[Federal Register Volume 66, Number 248 (Thursday, December 27, 2001)]
[Proposed Rules]
[Pages 66813-66819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31569]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 951

[No. 2001-30]
RIN 3069-AB14


Affordable Housing Program Amendments

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to amend its regulation governing the operation of the Affordable 
Housing Program (AHP) to improve the operation and effectiveness of the 
AHP. The proposed changes include: making the requirements for approval 
of post-completion project modifications the same as the current 
requirements for pre-completion project modifications; allowing the 
Federal Home Loan Banks (Banks) to define ``homeless household'' for 
purposes of scoring applications for AHP subsidy to finance housing for 
such households; allowing the Banks to award scoring points to projects 
using Federal government properties, regardless of the price at which 
they are conveyed, and for projects using non-government properties 
conveyed for an amount significantly below their fair market value; 
permitting the Banks to allow project sponsors or members to re-use 
recaptured direct subsidies or unused interest-rate subsidies from 
prepaid mortgage loans to assist another AHP-eligible household to 
purchase an owner-occupied unit; permitting a Bank to allocate up to 
the greater of $3 million or 25 percent of its annual required AHP 
contribution for the subsequent year to the current year's AHP 
competitive application program; including the Federal Financial 
Institutions Examination Council as a source of area median income data 
that may be used to determine household income eligibility; removing 
the requirement that the amount of AHP subsidies offered by a Bank in 
each funding period must be comparable; removing the requirement that 
the Banks must determine the feasibility of projects before their 
applications may be scored; and allowing the Banks additional time 
after completion of a rental project to review the

[[Page 66814]]

documentation received from the project owner for project compliance.

DATES: The Finance Board will accept written comments on the proposed 
rule that are received on or before February 25, 2002.

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

FOR FURTHER INFORMATION CONTACT: Charles E. McLean, Deputy Director, 
(202) 408-2537, Melissa L. Allen, Program Analyst, (202) 408-2524, 
Office of Policy, Research and Analysis; or Sharon B. Like, Senior 
Attorney-Advisor, (202) 408-2930, Office of General Counsel, Federal 
Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Section 10(j)(1) of the Federal Home Loan Bank Act (Bank Act) 
requires each Bank to establish a program to subsidize the interest 
rate on advances to members of the Bank System engaged in lending for 
long-term, low- and moderate-income, owner-occupied and affordable 
rental housing at subsidized interest rates. See 12 U.S.C. 1430(j)(1). 
The Finance Board is required to promulgate regulations governing the 
AHP. See 12 U.S.C. 1430(j)(1), (9). The Finance Board's existing 
regulation governing the operation of the AHP, which made comprehensive 
revisions to the AHP, was adopted in August 1997 and became effective 
January 1, 1998. See 62 FR 41812 (Aug. 4, 1997) (codified at 12 CFR 
part 951).
    Various amendments have been made to the AHP regulation since 1998 
in order to clarify AHP requirements and improve the operation and 
effectiveness of the AHP. The Banks, project sponsors and Finance Board 
staff have, over the course of implementation of the AHP, identified 
additional amendments that it is believed would improve the operation 
and effectiveness of the AHP. The proposed amendments are discussed 
further below. The Finance Board welcomes written comments on all 
aspects of the proposed rule.

II. Analysis of Proposed Rule

A. Definitions--Section 951.1

1. Removal of Definition of ``Homeless Household''
    For the reasons discussed in section F. below, the proposed rule 
would remove the definition of ``homeless household'' in Sec. 951.1 of 
the AHP regulation, and allow each Bank to define the term for purposes 
of scoring applications for AHP subsidy to finance housing for homeless 
households under Sec. 951.6(b)(4)(iv)(D).
2. Inclusion of FFIEC in Definition of ``Median Income for the Area''
    Under the AHP regulation, households are eligible for AHP subsidies 
if they have an income at or below the targeted income level, expressed 
as a percentage of median income for the area, specified in the AHP 
application. See 12 CFR 951.6(b)(4)(iv)(C). Section 951.1 of the AHP 
regulation defines ``median income for the area'' generally as one or 
more of the following, as determined by the Bank: (1) The median income 
for the area, as published annually by the Department of Housing and 
Urban Development (HUD); (2) the applicable median family income, as 
determined under 26 U.S.C. 143(f) and published by a state mortgage 
revenue bond program; (3) the median income for the area, as published 
by the U.S. Department of Agriculture; or (4) the median income for any 
definable geographic area, as published by a Federal, state or local 
government entity for purposes of that entity's housing programs, and 
approved by the Finance Board, at the request of a Bank, for use under 
the AHP. See 12 CFR 951.1.
    The Federal Financial Institutions Examination Council (FFIEC) is a 
Federal government source that publishes updated median income data for 
areas, based on existing HUD median income data. Since the FFIEC median 
income data is derived from existing HUD data, which is a permissible 
source of area median income data for determining the income 
eligibility of households under the AHP regulation, the Finance Board 
believes that the Banks should also be able to use such FFIEC data for 
determining household income eligibility. This proposed change would be 
consistent with the Finance Board's recent amendment to the definition 
of ``median income for the area'' in its Community Investment Cash 
Advance (CICA) Programs Regulation to include FFIEC as a source of 
median income data that may be used to determine income eligibility for 
projects and households funded under CICA programs. See 66 FR 50293 
(Oct. 3, 2001) (codified at 12 CFR 952.3).
    Accordingly, the proposed rule would add new paragraphs (1)(ii) and 
(2)(ii) to the existing definition of ``median income for the area'' in 
Sec. 951.1 to include FFIEC as a data source, and would renumber the 
remaining paragraphs accordingly.

