duties as the Federal Reserve Banks as 
Depositories may be requested by Ginnie Mae.
    (b) Each Federal Reserve Bank as Depository may issue Operating 
Circulars, not inconsistent with this part, governing the details of 
its handling of Book-entry Ginnie Mae Securities, Security 
Entitlements, and the operation of the book-entry system under this 
part.


Sec. 350.8  Withdrawal of Eligible Book-entry Ginnie Mae Securities for 
Conversion to Definitive Form.

    (a) Eligible Book-entry Ginnie Mae Securities may be withdrawn from 
the Book-entry System by requesting delivery of like Definitive Ginnie 
Mae Securities.
    (b) A Reserve Bank as Depository shall, upon receipt of appropriate 
instructions to withdraw Eligible Book-entry Ginnie Mae Securities from 
book-entry in the Book-entry System, facilitate the conversion of such 
securities into Definitive Ginnie Mae Securities and their delivery in 
accordance with such instructions. No such conversion shall affect 
existing interests in such Ginnie Mae Securities.
    (c) All requests for withdrawal of Eligible Book-entry Ginnie Mae 
Securities must be made prior to the maturity or date of call of the 
securities.
    (d) Definitive Ginnie Mae Securities that are to be delivered upon 
withdrawal may be issued in either registered or bearer form, to the 
extent permitted by the applicable Securities Documentation.


Sec. 350.9  Waiver of Regulations.

    Ginnie Mae reserves the right in its discretion, to waive any 
provision(s) of these regulations in any case or class of cases for the 
convenience of Ginnie Mae or the United States, or in order to relieve 
any Person(s) of unnecessary hardship, if such action is not 
inconsistent with law, does not adversely affect any substantial 
existing rights, and the Association is satisfied that such action will 
not subject the Association or the United States to any substantial 
expense or liability.


Sec. 350.10  Liability of Federal Reserve Banks as Depositories.

    The Federal Reserve Banks as Depositories may rely on the 
information provided in a Transfer Message, and are not required to 
verify the information. The Federal Reserve Banks as Depositories shall 
not be liable for any action taken in accordance with the information 
set out in a Transfer Message, or evidence submitted in support 
thereof.


Sec. 350.11  Notice of Attachment for Ginnie Mae Securities in Book-
entry System.

    The interest of a debtor in a Security Entitlement may be reached 
by a creditor only by legal process upon the Securities Intermediary 
with whom the debtor's securities account is maintained, except where a 
Security Entitlement is maintained in the name of a secured party, in 
which case the debtor's interest may be reached by legal process upon 
the secured party. These regulations do not purport to establish 
whether a Federal Reserve Bank as Depository is required to honor an 
order or other notice of attachment in any particular case or class of 
cases.

    Dated: August 14, 2001.
Ronald A. Rosenfeld,
President, Government National Mortgage Association.
[FR Doc. 01-21109 Filed 8-21-01; 8:45 am]
BILLING CODE 4210-66-P