B. Permitting Banks To Allocate AHP Funds From the Subsequent Year's 
Required Annual AHP Contribution to the Current Year's Competitive 
Application Program--Section 951.3(a)(2)

    The AHP regulation provides that in cases where the amount of AHP 
homeownership set-aside funds applied for by members in a given year 
exceeds the amount available for that year, a Bank may allocate up to 
the greater of $3 million or 25 percent of its annual required AHP 
contribution for the subsequent year to the current year's 
homeownership set-aside programs. See 12 CFR 951.3(a)(1). The AHP 
regulation does not allow the Banks to make a similar allocation of AHP 
funds from the subsequent year's required annual AHP contribution to 
the current year's AHP competitive application program. See 12 CFR 
951.3(a)(2).\1\
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    \1\ Each Bank is required generally to contribute annually to 
its AHP 10 percent of its net earnings for the previous year. If the 
aggregate amount of such annual payments by all of the Banks is not 
at least $100 million, each Bank must contribute to its AHP its pro 
rata share of $100 million. See 12 U.S.C. 1430(j)(5).
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    A number of Banks have indicated that there may be special 
circumstances in which it would be beneficial to have the flexibility 
to allocate a portion of the subsequent year's required AHP 
contribution to fund additional applications in the current year under 
the competitive application program. Such special circumstances could 
include natural or man-made disasters or other emergencies, or sudden 
changes in market conditions or demand caused by significant economic 
changes, that increase the need for affordable housing in the current 
year. Another circumstance might be a demand for additional AHP funds 
for use in conjunction with a special allocation of housing funds made 
by a Federal, state or local government agency in the current year.
    Several Banks also have raised the issue that a change in national 
accounting standards, contained in Federal Accounting Standard (FAS) 
133, could affect the timing of when a Bank recognizes some of its net 
earnings and thereby cause fluctuations in the Bank's required AHP 
contributions from year to year. Allowing the Banks to allocate AHP 
funds from the subsequent year's required AHP contribution to the 
current year under the competitive application program would give the 
Banks flexibility to mitigate some of these year-to-year fluctuations 
in

[[Page 66815]]

required AHP contributions when the Bank's required AHP contribution 
under-represents the Bank's actual earnings because of accounting 
rules. The proposal also would give the Banks flexibility to mitigate 
the effects on the amount of the Bank's required AHP contribution in a 
year in which the Bank's actual earnings are otherwise lower than 
expected or desired.
    The Finance Board believes that this proposal could be beneficial 
to the AHP. The Finance Board recognizes that allowing the allocation 
of AHP funds from the subsequent year's required AHP contribution to 
the current year may result in less AHP funds available for the 
subsequent year. However, the overall amount of AHP funds available 
would not decrease; a portion of the funds would simply be available in 
the current year rather than in the subsequent year. Moreover, there is 
no guarantee in any case that the amount of AHP funds available in a 
given year will be the same as the amount available in the previous 
year, given fluctuations in Bank net earnings from year to year.
    Accordingly, the proposed rule would amend Sec. 951.2(a)(2) to 
provide that a Bank, in its discretion, may allocate up to the greater 
of $3 million or 25 percent of its annual required AHP contribution for 
the subsequent year to the current year's competitive application 
program. The limit of $3 million or 25 percent is the same as the 
annual limit applicable to the homeownership set-aside programs. See 12 
CFR 951.3(a)(1). As with the homeownership set-aside programs, the 
proposed rule would include a Consumer Price Index (CPI) adjustment 
provision for the maximum dollar limit under the competitive 
application program.

C. Removal of Requirement That Banks Offer Comparable Amounts of 
Subsidies in Each Funding Period-- Section 951.6(b)(1)

    The AHP regulation provides that the amount of AHP subsidies 
offered by a Bank in each funding period under the competitive 
application program shall be comparable. See 12 CFR 951.6(b)(1). A 
number of Banks have suggested that this requirement be removed, in 
order to give the Banks flexibility to offer different amounts of AHP 
funds in each funding period to coincide with the funding cycles of 
other key funding sources in the Bank's district, or with different 
demands based on market or housing construction cycles. The Finance 
Board agrees that it would be beneficial for the Banks to have greater 
flexibility to manage their AHP funding in this way.
    Accordingly, the proposed rule would remove the requirement in 
Sec. 951.6(b)(1) that the amount of AHP subsidies offered in each 
Bank's funding period must be comparable.

D. Removal of Requirement That Banks Determine Compliance of AHP 
Applications With Eligibility Requirements Before Scoring 
Applications--Section 951.6(b)(4)(i)

    The AHP regulation provides that projects receiving AHP subsidies 
pursuant to a Bank's competitive application program must meet the 
eligibility requirements of the regulation. See 12 CFR 951.5(b). The 
AHP regulation further provides that a Bank shall score only those 
applications meeting the eligibility requirements of Sec. 951.5(b). See 
12 CFR 951.6(b)(4)(i). This means that a Bank must first determine 
whether each application received satisfies all of the regulatory 
eligibility requirements, including an assessment of each project's 
financial feasibility, before the Bank may score the application.
    Some Banks maintain that, given the high volume of applications 
received, it is burdensome and time consuming to have to determine the 
eligibility, and in particular, the financial feasibility, of each 
application before the application may be scored, especially when many 
of the applications determined to be eligible end up scoring too low to 
be awarded AHP funds. These Banks suggest that it would be more 
efficient to be able to score the applications first, and then 
determine their eligibility starting with the highest scoring 
applications and continuing on down the list, until all of the AHP 
subsidy is committed. The Finance Board agrees that the Banks should 
have the discretion to determine which approach works best for that 
Bank. Section 951.5(b) would still require that AHP subsidy may only be 
awarded to projects meeting the regulatory eligibility requirements, 
including financial feasibility. See 12 CFR 951.5(b).
    Accordingly, the proposed rule would amend Sec. 951.6(b)(4)(i) by 
removing the requirement that the Bank score only those applications 
meeting the regulatory eligibility requirements.

E. Permitting Banks to Award Scoring Points for Projects Using 
Properties Conveyed by the Federal Government Regardless of the Amount 
Charged for Conveyance, and for Projects Using Properties Conveyed by 
Non-Government Entities for an Amount Substantially Below Their Fair 
Market Value--Section 951.6(b)(4)(iv)(A)

    The AHP regulation includes, as one of nine criteria for scoring 
AHP applications, the creation of housing using a significant 
proportion of units or land donated or conveyed for a ``nominal'' price 
by the Federal government or any agency or instrumentality thereof, or 
by any other party. See 12 CFR 951.6(b)(4)(iv)(A). A ``nominal'' price 
is defined in the regulation as a small, negligible amount, most often 
one dollar, and may be accompanied by modest expenses related to the 
conveyance of the property for use by the project. See 12 CFR 
951.6(b)(4)(iv)(A). Scoring points, therefore, may not be awarded to 
projects using Federal government or non-government properties that 
were conveyed for more than a ``nominal'' price.
    In a number of markets throughout the country, there are 
substantial quantities of foreclosed housing units owned by HUD and 
other Federal government agencies. Allowing the Banks to award scoring 
points for projects using units conveyed by the Federal government, 
regardless of the amounts charged for their conveyance, would be 
consistent with the Bank Act provisions encouraging the use of AHP 
funds in projects involving housing owned or held by the Federal 
government, and coordination of the AHP with other Federal or 
federally-subsidized affordable housing activities to the maximum 
extent possible. See 12 U.S.C. 1430(j)(3)(B), (j)(9)(G).
    Accordingly, the proposed rule would amend Sec. 951.6(b)(4)(iv)(A) 
to provide that a Bank may award scoring points to projects using a 
significant proportion of housing units conveyed by the Federal 
government or any agency or instrumentality thereof, regardless of the 
amount charged for such conveyance. The proposed rule would retain the 
current provision allowing the Banks to award scoring points for 
projects using land donated by the Federal government.
    In addition, some Banks maintain that the definition of ``nominal'' 
in the regulation may be too restrictive in not recognizing the variety 
of ways in which properties are being conveyed by non-government 
entities to affordable housing project sponsors under different

[[Page 66816]]

local market conditions in each Bank district. For example, properties 
may be conveyed to project sponsors for a price of one dollar, for a 
price that is more than one dollar but significantly below the 
property's fair market value, or for payment of liens on the property 
such as back taxes, or the administrative costs of transferring the 
property, which may be more than one dollar but significantly below the 
property's fair market value. The Banks suggest that the regulation 
should explicitly allow scoring points to be awarded for properties 
conveyed from non-government entities under these circumstances, where 
the amounts paid for the properties are significantly below their fair 
market value. The Finance Board agrees that this proposal could be 
beneficial to the AHP, and that the Banks should have the discretion to 
define what is an amount significantly below the fair market value of 
the property, since these amounts may vary depending on local market 
conditions in each Bank district.
    Accordingly, the proposed rule would amend Sec. 951.6(b)(4)(iv)(A) 
by removing the ``nominal price'' requirement and adding language 
clarifying that a Bank may award scoring points for properties conveyed 
by a non-government entity at an amount that is significantly below 
their fair market value, as defined by the Bank in its AHP 
implementation plan. The proposed rule would retain the current 
provision allowing the Banks to award scoring points for projects using 
land donated by non-government entities.

F. Removal of Definition of ``Homeless Household'' for Purposes of the 
Homeless Households Scoring Criterion--Section 951.6(b)(4)(iv)(D)

    The AHP regulation also includes as a scoring criterion the 
creation of housing for homeless households, as further described in 
the regulation. See 12 CFR 951.6(b)(4)(iv)(D). The term ``homeless 
household'' is defined in the regulation as a household made up of one 
or more individuals, other than individuals imprisoned or otherwise 
detained pursuant to state or federal law, who:
    (1) Lack a fixed, regular and adequate nighttime residence; or
    (2) Have a primary nighttime residence that is:
    (i) A supervised publicly or privately operated shelter designed to 
provide temporary living accommodations (including welfare hotels, 
congregate shelters, and transitional housing for the mentally ill);
    (ii) An institution that provides a temporary residence for 
individuals intended to be institutionalized; or
    (iii) A public or private place not designed for, or ordinarily 
used as, a regular sleeping accommodation for human beings.

See 12 CFR 951.1.
    A number of Banks have maintained that this definition of 
``homeless household'' should include persons in certain additional 
situations who may be viewed as homeless, or at imminent risk of 
homelessness. For example, although the current definition covers 
victims of domestic violence living in organized shelters, it does not 
cover victims of domestic violence in rural areas where there are no 
organized shelters and the victims may have no alternative but to live 
in the homes of their abusers. Nor does the definition cover persons 
living in shared overcrowded housing in extremely cold climates where 
there is a shortage of organized shelters and it is impossible to 
survive living on the streets or in cars. Other situations may include 
children living in foster care who are about to reach the age of 18 and 
must leave the foster care system, and households facing imminent loss 
of their homes due to condemnation or eviction. The Finance Board 
agrees that the Banks should be able to award scoring points for 
projects serving these additional types of households. The Finance 
Board believes that the Banks should have the discretion to define what 
is a ``homeless household,'' since the types of homeless households may 
vary depending on local conditions in each Bank district. Allowing the 
Banks to define what is a ``homeless household'' would be consistent 
with the discretionary authority the Banks already have under the 
scoring criteria in the AHP regulation to define and provide 
preferences for other targeted groups, such as special needs households 
or first-time homebuyers. See 12 CFR 951.6(b)(4)(iv)(F) (1), (3).
    Accordingly, the proposed rule would remove the definition of 
``homeless household'' in Sec. 951.1 and amend Sec. 951.6(b)(4)(iv)(D) 
to provide that, for purposes of scoring applications that reserve 
units for ``homeless households,'' a ``homeless household'' shall have 
the meaning as defined by the Bank in its AHP implementation plan.

G. Making The Requirements for Post-Completion Modifications The Same 
as the Current Requirements for Pre-Completion Modifications --Sections 
951.7, 951.9

    The AHP regulation sets forth different requirements that must be 
satisfied in order for a Bank to approve, in its discretion, a 
modification to the terms of a project's application, depending on 
whether the modification would be made prior to or after the project's 
completion. The regulation provides that a Bank, in its discretion, may 
approve a modification request, including requests for additional AHP 
subsidy, made prior to project completion, provided that:
    (1) The project, incorporating any such changes, would meet the 
regulatory eligibility requirements;
    (2) The application, as reflective of such changes, continues to 
score high enough to have been approved in the funding period in which 
it was originally scored and approved by the Bank; and
    (3) There is good cause for the modification.

See 12 CFR 951.7.
    A Bank, in its discretion, may approve modification requests, not 
including requests for additional AHP subsidy, made after project 
completion, provided that:
    (1) The project, incorporating any material changes, would meet the 
regulatory eligibility requirements;
    (2) the application, as reflective of such changes, continues to 
score high enough to have been approved in the funding period in which 
it was originally scored and approved by the Bank;
    (3) the project is in financial distress, or is at substantial risk 
of falling into such distress (financial distress requirement); and
    (4) the project sponsor or owner has made best efforts to avoid 
noncompliance with the terms of the application for subsidy and the 
requirements of the regulation.

See 12 CFR 951.9.
    Because a Bank may not approve additional AHP subsidy for a post-
completion modification of a project, projects seeking additional 
subsidy have to submit a new application for subsidy in a regular 
competitive application funding period and score highly enough to be 
approved in that funding period. Projects may be unable to score 
successfully in the new funding period because the scoring criteria and 
priorities in the new funding period may not be the same as those 
applicable in the funding period when the projects

[[Page 66817]]

were originally approved. Some Banks have argued that they should be 
able to approve modifications of completed projects for good cause even 
when the project is not faced with financial distress. A number of 
Banks also have indicated that the inability to provide additional 
subsidy to completed but troubled projects makes it difficult or 
impossible for the Banks to participate with other funding sources in 
workout arrangements to help such projects retain their affordable 
units or forestall financial distress. The projects may then fail to 
comply with their AHP regulatory requirements or application 
commitments, subjecting them to possible recapture of the AHP subsidy. 
See 12 CFR 951.12. The Finance Board believes that it would be 
beneficial for such projects if the Banks had more flexibility to 
participate in such workouts. Therefore, the proposed rule would allow 
the Banks, in their discretion, to approve increases in subsidy, would 
remove the financial distress requirement, and would otherwise make the 
post-completion modification requirements the same as those currently 
applicable to pre-completion modifications. The Finance Board will be 
requesting information from the Banks on how this new authority is 
being implemented.
    A number of Banks and project sponsors also have suggested that the 
Finance Board consider removing the requirement in Sec. 951.7(a)(2) 
that a project, as proposed to be modified, must continue to score high 
enough to have been approved in the funding period in which it was 
originally scored and approved by the Bank, in order to be approved for 
a modification. In some cases, the project may need to be modified 
because of changed market conditions, but the project, as modified, 
would not continue to score high enough to have been approved in its 
original funding period. Banks and project sponsors have argued that 
market conditions may change dramatically over many years, and that it 
is impractical to hold a project to the same scoring criteria that 
existed years earlier. While the Finance Board recognizes the points 
raised by this argument, the Finance Board remains concerned about the 
potential that modifications offer for an applicant to manipulate the 
scoring system by making overly optimistic commitments that it knows it 
cannot reasonably meet, in its AHP application, in order to score 
successfully, with the anticipation of getting a modification after 
approval to reduce those commitments. Moreover, the Finance Board has a 
waiver process that would enable the Finance Board, upon a showing of 
good cause, to waive the re-scoring requirement for a modification, on 
a case-by-case basis. See 12 CFR 907.2. The proposed rule, therefore, 
would retain the current re-scoring requirement in Sec. 951.7(a)(2).
    In short, the proposed rule would remove Sec. 951.9, and make the 
requirements of Sec. 951.7 applicable to post-completion, as well as 
pre-completion, modification requests.

H. Providing the Banks With an Additional 120 Days to Conduct the 
Initial Monitoring of Completed Rental Projects--Section 951.10(c)(2)

    The AHP regulation provides that within the first year after 
completion of a rental project, the project owner must:
    (i) certify to the Bank that the services and activities committed 
to in the AHP application have been provided in connection with the 
project; and
    (ii) provide a list of actual tenant rents and incomes to the Bank, 
and certify that the tenant rents and incomes are accurate and in 
compliance with the rent and income targeting commitments made in the 
AHP application, and that the project is habitable.

See 12 CFR 951.10(a)(2)(ii).
    The regulation further provides that each Bank must take the steps 
necessary to determine that:
    (i) within the first year after completion of a rental project, the 
services and activities committed to in the AHP application have been 
provided in connection with the project; and
    (ii) the AHP subsidies were used for eligible purposes, the 
project's actual costs were reasonable and customary in accordance with 
the Bank's project feasibility guidelines, and the subsidies were 
necessary for the financial feasibility of the project, as currently 
structured.
See 12 CFR 951.10(c)(2).
    A number of Banks have indicated that if a project owner does not 
provide its certifications and other documentation to the Bank until 
late in the first year after project completion, the Bank may not be 
able to complete its reviews of the documentation and make its 
determinations of compliance under Sec. 951.10(c)(2) by the end of that 
year, as prescribed by the regulation. The suggestion has been made 
that the Banks be given some additional reasonable period of time after 
receipt of the project owners' documentation to conduct their own 
review and compliance determinations. This would be consistent with the 
approach taken in the regulation for Bank reviews of owner-occupied 
certifications. See 12 CFR 951.10(c)(1).
    The Finance Board believes that providing the Banks with an 
additional 120 days after receipt of the project owner documentation 
would be a reasonable amount of time to complete the compliance 
reviews. The Finance Board also believes that this requirement should 
apply not only to the services and activities review, but also to the 
review of eligible purposes, actual costs and feasibility required 
under existing Sec. 951.10(c)(2)(ii).
    Accordingly, the proposed rule would amend Sec. 951.10(c)(2) to 
require each Bank to complete the compliance reviews required 
thereunder within 120 days after receiving the project owner 
documentation.

I. Permitting the Banks to Allow Re-Use by Project Sponsors or Members 
of Recaptured Direct Subsidies or Unused Interest-Rate Subsidies From 
Prepaid Mortgage Loans For Owner-Occupied Projects--Sections 951.12(e), 
951.13(c)(3)(iii)

    Prior to 1995, sponsors of owner-occupied projects were allowed to 
re-use recaptured AHP direct subsidies to provide the same kind of 
direct subsidy assistance to subsequent eligible households in 
accordance with the sponsor's approved application. A sponsor also 
could use the unused interest-rate subsidy of a prepaid mortgage loan 
funded with an AHP subsidized advance to subsidize the interest rate on 
another mortgage loan to an eligible household that replaced the 
prepaid mortgage loan in a pool of mortgage loans held by the member.
    In 1995, the Finance Board discontinued authorization of these 
types of re-use of AHP funds in new projects, pending a comprehensive 
review and revision of the AHP regulation. The current regulation, 
which went into effect in 1998, continues to prohibit such re-use of 
AHP funds. Specifically, the AHP regulation provides generally that an 
owner-occupied unit that is purchased, constructed, or rehabilitated 
with the proceeds of an AHP direct subsidy must be subject to a deed 
restriction requiring that the homeowner repay directly to the Bank a 
pro rata share of the subsidy if the unit is sold to an ineligible 
household or refinanced prior to the end of the five-year retention 
period and is no longer subject to a deed restriction. See 12 CFR 
951.13(d)(1). The Bank may use these recaptured AHP subsidies to fund 
project modifications, interest-rate increases in approved projects, 
homeownership set-aside applications, or an approved alternate project 
if

[[Page 66818]]

sufficient other funds are available. See 12 CFR 951.8(c)(4), 
951.12(e), 951.14(a)(2). Where mortgage loans financed by an AHP 
subsidized advance are prepaid by the project to the member, the AHP 
regulation provides generally that the member must either repay the 
advance to the Bank and possibly be subject to a prepayment penalty, or 
maintain the advance outstanding subject to the Bank resetting the 
interest rate. See 12 CFR 951.13(c)(3).
    A number of Banks and project sponsors have requested that the 
Finance Board allow owner-occupied project sponsors (or members in the 
case of AHP direct subsidies provided through the homeownership set-
aside program) to re-use direct subsidies in the ways described above. 
The Banks and project sponsors maintain that allowing such re-use of 
direct subsidies can be an efficient use of AHP subsidies. The amounts 
recaptured or unused are generally quite small, the sponsor receives no 
additional subsidy from the Bank, and the re-used subsidy continues to 
assist AHP-eligible households in accordance with the original 
application commitments. Any household assisted through the re-use of 
recaptured or unused direct subsidy would be subject to a new five-year 
retention agreement. See 12 CFR 951.5(a)(5), 951.13(c)(4), 
951.13(d)(1). Permitting such re-use of direct subsidies can help those 
sponsors whose projects are aimed at maintaining a core of homeowners 
in particular areas to promote neighborhood stabilization and 
revitalization in those areas.
    For the reasons discussed above, the Finance Board believes that 
the Banks should have the authority to allow the re-use of recaptured 
or unused direct subsidy. Accordingly, the proposed rule would amend 
Secs. 951.12(e) and 951.13(c)(3) to authorize each Bank, in its 
discretion, as provided in its AHP implementation plan, to allow 
project sponsors or members to re-use recaptured or unused direct 
subsidy, respectively, as further prescribed in the proposed rule. One 
concern that has been raised is that recaptured or unused direct 
subsidies might not be re-used quickly and could remain idle, when they 
otherwise could be made available by the Bank for project modifications 
or new AHP-eligible projects. The proposed rule would address this 
concern by requiring the Bank to specify in its AHP implementation plan 
a time limit by which such subsidy must be re-used by the sponsor. A 
second concern that has been raised is whether the sponsor could earn 
interest on the recaptured funds while they remain idle. This would not 
be possible under the proposed rule, which would retain the current 
requirement that any recaptured or unused direct subsidy be returned 
directly to the Bank rather being held by the project sponsors, pending 
subsequent disbursement by the Bank for re-use by the sponsor.

III. Paperwork Reduction Act

    The proposed rule does not contain any collections of information 
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et 
seq. Therefore, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.

IV. Regulatory Flexibility Act

    The proposed rule would apply only to the Banks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA). See 5 U.S.C. 601(6). Thus, in accordance with 
section 605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board hereby 
certifies that the proposed rule, if promulgated as a final rule, will 
not have a significant economic impact on a substantial number of small 
entities.

List of Subjects in 12 CFR Part 951

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

    Accordingly, the Finance Board hereby proposes to amend part 951, 
title 12, chapter IX, Code of Federal Regulations, as follows:

PART 951--AFFORDABLE HOUSING PROGRAM

    1. The authority citation for part 951 continues to read as 
follows:

    Authority: 12 U.S.C. 1430(j).

    2. Amend Sec. 951.1 by:
    a. Removing the definition of ``Homeless household''; and
    b. In the definition of ``Median income for the area'', 
redesignating paragraphs (1)(ii) through (1)(iv) and paragraph (2)(ii) 
as paragraphs (1)(iii) through (1)(v) and paragraph (2)(iii), 
respectively; and adding new paragraphs (1)(ii) and (2)(ii).
    The revisions read as follows:


Sec. 951.1  Definitions.

* * * * *
    Median income for the area.
    (1) * * *
    (ii) The median income for the area obtained from the Federal 
Financial Institutions Examination Council;
* * * * *
    (2) * * *
    (ii) The median income for the area obtained from the Federal 
Financial Institutions Examination Council;
* * * * *
    3. Revise Sec. 951.3(a)(2) to read as follows:


Sec. 951.3  Operation of Program and adoption of AHP implementation 
plan.

    (a) * * *
    (2) Competitive application program. That portion of a Bank's 
required annual AHP contribution that is not set aside to fund 
homeownership set-aside programs shall be provided to members through a 
competitive application program, pursuant to the requirements of this 
part. A Bank may allocate up to the greater of $3 million or 25 percent 
of its annual required AHP contribution for the subsequent year to the 
current year's competitive application program. Beginning in 2002 and 
for subsequent years, the maximum dollar limit set forth in this 
paragraph shall be adjusted annually by the Finance Board to reflect 
any percentage increase in the preceding year's Consumer Price Index 
(CPI) for all urban consumers, as published by the Department of Labor. 
Each year, as soon as practicable after the publication of the previous 
year's CPI, the Finance Board shall publish notice by Federal Register, 
distribution of a memorandum, or otherwise, of the CPI-adjusted limit 
on the maximum competitive application dollar amount.
* * * * *
    4. Amend Sec. 951.6 by:
    a. Removing the last sentence in paragraph (b)(1);
    b. Removing the first sentence in paragraph (b)(4)(i);
    c. Revising paragraph (b)(4)(iv)(A); and
    d. Revising paragraph (b)(4)(iv)(D).
    The revisions read as follows:


Sec. 951.6  Procedure for approval of applications for funding.

* * * * *
    (b) * * *
    (4) * * *
    (iv) * * *
    (A) Use of donated or conveyed government-owned or other 
properties. The creation of housing using a significant proportion of:
    (1) Land donated by the Federal government or any agency or 
instrumentality thereof, or any other party;
    (2) Units conveyed by the Federal government or any agency or 
instrumentality thereof, regardless of the amount charged for such 
conveyance; or
    (3) Units conveyed by any other party for an amount significantly 
below the fair market value of the property, as

[[Page 66819]]

defined by the Bank in its AHP implementation plan.
* * * * *
    (D) Housing for homeless households. The creation of rental 
housing, excluding overnight shelters, reserving at least 20 percent of 
the units for homeless households, the creation of transitional housing 
for homeless households permitting a minimum of six months occupancy, 
or the creation of permanent owner-occupied housing reserving at least 
20 percent of the units for homeless households. For purposes of this 
paragraph, the term ``homeless households'' shall have the meaning as 
defined by the Bank in its AHP implementation plan.
* * * * *


Sec. 951.7  [Amended]

    5. Amend Sec. 951.7 by:
    a. In the section heading, adding the words ``or after'' between 
the words ``to'' and ``project''; and
    b. In the introductory text of paragraph (a), adding the words ``or 
after'' between the words ``to'' and ``final.''


Sec. 951.9  [Removed]

    6. Remove Sec. 951.9.
    7. Revise Sec. 951.10(c)(2) introductory text and paragraph 
(c)(2)(i) to read as follows:


Sec. 951.10  Initial monitoring requirements.

* * * * *
    (c) * * *
    (2) Rental projects. Each Bank must take the steps necessary to 
determine that, within 120 days after receiving the documentation 
described in paragraph (a)(2)(ii) of this section:
    (i) The services and activities committed to in the AHP application 
have been provided in connection with the project; and
* * * * *
    8. Amend Sec. 951.12 by revising paragraph (e) to read as follows:


Sec. 951.12  Remedial actions for noncompliance.

* * * * *
    (e) Use of repaid subsidies--(1) Use of repaid AHP subsidies in 
other AHP-eligible projects. Except as provided in paragraph (e)(2) of 
this section, amounts of AHP subsidy repaid to a Bank pursuant to this 
section, including any interest, shall be made available by the Bank 
for other AHP-eligible projects.
    (2) Re-use of repaid AHP subsidies in same project. Where AHP 
direct subsidy has been provided by the project sponsor (or the member 
in the case of direct subsidy provided through the homeownership set-
aside program) as downpayment, closing cost, rehabilitation or interest 
rate buydown assistance to a household to purchase an owner-occupied 
unit pursuant to an approved AHP application, amounts of AHP subsidy 
repaid to the Bank, including any interest, may, if authorized, in the 
Bank's discretion, in its AHP implementation plan and within the period 
of time specified by the Bank in such plan, be made available by the 
project sponsor or member to another AHP-eligible household to purchase 
an owner-occupied unit in accordance with the terms of the approved AHP 
application.
* * * * *
    9. Amend Sec. 951.13 by adding paragraph headings to paragraph 
(c)(3)(i) and (c)(3)(ii), and adding paragraph (c)(3)(iii) to read as 
follows:


Sec. 951.13  Agreements.

* * * * *
    (c) * * *
    (3) * * *
    (i) Repayment of advance. * * *
    (ii) Maintain advance outstanding with reset interest rate. * * *
    (iii) Loan pool substitution. If authorized, in the Bank's 
discretion, in its AHP implementation plan, continue to maintain the 
advance outstanding without the Bank resetting the interest rate, 
provided that:
    (A) The loan, before its prepayment, was used by a household to 
purchase an owner-occupied unit pursuant to the project sponsor's 
approved AHP application;
    (B) The loan was purchased by the member from the project sponsor 
and held by the member as part of a pool of loans financed by 
subsidized advances or direct subsidies and purchased from the project 
sponsor;
    (C) Within the period of time specified by the Bank in its AHP 
implementation plan, the member makes the unused AHP subsidy resulting 
from the prepaid loan available to the project sponsor to reduce the 
interest rate on a new loan from the project sponsor to another AHP-
eligible household to purchase an owner-occupied unit in accordance 
with the terms of the approved AHP application;
    (D) Within the period of time specified by the Bank in its AHP 
implementation plan, the member purchases the new loan for inclusion in 
the loan pool; and
    (E) After substitution of the new loan for the prepaid loan in the 
loan pool, the aggregate principal balance of the loan pool is the same 
as or higher than the original principal balance of the loan pool.
* * * * *

    Dated: December 11, 2001.

    By the Board of Directors of the Federal Housing Finance Board.
J. Timothy O'Neill,
Chairman.
[FR Doc. 01-31569 Filed 12-26-01; 8:45 am]
BILLING CODE 6725-01-P